Puerto Rico Debt Crisis

UBS to Pay $19.8M in Puerto Rico Bond Fraud Case

Published on: October 25, 2018 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel is ordering UBS Financial Services Inc. (UBS) to pay restitution of almost $19.8M in an arbitration case involving Puerto Rico bonds and closed-end funds that were sold to investors. This is the largest amount that UBS has paid to date to claimants in a Puerto Rico bond fraud case.

The arbitration ruling involved not only the sale of the Puerto Rico bonds but also how credit lines were used as part of the investing strategies involving the investor accounts. Of the $19.8M: $14.9M is for compensatory damages, $745K is interest, $3.9M is legal fees, and $215K is for other costs.

This is just one of several Puerto Rico bond and closed-end bond fraud awards that UBS and its affiliated financial firm, UBS Financial Services of Puerto Rico (UBS-PR), have been ordered to pay in the last few years. In December 2016, A FINRA arbitration panel ordered UBS to pay $18.6M to two UBS clients who had alleged breach of contract, breach of fiduciary duty, and other violations over their Puerto Rico securities losses.

Investors Suing UBS Puerto Rico Over Closed-End Fund Losses Are Denied Class Action Certification

Published on: September 19, 2018 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Sidney H. Stein is refusing to grant class action certification to a group of investors suing UBS Puerto Rico over its sale of proprietary closed-end mutual funds. In particular, the class action complaint dealt with a series of 23 closed-end bond funds that UBS Puerto Rico developed and marketed exclusively to Puerto Rico residents.

These proprietary closed-end funds were comprised of at least 2/3 Puerto Rico debt (and often much higher), resulting in a geographic concentration that placed the owners of such funds at a great risk if anything negative happened on the island. Additionally, the UBS closed-end funds were highly leveraged, typically borrowing $1 for every $1 invested, meaning that any losses in the closed-end funds would be significantly increased.

Notwithstanding the above, the plaintiff investors say that UBS falsely depicted these closed-end mutual funds as safe and secure investments that would garner fund holders tax-free income when, in truth, the mutual funds were “ticking time bombs” that were actually very risky.

New Report Suggests Banco Popular de Puerto Rico Could Be Held Liable Over Island’s Final Junk Bond Issuance

Published on: September 6, 2018 | by Shepherd Smith Edwards & Kantas, LLP

Four years after Puerto Rico brought to market what became its biggest and final issuance of junk bonds, a 600-page report by disputes and investigative international law firm Kobre & Kim suggests that Banco Popular de Puerto Rico (BPPR) could potentially be held liable for losses related to the issuance. The findings are part of the efforts of the U.S. territory’s Financial Oversight and Management Board to look into what caused the island’s current financial crisis. To date, Puerto Rico remains in over $120 billion in debt as a result of bond issuances and pension liabilities. Thousands of investors continue to file Puerto Rico bond fraud and closed-end bond fund claims to recover their losses sustained when the securities plunged in value in 2013.

According to Kobe & Kim’s findings, while initially both Citigroup (C) and Banco Popular cautioned against yet another junk bond issuance in the wake of the financial challenges Puerto Rico was facing at the time, Banco Popular became part of the syndicate of banks that participated in the $3.5B issuance, profiting in the process. The report indicates, while making clear that the findings are not legal advice, that Banco Popular could potentially be held liable for claim and repayments related to Puerto Rico’s bankruptcy process. Kobe & Kim’s findings are primarily related to a memo that Citigroup and Banco Popular sent to then-Government Development Bank President David Chafey, which included that they did not think the bond issuance was a good idea.

Still, both banks proposed providing instant liquidity backed by taxes in return for the Puerto Rico government approving a balanced budget law, an additional financial control law, and a supervisory group with members appointed by the U.S. Treasury and the Federal Reserve. Citigroup eventually opted not to take part in the bond issuance.

Ex-UBS Official Recounts How the Bank Got Investors to Take on More Puerto Rico Debt

Published on: May 2, 2018 | by Shepherd Smith Edwards & Kantas, LLP

A former UBS (UBS) banking official is claiming that Wall Street banks like his previous employer played a key role in the Puerto Rico economic crisis that has left the U.S. territory more than $70 billion in debt and mired in bankruptcy-like proceedings. The ex-UBS official, Carlos Capacete, was interviewed as part of a joint NPR and FRONTLINE probe. Capacete worked for UBS Puerto Rico (UBS-PR) for over a quarter of a century and was the head of the biggest UBS branch on the island in Hato Rey. At one point, Capacete oversaw $3 billion in client assets. Capacete left UBS in 2014 shortly after the crash in Puerto Rico bonds.

Prior to the market crash, Puerto Rico bonds and closed-end bond funds were highly profitable sales products for UBS and other banks on the island. While trying to prevent a government shutdown a number of years back, the U.S. territory started to borrow to pay for yearly government costs. This added $48 billion of debt in 14 years, reports PBS and FRONTLINE.

The Puerto Rico Debt Crisis Only Increased as Banks Made More Money