In 2002 and 2003, the client inherited what she understood to be bonds and mutual funds from her parents’ UBS PaineWebber accounts when they passed away. The client did not know the true nature or risk of the investments that she had inherited and held in her account. She thought she actually owned bonds that would always pay interest until they matured. Neither UBS Puerto Rico nor her UBS Puerto Rico Stockbrokers ever gave her a full explanation of what type of investments she really owned, which were closed-end funds and that what she actually owned was shares of the closed-end funds (like common stock shares) that only paid dividends at the manager’s discretion. She also didn’t know that these were leveraged, illiquid investments which were very risky.
In October of 2011, the client received a document from UBS Puerto Rico requesting that she confirm some account information. She saw the words “aggressive/speculative” on the document and immediately called one of her UBS Puerto Rico stockbrokers, making it clear that she was a conservative investor. She reminded the stockbroker that she couldn’t afford to lose principal in the account that she needed to support herself. The UBS Puerto Rico stockbroker assured the client that he understood and that this was a mistake that would be corrected.
At that time, the client also wanted her UBS Puerto Rico stockbroker’s opinions on every bond and bond fund in her account. She wanted to know if they were conservative investments which suited her needs. The UBS Puerto Rico stockbroker claimed that each of the bond funds had an excellent track record and highly recommended them. The UBS Puerto Rico stockbroker also told Client that the bonds were protected by the government.
Two months later, the client received a confirmation that the information on the prior form was changed. The information on the Confirmation stated her conservative investment objectives.
In March 2013, the client heard about Puerto Rico bonds in the media and contacted her UBS Puerto Rico Stockbrokers. They told her not to worry or sell and that the Puerto Rico bonds were protected by the government.
At that time, the client also discussed the large loan balance due to withdrawals for income needed during her period of unemployment. The loan balance had increased to over $231,000 and she was paying approximately $750 a month in interest! Once the client began working again, she wanted to pay off the loan but the UBS Puerto Rico Stockbrokers discouraged her from doing so, telling her that the income she earned on the funds was greater than the interest she paid on the loan. Nevertheless, she insisted that some of the bonds in her account be sold and the loan paid off in full. The UBS Puerto Rico stockbroker told her that she must hold onto the balance of the so-called bond funds because they were “safe” investments that generated a large amount of income.
By June 2013, all that was left in the client’s two accounts was investments in the Puerto Rico Investors Tax Free Fund, Puerto Rico Fixed Income Fund III, Puerto Rico Fixed Income Fund IV, and Blackrock MuniYield Fund.
In October 2013, the client learned that the value of the bond funds in her account had declined substantially, so she contacted her UBS Puerto Rico stockbroker who blamed the municipal bond market in general and economic events in the United States for the decline. He was silent about the economic and political crisis in Puerto Rico and the looming junk bond credit rating for Puerto Rico.
The client owned 5 of the Puerto Rico closed-end funds, namely, Puerto Rico Investors Tax Free Fund; Puerto Rico Fixed Income Fund III; Puerto Rico Fixed Income Fund IV; Puerto Rico Tax Free Target Maturity Fund II; Puerto Rico AAA Portfolio Target Maturity Fund; and Puerto Rico GNMA & U.S. Gov’t Target Maturity Fund.
UBS Puerto Rico used leverage to enhance the yields of its funds and attract investors. UBS Puerto Rico management pushed its brokers to sell and have investors hold the UBS Funds. Many UBS Puerto Rico brokers encouraged investors to take out loans and unwittingly double the leverage risk they were exposed. In August 2013, Puerto Rico credit market downgrades, bad news, excessive concentration, and margin calls resulted in the collapse of the UBS Funds.
The UBS Puerto Rico Stockbrokers’ recommendations that the client hold the balance of the UBS Funds in her account after she paid off the loan, a point in time when the risk of loss was greatest, was in violation of FINRA Rules of Conduct 2110, 2111 and 2120, which relate to commercial honor, investment suitability, and the use of manipulative, deceptive and fraudulent devices, respectively.
UBS Puerto Rico is responsible for its own wrongs and vicariously liable for the acts and omissions of its stockbrokers. UBS Puerto Rico is also vicariously liable for its stockbrokers’ false and misleading information regarding the UBS Funds and for mismanaging the client’s account. Accordingly, the Respondent violated and/or is vicariously liable for violations of the FINRA Code of Conduct and Uniform Securities Act of Puerto Rico and for fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligent management and failure to supervise its employees.
For dedicated representation by a law firm with over of experience in all kinds of investment related disputes, a firm that knows how to handle these Puerto Rico bond fund cases, contact us by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail. We may also be able to arrange a meeting with you at offices located in San Juan, Puerto Rico or in Boca Raton, Florida.