Puerto Rican investors in municipal bond closed-ended funds run by UBS AG, Banco Popular and Popular Securities have sued the firms.
Starting in the fall of 2013, in the midst of lowering prices of Puerto Rico bonds in the secondary market, investors in these funds who had used credit to invest in them were pressured by margin calls. Some turned to law firms for relief.
The cases concern closed ended funds that invest at least 67% of their money in Puerto Rico municipal bonds, and are used exclusively by Puerto Rico residents.
The investors said that the firms had recommended inappropriately risky vehicles for their retirement savings. Many filed arbitration cases against UBS with the Financial Industry Regulatory Authority.
The latest action is different because it is a lawsuit against the financial firms. Three law firms and an independently operating lawyer filed the case on Monday in United States District Court in the Southern District of New York.
UBS and Popular breached their fiduciary duty to the investors by recommending a quite risky investment vehicle, said Daniel Berger, director at Grant & Eisenhofer, one of the law firms representing the plaintiffs. The firms got fees in various ways from the recommendations and were placing their interests above those of their clients, Berger said.
“UBS believes the allegations in today's complaint are wholly without merit, and we intend to defend ourselves vigorously against them,” said Gregg Rosenberg, senior media relations officer for UBS Americas.
“The funds' holdings are required to consist of at least 67% Puerto Rico assets in order to achieve the tax benefits sought by investors. Each prospectus also describes the use of leverage and permissible leverage ratios for the respective fund.”
"Popular's policy is not to comment on pending or ongoing litigation," said Teruca Rullán, senior vice president of corporate communications for Popular, Inc., parent of both Banco Popular and Popular Securities.
"We note, however, that most of the allegations contained in the complaint are targeted at parties other than Banco Popular or Popular Securities. We plan to defend against this action vigorously, and take this opportunity to confirm our continuous commitment to complying with the laws and regulations applicable to our business."
The suit is a class action suit with seven named plaintiffs. Ultimately, more than a 1,000 investors could benefit if the plaintiffs win, Berger said. At this time the suit is not seeking a specific monetary sum.
