UBS Puerto Rico Faces Surge in Arbitration Claims

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WASHINGTON — Puerto Rican investors are lining up for arbitration with UBS AG over losses when the commonwealth's bonds plunged last year.

The Financial Industry Regulatory Authority has received dozens of filings for arbitration from investors on the island who say they were harmed by negligence and unsuitable advice from UBS Financial Services and UBS Financial Services of Puerto Rico. The surge in claims came as the commonwealth geared up for a new issue of general obligation bonds and the main rating agencies cut the territory's debt to speculative grade.

Scott Silver, managing partner of the Silver Law Group in Coral Springs, Fla., said his firm has filed about three dozen claims for FINRA arbitration in the past several weeks. Silver said his clients are Puerto Ricans to whom UBS recommended concentrating the vast majority of their investments into UBS proprietary closed-end bond funds, managed or co-managed by UBS, and municipal bonds. The arbitration claims further allege that UBS frequently recommended the use of the UBS Puerto Rico bond funds as collateral for UBS bank loans.

"When you walked into a UBS office, they said 'this is the product for you'" Silver said. "UBS asset managers had the ability to leverage the investments made in the UBS bond mutual fund portfolios up to 50% of the value of the underlying portfolio geographically concentrated in Puerto Rico bonds, which assumed considerably more risk than my clients understood."

Several other law firms have also filed claims in the past several weeks, including firms in Puerto Rico, Chicago, and New York. The claimed losses total hundreds of millions of dollars. A UBS spokeswoman didn't respond to a request for comment. The firm launched its own investigation into the matter last fall.

The market for Puerto Rico debt became increasingly volatile last year amid concerns over the island's economy, as the government enacted pension reforms and other measures in its ultimately futile attempt to protect the commonwealth's investment grade ratings.

Silver said his clients "run the gamut" from the wealthy to retired couples who lost their entire life savings when the bond market went south.

Silver said his clients should be able to recover their losses in an arbitration claim because UBS failed to meet its obligations under securities rules. Both FINRA and Municipal Securities Rulemaking Board rules require dealers to have a reasonable basis for believing that their recommendations are suitable for their customers.

Silver also pointed out that rules require dealers to supervise the activities in customer accounts, and said his clients' losses may be attributed to a failure by UBS to supervise their financial advisors.

In November UBS offered to repurchase some shares of its Puerto Rico bond funds after 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 that 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 prices up and maintain the appearance of a stable market.

Silver said he had some concerns that FINRA arbitrators drawn from South Florida wouldn't have the Spanish proficiency the arbitration might require, and labeled it as a potential "procedural nightmare."

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Enforcement Buy side Law and regulation Puerto Rico