Judge finds for SEC in UBS Puerto Rico closed-end fund case

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WASHINGTON - Former UBS Financial Services of Puerto Rico broker Jose Ramirez violated securities laws when he funneled customers into Puerto Rico closed-end funds, a federal judge found this week, setting the stage for the conclusion of the years-old Securities and Exchange Commission case.

Pedro Delgado-Hernández, a U.S. district court judge in San Juan, ruled April 30 that the SEC had shown adequate evidence that Ramirez committed fraud to warrant a partial summary judgment against the former broker. The SEC charged Ramirez in late September, 2015, alleging that he misled customers about the safety of the closed-end funds (CEFs) and lined his pockets with an extra $2.8 million by having customers use proceeds from lines of credit with UBS Bank to purchase shares in the UBS Puerto Rico funds. The stage is now set for the SEC to make Ramirez pay for his actions.

Delgado-Hernández granted the SEC’s motion for a summary judgment, saying that the commission’s lawyers had demonstrated that Ramirez broke the law. The judge found that Ramirez knew it was against his firm’s policy to allow customers to use lines of credit to purchase securities, but schemed to have customers move money to their personal accounts and then deposit it into a brokerage account managed by Ramirez to avoid detection.

Ramirez lied to customers about this, the judge found, and did not inform them that if the value of their collateral decreased below a certain level, they could be subject to a maintenance call and the firm could liquidate the customer’s investments to satisfy it.

That was precisely what began happening in 2013, when a series of credit downgrades hit Puerto Rico. Some of the funds lost 20%-30% of market capitalization, the court found, and by the end of September 2013, 37 of Ramirez’s customers were subject to maintenance calls of over $37 million.

Ramirez, meanwhile, had done well through his misleading and against-policy line of credit scheme. He even received a “banking champion” award and was considered a top-performing LOC business producer. He earned commissions on the CEFs his customers purchased and from 2011-2013, he received over $12.9 million in total compensation, more than $5.5 million of which the court found was attributable to customer LOCs.

An internal review at the firm identified 414 instances where it appeared that CEFs were purchased with proceeds of LOCs from 2011-2013, and Ramirez was fired in early 2014.

Ramirez denied the SEC’s charges, though he invoked his right against self-incrimination under the Fifth Amendment. His attorney argued that the court should not make a summary judgment, because merely refusing to testify is not an admission of wrongdoing. He also argued that some of the SEC’s evidence was not properly admissible. Delgado-Hernández was unmoved, ruling that Ramirez had “failed to create a genuine issue of material fact.”

“The SEC has established all the necessary elements to show that Ramirez violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder,” the judge wrote.

The summary judgment opens up a window of time for the SEC and Ramirez to agree on terms for his punishment. Court documents indicate the SEC is seeking injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and a civil penalty. Delgado-Hernández granted the SEC until June 15 to file a motion for those things with the court in the event that no agreement can be reached with Ramirez.

The judge instructed both sides to follow a joint motion on the status of the case on May 25.

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Securities law Securities fraud SEC enforcement Closed-end funds SEC