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More Downgrades Loom For PREPA and More Losses For UBS Puerto Rico Investors

Standard and Poor’s, Fitch Ratings and Moody’s ratings services have placed Puerto Rico’s general obligation bonds credit rating on negative watch which meant the next step was to downgrade Puerto Rico’s general obligation bonds to junk status. On Friday, Moody’s warned of another possible downgrade; this time of the Puerto Rico Electric Power Authority’s (PREPA) bonds. All three rating agencies have expressed concerns about the Island’s inability to access the market for refinancing and reasonable rates; the extent to which budget targets for the current fiscal year are being met; the instability in the performance of the Puerto Rico economy.

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Oppenheimer Fined By FINRA for Excessive Markups and Failure to Supervise

Oppenheimer & Co., Inc. (Oppenheimer) was fined $675,000 by the Financial Industry Regulatory Authority (FINRA) and ordered to pay over $246,000 in restitution to customers for charging unfair prices in municipal securities transactions and for failing to have an adequate supervisory system. FINRA also fined Oppenheimer’s head municipal securities trader, David Sirianni, $100,000 for his role in the excessive markups.

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Merrill Lynch Settles $131.8 Million Dollar Fraud Claim

The United States Securities and Exchange Commission (SEC) charged Merrill Lynch with false and misleading disclosures relating to two collateralized debt obligations (CDOs) and false records relating to a third CDO. Merrill Lynch settled the case for $131.8 million simultaneous with the filing of the SEC’s charges. According to the SEC, Merrill Lynch hid important facts from investors about a hedge fund known as Magnetar Capital, LLC and its involvement over the selection of collateral for the CDOs Octans I CDO Ltd. and Norma CDO I Ltd. Magnetar had undisclosed conflicts of interest. It bought the equity in the CDOs and hedged that equity position by shorting against the CDOs themselves.

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More Headwinds For UBS Puerto Rico Bond Fund Investors

Three weeks ago, Fitch Ratings placed Puerto Rico’s BBB minus credit rating on negative watch which meant the next step was to downgrade Puerto Rico’s general obligation bonds to junk status. Yesterday, the Moody’s Investors Service joined in Fitch Ratings’ analysis and placed Puerto Rico’s general obligation bonds and related credit on review for possible downgrade to junk bond status as well. Both Moody’s and Fitch, as well as Standard & Poors rate Puerto Rico debt a single level above junk. All three rating agencies have expressed concerns about the Island’s inability to access the market for refinancing at reasonable rates; the extent to which budget targets for the current fiscal year are being met; the instability in the performance of the Puerto Rico economy.

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FINRA Bars Raymond James Broker Paul Arnold for Misappropriation

According to FINRA, Raymond James and Associates, Inc. (Raymond James) stockbroker Paul David Arnold (Arnold) misappropriated and misused funds of an 88-year-old customer. The regulator alleged that during the period May 2010 through April 2011 that Arnold, a stockbroker in Raymond James’ Largo, Florida office, had customers sign blank checks that Arnold later made payable to his own wife and son without the customer’s authorization. FINRA found that Arnold misappropriated and misused $173,600 in customers’ funds. Arnold did not contest the charges and failed to appear for testimony on two separate occasions. The customer received an arbitration award against Arnold and appears to have settled his claim against the broker-dealer. Arnold has been permanently barred from serving in any capacity in the securities industry.

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J.P. Turner Owes $700,000 For Unsuitable ETFs and Mutual Fund Investments

J.P. Turner & Co., LLC (J.P. Turner) was ordered by the Financial Industry Regulatory Authority (FINRA) to pay over $700,000 in restitution to more than 80 customers for sales of unsuitable leveraged and inverse exchange-traded funds (ETFs) and for excessive mutual fund switches by its registered representatives. This was just the tip of the iceberg and undoubtedly many more J.P. Turner customers have suffered from these unlawful sales practices.

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Martinez-Ayme Securities Sanctioned Again For Securities Law Violations

The Martinez-Ayme Financial Group Inc. D/B/A Martinez-Ayme Securities was recently sanctioned by the Financial Industry Regulatory Authority (FINRA) for alleged violations of Rule 101 of Regulation M of the Securities Exchange Act of 1934 and the self-regulatory agencies rules in connection with a series of private placement offerings, including a company described as CPWV. This company’s business was the development, commercialization and marketing of a series of electric generating power systems designed to produce electrical power with zero omissions or waste byproducts.

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UBS Puerto Rico Bond Fund Investors Continue To Lose

Although there was a blip in the UBS sponsored Puerto Rico closed-end bond fund prices recently, the net asset values (NAVs) of the various funds have continued their move downward. The decline is a reflection of the Puerto Rican economy which has been in recession for nearly 8 years. The most recent NAV’s published on November 27 and 29, 2013, put the value of the funds as follows:

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Puerto Rico: Default Talk Ramps Up!

A couple of months ago when the press began its aggressive coverage of the Puerto Rican municipal bond market, default was never an option. However, Justin Vélez-Hagan, executive director of The National Puerto Rican Chamber of Commerce has called it inevitable. The Chamber of Commerce official has cited more than 10 facts for his opinion: 1) $70 billion of debt is now held by institutional investors and mutual funds; 2) the debt-to-GDP ratio is now nearly 70% and growing; 3) including pension obligations the debt-to-GDP ratio exceeds 90%; 4) the per capita debt load is $19,000 per person on this tiny island, which is many multiples over the debt load in any state; 5) the eight-year recession has contracted the economy by over 16%; 6) the 2014 budget deficit is estimated between $300-$800 million; 7) the repeal of IRS Rule 936 has caused the giant pharmaceutical manufacturers and many other mainland corporations to continue to close their businesses on the island; 8) Puerto Rico has become a welfare state with only 40% of eligible workers seeking employment; 9) federal government assistance programs account for 21% of Puerto Rico’s economy; and 10) debt service is now 20% of the budget and before long, even if interest rates remain at 9%, the debt service will increase to 30, 40 or even 50% of the budget.

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