The UBS Puerto Rico stockbroker has been the client’s primary broker for many years and knows the client’s age, employment status, and financial condition. The stockbroker knew that the client’s life savings were deposited with UBS Puerto Rico and in his hands. The client has been a passive investor and relied exclusively on his stockbroker to make all of the investment decisions in his UBS Puerto Rico account. As a result of the UBS Puerto Rico stockbroker’s recommendations and decisions, the client’s account became highly concentrated (100%!) in Puerto Rico bonds.
In August 2012, the UBS Puerto Rico stockbroker solicited the client to sell his investment in the Puerto Rico Fixed Income Funds and to purchase the Puerto Rico Fixed Income Fund V because it would supposedly increase the amount of income the client would receive by investing in a different “fund.” When asked if this was a safe investment, the stockbroker assured the client that it was a very conservative and low risk investment.
In March of 2013, the client became concerned about his account. Noticing that his account values had dropped, he set up a meeting with his UBS Puerto Rico stockbroker. He told the broker that he wanted to sell all of his investments because he was very concerned about Puerto Rico’s economic future. The stockbroker told the client not to worry, not to sell and that they will never become junk bonds. The stockbroker never said anything about the continuing decline in the Puerto Rican bond ratings by Moody’s, Standard and Poors, and Fitch. As usual, the client relied on the advice of the UBS Puerto Rico stockbroker for investment advice and held all of the Puerto Rico bonds.
Meeting with the client again on February 13, 2014, the UBS Puerto Rico stockbroker continued to speak highly of the Puerto Rico bonds, telling the client that the decline in the value of the funds was not permanent and that prices would rebound. The big difference was that now he spoke of the bonds returning to their original prices in terms of years — not months.
The client owned 10 of twenty-three 23 Puerto Rico closed-end funds, namely, PR Fixed Income Fund V, Puerto Rico Fixed Income Fund IV, Puerto Rico Fixed Income Fund VI, Puerto Rico GNMA & US Government Target Maturity Fund, Puerto Rico Fixed Income Fund II, Puerto Rico Fixed Income Fund III, Puerto Rico AAA Portfolio Target Maturity Fund, Puerto Rico AAA Portfolio Bond Fund, Tax Free Puerto Rico Fund, and Tax Free Puerto Rico Target Maturity Fund. UBS Puerto Rico used leverage to enhance the yields of the UBS Funds and attract investors and pushed its brokers to sell and to encourage investors to hold on to the UBS Funds. Many UBS Puerto Rico brokers even encouraged investors to take out loans and unknowingly double the leverage risk. It has been estimated that 9 out of 10 investors in Puerto Rico own the UBS Funds. In August 2013, a series of downgrades of Puerto Rico credit markets, excessive concentration, and margin calls resulted in the collapse of the house of cards i.e., the UBS Funds.
The UBS Puerto Rico stockbroker’s actions were in violation of FINRA Rules of Conduct 2110, 2111, and 2120, which relate to standards of commercial honor and trade principles, investment suitability, and the use of deception, manipulation and fraud, respectively.
UBS Puerto Rico and its stockbroker continuously misrepresented the UBS Funds as safe conservative, and low risk investments to the client. The concentration, conflict, illiquidity, and leverage risks of the UBS Funds were high and never disclosed to Client when the UBS Puerto Rico stockbroker made recommendations to “purchase” and then to “hold” the UBS Funds. Thus, UBS Puerto Rico and its stockbroker’s actions not only violated the FINRA standards of commercial honor and principles of trade but also included the use of manipulative, deceptive and fraudulent devices.
The client’s account was 100% invested in Puerto Rico. The UBS Puerto Rico stockbroker’s recommendation that the client switch funds concentrated in a single geographic area – Puerto Rico and then demand that the client continue to hold them when he requested liquidation were a direct breach of FINRA’s suitability rule.
UBS Puerto Rico was obligated to implement a system of supervision to assure compliance with Federal and Puerto Rico law, as well as FINRA conduct rules. However, at no time did any supervisory or compliance personnel ever question the over-concentration of Puerto Rico securities in the client’s account. Nor did UBS Puerto Rico ever take any action to properly disclose and stem the flow of misinformation to clients about the UBS Funds.
UBS Puerto Rico is responsible for its own wrongs and vicariously liable for the acts and omissions of its stockbroker. Accordingly, UBS Puerto Rico violated and is vicariously liable for violations of the FINRA Code of Conduct and Uniform Securities Act of Puerto Rico and for common law fraud, constructive fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, negligent management, negligent supervision of its employees, and fraudulent concealment of its misconduct.
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.