First it was unreported foreign accounts and now it’s a junk quality Puerto Rico bond fund offering, UBS certainly is not making many friends these days. Every week we write a new column about the latest investor win against UBS and this week is no exception. An arbitration panel of the Financial Industry Regulatory Authority (FINRA) ruled that UBS Financial Services, Inc. must buy back the Puerto Rico bonds sold to investor Juan Burgos Rosado.
Most disputes over bad investments or stockbroker fraud are handled by arbitration. Like a jury, arbitration panels don’t typically give reasons for their decisions. Either you win or lose. This case was different, however. The three person arbitration panel issued a detailed ruling in support of its decision.
The FINRA panel found that the liquidity of UBS’ Puerto Rico bond fund portfolio was “limited.” As we have said in many prior posts, these bond funds were so concentrated that they could be quite difficult to sell in a down market. We also worried about the credit risks of these bonds (There have been defaults this year causing many of these bonds to be nearly worthless.)
The findings thus far are what we expected. In our opinion, these particular funds were risky and should not have been marketed to retail customers. The remainder of the opinion, however, offers some fascinating new insights into the dirty selling practices of UBS.
First, it appears that UBS was pushing its own brokers to sell its Puerto Rico bond funds. Obviously a brokerage firm is free to recommend its own products over competitive products but stockbrokers must always make sure that what they recommend is “suitable” for their customers. While institutional investors may be more willing to accept more risk and lower liquidity, these bond offerings should not have been sold to retirees or folks who needed ready access to their money.
The push to unload these bonds was apparently so bad at UBS that some brokers were receiving internal over concentration memos. These memos are internal warnings that a customer has too much invested in a single security. (Think of the old adage of “not putting all your eggs in one basket.”) While the compliance folks at UBS were apparently warning brokers to not put too much customer money in these Puerto Rico bond fund offerings, management was pushing brokers to sell, sell, sell.
While the bonds were nearing default and the bond fund was sinking, we believe that UBS was actively encouraging investors to “hold on” and “ride out the storm.” Unfortunately, like the HMS Titanic, the ship hit an iceberg when issuers missed bond payments and went into default.
Things are actually worse, however. As we explained in our last post, UBS was loaning customers money against these funds; funds they knew or should have known are worthless. When that happens, a customer not only loses his or her investment but then owes money to UBS.
We have heard that UBS was actively telling customers not to sell and to hold on. Some investors remain reluctant to file a claim in the mistaken belief that the bonds will somehow come back. In our opinion, the likelihood of such a miraculous recovery is near zero. Evidently the Financial Industry Regulatory Authority agrees with us after as arbitration panels continue to order UBS to pay back customers. In this case, Mr. Rosado was awarded approximately $1 million.
We are troubled when a brokerage firm tries to dump its own inventory of worthless bonds while encouraging customers to hold on to their portfolio. Obviously UBS denies the allegations and charges against it. We are puzzled while they keep insisting on a trial even though they repeatedly lose.
If you invested in a UBS Puerto Rico bond fund – either through UBS Financial Services / UBS Wealth Management or another broker – give us a call. It is possible to get back your hard earned money. As noted above, most cases are handled through binding arbitration and can be handled from filing through trial in about 14 months. There are no legal fees unless we are successful in getting back your hard earned money. Depending on where you are located, we may partner with another law firm but can handle these cases anywhere in the United States and Puerto Rico.
MahanyLaw – America’s Fraud Recovery Lawyers