WASHINGTON — Claims against UBS from Puerto Rican investors have surged to $900 million, the Swiss-based firm said Tuesday in its third-quarter earnings report.
Total damages sought rose from $600 million in the second quarter and $300 million from its first quarter this year, according to the statements. UBS clients in Puerto Rico who owned the UBS-managed Puerto Rico closed-end municipal bond funds filed the claims. Their allegations include fraud, misrepresentation and unsuitability of the investments.
"Our balance sheet at September 30, 2014 reflected provisions with respect to matters described in this item in amounts that UBS believes to be appropriate under the applicable accounting standard," UBS said. But it didn't disclose how much specifically it set aside to cover the damages. Last quarter, the number was $44 million.
The funds in question are for Puerto Rico residents, because they are structured to produce income exempt from Puerto Rico taxes. A Puerto Rico law requires that at least 67% of a fund must consist of Puerto Rico munis for the fund to be exempt from Puerto Rico taxes.
Investors complained after the Puerto Rico funds plunged in August 2013. That triggered call provisions of some of the funds, affecting investors with leveraged positions. Investors were asked to pay additional money, and those who were unable to do so lost large portions of their investments. The complaints have led to regulatory inquiries and customer requests for Financial Industry Regulatory Authority arbitration.
This February, a shareholder derivative action was filed against UBS and its current and former fund directors, alleging hundreds of millions in losses in the funds. In May, another federal class action complaint was filed against UBS, seeking damages for investor losses between May 2008 and May 2014, the firm said in the report.
Earlier this month, UBS reached a settlement with the Office of the Commissioner of Financial Institutions for the Commonwealth of Puerto Rico, under which the firm will contribute $3.5 million to an investor education fund and will offer $1.68 million in restitution to certain investors.
