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UBS’s continual, massive sale of Puerto Rico municipal bonds and UBS’s proprietary Puerto Rico bond funds involves a number of failures of its legal duties, some of which vary by the individual facts of each investor. According to the SEC investigation, UBS Puerto Rico was ordered by its parent company to massively sell off its inventory of Puerto Rico bond securities. In order to accomplish that, UBS Puerto Rico continually and intentionally undercut sell orders from its customers in these securities, ensuring that UBS’s securities sold, while other customers were unable to get out of their positions.

Despite the fact that UBS knew that these securities were becoming more and more illiquid, the SEC investigation indicates that UBS continued to sell massive amounts of the securities to its clients, in large part to ensure that UBS could offload its own holdings of the bonds before the bottom fell out of the market. This means that UBS was recommending that its clients buy securities that it knew were rapidly becoming difficult to sell, and which UBS knew had a seriously likelihood of significant value declines at the same time.

Many UBS clients were also being told to purchase these Puerto Rico bonds and bond funds in huge concentrations in their accounts. Many clients had 100% of their account in these securities. This type of investing violates very clear industry norms which require brokers to recommend that their clients diversify their portfolio, so that the failure or decline of one issuer or security, such as Puerto Rico, does not have a cataclysmic effect on the client’s entire account.

UBS Puerto Rico

A catastrophic collapse of life savings such as many investors in Puerto Rico bonds have been experiencing does not just happen on its own. There are inevitably a number of different parties that are involved, often to varying degrees. For most affected investors, the main party is UBS Financial Services Incorporated of Puerto Rico (“UBS Puerto Rico”). UBS Puerto Rico is a broker-dealer, meaning that it is a company in the business of buying and selling securities for clients, either by pairing together individuals looking to buy a particular security with a seller looking to sell that same security, and thus acting as a broker, or by buying and selling securities to investors out of its own portfolio, thus acting as a dealer. As a broker-dealer, UBS Puerto Rico is required to, and has, registered with the Financial Industry Regulatory Authority (“FINRA”), which is the regulator of broker-dealers in the United States and its territories. However, UBS Puerto Rico is licensed to operate solely within Puerto Rico.

Without delving into the legal issues involved, some of which have been discussed in previous posts and some of which will be addressed in subsequent ones, a broker-dealer can be legally liable for losses that its clients suffer under some circumstances. These situations can either because applicable laws and regulations covering broker-dealers in the United States require broker-dealers to properly supervise their brokers, and put in place various compliance systems to make sure the brokers are doing what they are supposed to be doing. Liability can also exist simply if the employees of the broker-dealer act improperly, even if the broker-dealer had no knowledge that it was going on, under legal theories such as respondeat superior.

The Wall Street Journal is reporting that JP Morgan Chase & Co., in its yearly Securities and Exchange Commission filing, said it may be facing up to $4.5 billion in legal losses over the losses it accounts for in its established litigation reserves. The SEC had asked for this additional disclosure in the wake of the economic crisis that has left many investment banks contending with securities fraud complaints from investors.

JP Morgan Chase’s $4.5 billion figure is a worst-case estimate. This means that additional losses could be anywhere from 0 to much higher than $4.5 billion. The investment bank is unable to make estimates at this time on over 10,000 legal proceedings.

JP Morgan also included a disclosure that it had received informal requests and subpoenas for information regarding its mortgage business. Many of the investors who have made securities fraud claims sustained their losses from their purchase of mortgage-backed securities during the housing market collapse. The investment bank said that some of the investigations came about following its announcement of a foreclosure moratorium because of issues with its foreclosure practices.

