Puerto Rico UBS Closed-End Mutual Fund Fraud Lawsuit Goes to Arbitration

UBS Financial Services, Inc. (UBS) and two investors will now arbitrate a Puerto Rico closed-end bond fraud lawsuit accusing the investment arm of the Swiss bank of improperly structuring investments. The plaintiffs, Augusto Schreiner and Nora Fernandez, contend that UBS, its Puerto Rican subsidiaries, firm executives, and Banco Popular de Puerto Rico failed to suitably examine nearly two dozen closed-end mutual funds that held the beleaguered island’s government bonds.

Schreiner and Fernandez were initially part of an attempt to file a class action lawsuit against UBS and its subsidiaries. However, last month, US District Court Judge Sidney H. Stein refused to grant the case class certification status.

The Court found that because all of the plaintiffs had different investment objectives, they would not be able to demonstrate that the mutual funds were unsuitable in general. Judge Stein ruled that it was up to each investor to prove individually, according to their respective needs, objectives, and ability to handle risk, that UBS had neglected to properly analyze the risks that came with the funds.

In their amended class action complaint, Fernandez and Schreiner claimed that UBS falsely marketed the mutual funds as fixed-income securities that were safe and would garner tax-free income, when in reality, UBS’s Puerto Rico Closed-End Funds were risky leveraged investments incorrectly identified as “consistent with capital preservation.” In the plaintiff’s words, UBS failed to disclose that these investments were, in fact, “ticking time bombs.”

They contend that the brokerage firm and its affiliates knew their proprietary Puerto Rico closed-end funds were far riskier than represented, but that profiting, rather than investors’ best interests, was their priority. The plaintiffs referenced a speech in 2011 by ex-UBS Puerto Rico Chairman Miguel A. Ferrer in which he pressured the bank’s brokers to continue pushing these investments onto investors.

To support their claims and class status, Fernandez and Schreiner contend that:

    • Because approximately half of the funds issued were heavily tied to Puerto Rico debt, they were, in fact, “volatile” and incredibly risky.
    • UBS prevented its own financial advisers from knowing about all of the risks involved.
    • The firm was in breach of fiduciary duty and breach of contract.

Puerto Rico Bond Fraud Cases
Having represented hundreds of investors in Puerto Rico over the last five years, many of whom invested in local Puerto Rico closed-end funds, the attorneys at Shepherd, Smith, Edwards & Kantas, LLP (SSEK) can confirm that Fernandez and Schreiner’s allegations are true and provable. However, because of the differences in each investor’s situation, the claims are not appropriate for a class action and therefore must be individually arbitrated.

In the meantime, the U.S. territory remains mired in over $70 billion of debt. In 2013, thousands of investors sustained catastrophic financial losses. Since then, many of them have filed Financial Industry Regulatory Authority (FINRA) securities arbitration claims contending that these investments, and their money, were improperly handled.They also claim that they were not properly apprised of the risks, which they say were misrepresented to them.

When Puerto Rico bonds and closed-end bond funds plunged in value beginning in 2013, thousands of investors, including those with money in mutual funds and hedge funds holding Puerto Rico securities, collectively lost billions of dollars. Many of them have filed Puerto Rico closed-end bond fraud and bond fraud claims in an effort to recoup these losses. Already, UBS has had to pay hundreds of millions of dollars in these cases.

It is not just UBS that is involved in these Puerto Rico cases. Investors are accusing a number of brokerage firms of fraud and negligent acts. Those firms include Popular Securities (a division of Banco Popular), Santander Securities (a division of Banco Santander), Oriental Securities (a division of Oriental Bank) and a handful of others that operate primarily in the Commonwealth. UBS Financial Services Incorporated of Puerto Rico (UBS-PR), especially, has come under fire as former customers are claiming that not only did the broker-dealer knowingly sell them investments that were inappropriate and too risky, but also, they encouraged customers to take out loans so they could purchase even more Puerto Rico securities.

SSEK Law Firm
In Puerto Rico and the U.S. Mainland, our UBS Puerto Rico bond fraud lawyers have been helping investors in their fight to recoup their hard earned savings. We have been committed to helping Puerto Rico investors for more than five years and will continue as long as investors are harmed. In addition to representing customers against UBS, we also represents investors with Puerto Rico bond fraud claims against Popular Securities, Banco Santander, Oriental Bank, and other brokerage firms. Contact Shepherd Smith Edwards and Kantas, LLP today.

Investors, UBS Agree To Arbitrate Mutual Fund Risk Suit, Law360, October 26, 2018

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