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UBS PR to Pay $26.6M to Settle SEC Charges Over Muni, Other Funds

MAY 1, 2012 6:06pm ET
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WASHINGTON — UBS Financial Services Inc. of Puerto Rico, a division of UBS AG, has agreed to pay $26.6 million to settle charges that it misled investors, concealed a liquidity crisis and masked control of the secondary market for 23 proprietary closed-end mutual funds.

Most of the funds held municipal bonds.

The Securities and Exchange Commission announced the settlement Monday and said it also filed charges in administrative proceedings against two executives at the firm, former vice chairman and chief executive Miguel A. Ferrer and head of capital markets Carlos J. Ortiz.

UBS Puerto Rico, which is based in Hato Rey near San Juan, agreed to settle the charges without admitting or denying guilt.

The $26.6 million settlement, which will be placed into a fund to help harmed investors, includes $11.5 million in disgorged ill-gotten gains, $1.1 million in prejudgement interest and a $14 million civil penalty.

“UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law — accurate price and liquidity information, and a trading desk that did not advantage UBS’ trades over those of its customers,” Robert Khuzami, director of the SEC’s division of enforcement, said in a media release.

The SEC said that, starting in 2008, the firm promoted the performance and high premiums of UBS Puerto Rico-affiliated, non-exchange-traded closed-end funds, and solicited thousands of retail investors to purchase shares.

Most of the funds, which are organized as corporations and underwritten or co-managed by UBS Puerto Rico, have significant holdings of Puerto Rico municipal bonds, according to the SEC.

When demand for the bonds declined, the firm sought to maintain the illusion of a liquid market by buying shares for its own inventory from customers who wished to sell. The firm then continued to sell shares by conducting primary offerings in order to grow its closed-end fund business.

The SEC said UBS Puerto Rico knew about a significant supply and demand imbalance and that staffers at the firm mentioned a “weak secondary market” in internal discussions.

In 2009, after parent firm UBS AG directed the Puerto Rico subsidiary to reduce its holdings in the funds, UBS Puerto Rico executed “Objective: Soft Landing,” a plan to sell shares at prices that undercut pending customer orders to sell, the SEC said.

The firm’s actions prevented some customers from selling shares, as UBS dumped 75% of its holdings in the funds, a value of $35 million, between March and September 2009. By the time the firm completed selling its holdings, market prices of some of the funds dropped as much as 15%.

UBS spokesperson Karina Byrne said the firm believes that investors who bought the funds during the 2008 and 2009 time period and then sold them realized losses of “less than $5 million.”

“By comparison, as of March 31, 2012, the aggregate market capitalization of the funds was almost $5 billion,” she said.

Byrne said UBS Puerto Rico is “pleased to have resolved this matter, which relates to a period of significant turmoil in the global financial markets between 2008 and 2009.”

She also noted that the firm disclosed the SEC’s investigation more than a year ago and has taken additional steps to improve the transparency of trading procedures since then as part of an “ongoing commitment to the local capital market.”

Investors who bought shares in the fund during the period, and continue to hold them, have made substantial returns, Byrne said. She noted that most of the funds have produced returns of more than 20% in the last year.

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