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

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 

Capacete noted that this created more business for the banks, which served as underwriters for Puerto Rico’s bond offerings and sought buyers for the debt.  As a result, the investment banks made millions of dollars in fees while the territory struggled.

The former UBS Puerto Rico banking official stated that even as questions began to arise over whether the territory’s debt was sustainable, money managers continued to market the bonds to investors on the island and the mainland as being safe and secure investments. The tax exemptions that came with these bonds only served to enhance the attractiveness of the investments.

Capacete said that when there was a shortage of investors wanting to buy, UBS began to strategize ways to sell more bonds to clients that had already purchased the Puerto Rico bonds. He said that the bank also pressured brokers to either “sell the funds or find a new job.”  Capacete said that this mandate was not just for the sale of bond funds and loans, but also to get customers to use the investments they had purchased as collateral to buy additional funds. He noted that he considered it a violation of banking rules for a customer to take out a loan to purchase Puerto Rico bond funds.

Capacete expressed concern that clients who did get loans were likely not aware that their losses could be “magnified” in the event of a market failure.  When he voiced his concerns to compliance officers in 2012, Capacete reported that it wasn’t until early 2013 that he got a response. The officers reported back that the questionable activities he’d discussed with them never occurred.

Later that year, when the bond prices dropped, tens of thousands of investors sustained significant losses that only moved the Puerto Rico debt crisis even further. For many Puerto Ricans that were heavily invested in the territory’s bond funds, the losses they sustained were in the billions of dollars.

According to PBS and FRONTLINE, UBS refused to be interviewed for their investigation and tried to discredit Capacete by calling him a “disgruntled former employer.” The bank claims that only one broker was found to have improperly used its loan program and that individual has since been fired.

Puerto Rico Bond Fraud Cases 

Regardless of what UBS is claiming, over the last 4 ½ years, thousands of investors have filed their Puerto Rico bond fraud claims against a number of broker-dealers alleging misrepresentations and inappropriate recommendations of these investments that for some led to catastrophic losses. Santander Securities (SAN), Banco Popular, Oriental, Merrill Lynch (BAC) and others are among those that been named by their investors.

UBS especially has come under fire for its brokers recommending that investors take out loans to purchase Puerto Rico bond funds and closed-end bond funds.  FRONTLINE AND PBS report  that over 1900 UBS customers just in Puerto Rico have filed proceedings against the broker-dealer.  Roughly half of these cases have been resolved through arbitration or settlement and UBS has already paid out over $350 million to its former clients.

Since 2013, our UBS Puerto Rico bond fraud lawyers have been working with investors part of the Puerto Rico debt crisis to help those investors recoup their losses from investing in these securities that were inappropriately recommended to them. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Frontline Insider Says Banks Fueled Economic Crisis in Puerto Rico, FRONTLINE/PBS, May 1, 2018

More Blog Posts from SSEK Law Firm:

Investors Continue to Pursue Puerto Rico Bond Fraud Recovery From Santander Securities, Stockbroker Fraud Blog, May 22, 2017

FINRA Panel Orders UBS to Pay $204K in Puerto Rico Bond Fraud Claim, Stockbroker Fraud Blog, March 22, 2018

Hedge Funds Get Rid of Puerto Rico General Obligation Bonds After Hurricane Maria, Stockbroker Fraud Blog, November 22, 2017

Contact Information