WASHINGTON – The Securities and Exchange Commission is asking a Puerto Rico court judge to find a former UBS Puerto Rico employee guilty of misleading customers by having them improperly use lines of credit to increase investments in UBS-affiliated, non-exchange traded closed-end funds.
The SEC filed its case against Jose Ramirez in the U.S. District Court for the District of Puerto Rico in September 2015. The commission is now asking Judge Pedro Delgado-Hernandez for a summary judgment against Ramirez because it believes the "undisputed facts show that … Ramirez violated the securities laws." The commission is seeking an injunction against Ramirez from future violations of securities laws, as well as the disgorgement of ill-gotten gains, and civil monetary penalties.
Ramirez was a registered representative of UBSPR at the firm's Guaynabo, Puerto Rico branch but was fired after the firm discovered his activities, according to the SEC. UBSPR and Ramirez's former branch manager Ramiro Colon previously agreed to settle related charges for $15 million as well as disgorgement of ill-gotten gains and $25,000, respectively. Colon was also suspended from his supervisory role for one year.
The SEC alleges that Ramirez's fraudulent conduct involved the purchase and sale of almost $50 million of certain UBSPR affiliated, non-exchange traded closed-end funds (CEFs) with large holdings of Puerto Rico bonds. The commission found that from 2011 through September 2013, Ramirez made over $12.8 million in total compensation, more than $5.5 million of which was attributable to customer investments in the lines of credit.
Guillermo Ramos Luiña, Ramirez's lawyer, declined to comment on the SEC's request for the pre-trial ruling.
Ramirez's alleged scheme involved non-purpose lines of credit (LOCs) from a Utah-based affiliate, UBS Bank USA, that UBSPR offered to brokerage customers at no initial cost and at a low interest rate, according to the SEC. BUSA's loan agreements and UBSPR's internal policy prohibited the use of LOC proceeds to purchase, carry, or trade in securities. The LOCs were instead meant to provide existing customers with liquidity and immediate access to cash to cover other purchases or expenses.
Registered representatives with UBSPR were incentivized to offer LOCs to customers because they received additional compensation based on: opening up LOCs; the amount drawn on customers' LOCs; and net new assets when an LOC was opened, according to the SEC.
The SEC said that Ramirez devised and carried out a strategy to have certain customers use LOC proceeds to purchase CEFs and misrepresented to customers that they could do so without violating the UBSPR policy or the LOC terms. The scheme involved: transferring money from a customer's LOC account to an outside bank account; retransferring the money from the outside bank account into the customer's UBSPR brokerage account; and having Ramirez use the funds to purchase additional CEFs in the customer's accounts, the SEC said.
Ramirez also made material misrepresentations to the customers when he assured them the strategy was safe and did not disclose the risks involved if the value of the CEFs, which were used as collateral for the LOCs, decreased below specified levels, according to the SEC. He allegedly tried to ease customer concerns about the risks by telling them that Plaza las Americas, a large shopping mall in Puerto Rico, would go broke before something would happen to their money.
The SEC said the misrepresentations and omissions in Ramirez's communications with customers were material because "reasonable investors clearly would want to know the risks involved in Ramirez's recommended strategy."
"Had customers known the risk involved in Ramirez's scheme, and that doing so was against UBSPR policy and a violation of the LOC loan agreement, they would not have invested in CEFs using LOC proceeds," the SEC said.
The commission added that Ramirez acted with scienter, or a mental state embracing intent to deceive, manipulate or defraud. Its lawyers point to his participation in trainings on the LOCs where the restrictions on use of proceeds was discussed and his signatures on documents falsely saying he disclosed those restrictions to customers.
The alleged scheme unraveled in 2013 as Puerto Rico's credit rating and bond prices began eroding. The CEFs lost more than $1.6 billion, or 25 to 30% of the total CEF market capitalization, from January through September of 2013, the SEC found. Ramirez went on disability leave in August 2013 and as his customers met with other UBSPR representatives to discuss outstanding maintenance calls, the firm began to find evidence of Ramirez's loan recycling.
