WASHINGTON — The Financial Industry Regulatory has a growing list of arbitration claims related to closed-end Puerto Rico bond funds on its plate as investors seek damages for what they claim was misleading advice.
Investors in these funds, most of whom live in Puerto Rico, have filed about 165 claims against UBS Financial Services of Puerto Rico, Merrill Lynch, Banco Popular, Santander Securities, and Oriental Financial Services, FINRA said. The number of claims could swell to more than 500 eventually, it said.
The investors making these claims said the financial services firms over-concentrated their assets in these funds, which caused them to suffer losses when the value of the commonwealth's bonds plunged last year.
"Here's the problem in a nutshell," said Jake Zamansky, a New York-based attorney who has filed dozens of arbitration cases, primarily against UBS. "You have over-concentration in these funds."
Zamansky said some of his clients are elderly people who lost their retirements or other crucial savings because their investments were inappropriately handled. "That's irreplaceable money," Zamansky said.
Scott Silver, managing partner of the Silver Law Group in Coral Springs, Fla., said his firm expects to file more than 100 separate claims eventually. Silver said all of his closed-end fund claims are against UBS. He has said his clients were invested in the funds without regard to whether it made sense for their needs. Both FINRA and Municipal Securities Rulemaking Board have rules requiring dealers to have a reasonable basis for believing that their recommendations are suitable for their customers. Other law firms based in Puerto Rico and Chicago and other areas plan to or have also filed claims for investors in the past several weeks. They claim losses could be in the billions of dollars if the number of complaints swells as high as FINRA anticipates. In November, UBS offered to repurchase some shares of its Puerto Rico bond funds after they had historically bad losses of 16%. A month prior to that, a Securities and Exchange Commission administrative law judge dismissed SEC claims against two UBS Puerto Rico executives for allegedly misleading mutual fund investors.
UBS previously agreed to settle the SEC charges for $26.6 million. The SEC alleged the firm knew about a significant "supply and demand imbalance" and discussed the "weak secondary market" internally, but made misleading statements to investors and increased its own holdings to keep up prices of fund shares and maintain the appearance of a stable market.
Zamansky said the entire process is on a brief delay while FINRA recruits additional arbitrators from ten southern states, and that he expects his first claims will be heard in a few months. He said he hopes the early success of his clients will be beneficial for those heard later.
"We hope if we do well it will inform other cases," he said.