Other investment banks have also provided their worst-case scenarios:

• Citigroup Inc. estimated its worst-case scenario at $4 billion
• Wells Fargo & Co. estimated $1.2 billion
• Bank of America Corp. estimates about $1.5 billion

Related Web Resources:
J.P. Morgan Faces $4.5 Billion in Worst-Case-Scenario Losses, The Wall Street Journal, February 28, 2011

JP Morgan Chase and Co, SEC FIlings, Yahoo Finance

More Blog Posts:
Insurer Claims that JP Morgan and Bear Stearns Bilked Clients Of Billions of Dollars with Handling of Mortgage Repurchases, Institutional Investors Securities Blog, February 3, 2011

JPMorgan Chase & Co. CEO Warns Municipal Bond Investors to Expect More Bankruptcies, Institutional Investors Securities Blog, January 18, 2011

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Enemies of Wall Street learned even before the recent Alberto Gonzales affair that indictments by U.S. Prosecutors can be in their future.

King of securities class action suits was the law firm of Milberg Weiss & Bershad LLP. Federal prosecutors indicted the firm last year on charges of paying kickbacks to clients to serve as lead plaintiffs in class-action lawsuits.

The government probe of the firm began just after the Bush Administration entered the White House promising to curtail law suits. After the firm pleaded not guilty, prosecutors went after the firm’s partners. With little headway seemingly made, prosecutors were criticized that the case must lack legs.

First, a recap: The Investment Advisors Act of 1940 states that investment advisors have a fiduciary duty to clients. Stock Brokerage firms have worked for decades attempting to escape any fiduciary duty to their clients. When they decided that, in addition to being brokerage firms, becoming investment advisors was also lucrative, what were they to do?

Simple, use their political influence at the SEC. While the SEC’s job is to protect investors, as political appointees, its Commissioners are political (the present SEC Chairman is a former activist Republican Congressman). To accommodate Wall Street, the SEC simply said Wall Street firms were exempt from the Investment Advisors Act.

Crying foul, the Financial Planning Association, those who are not stock brokers, sued the SEC – and, two months ago, they won! Stinging from the defeat, the SEC decided not to appeal. (After all, how can the SEC exempt anyone from laws written by Congress?) Wounded, Wall Street then asked for and was granted several months to decide what to do.

Linsco Private Ledger (LPL) has apparently warned competitor National Planning Holdings, Inc. (NPH) to stop its aggressive recruiting practices aimed at luring registered representatives away from three broker-dealer firms LPL is in the process of acquiring. Reportedly, LPL has threatened to steer all its representatives away from selling insurance products of the parent firm of NPH if such recruiting tactics do not end.

After months of negotiations, LPL, the largest independent-contractor broker-dealer in the industry, said at the beginning of March that it was acquiring three broker-dealers owned by Pacific Life Insurance Co. of Newport Beach, Calif. Along with Mutual Service Corp., the other broker-dealers were Associated Securities Corp. of El Segundo, Calif., and Waterstone Financial Group of Itasca, Ill.

National Planning is a Santa Monica, Calif.-based network of four broker-dealers owned by Jackson National Life Insurance Co. of Lansing, Mich. Industry observers said that National Planning recruiters were talking to and negotiating with reps and advisers affiliated with the three Pacific broker-dealers LPL is acquiring.

Morgan Stanley shared in the earnings boom for Wall Street Firms as it reported earnings for its latest quarter of $2.56 Billion, a 29% increase over a year ago.

The investment giant is also celebrating a victory in the Florida courts, having convinced an appeals court to throw out an $1.58 Billion jury award against it for its mis-handling of a 1998 merger between Coleman Company with Sunbeam Corporation.

Morgan Stanley had faced an uphill fight in that case because it failed to honor a court order to produce e-mails sought by lawyers for the plaintiffs. Frustrated by the delays, Palm Beach County trial judge Elizabeth Maass issued a ruling that the Morgan Stanley and Sunbeam conspired to defraud the plaintiff and presented the case to the jury to establish the damages. Morgan Stanley had in 2005 set aside $360 million of reserves for the case expecting the jury verdict to be reduced. That will presumably will then be added to the firm’s current earnings.