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SEC and FINRA FINE UBS OVER PUERTO RICO BOND FUNDS
The SEC and FINRA have brought charges and fined UBS relating to sales practices and supervision of their UBS Puerto Rico Bond Funds.
The SEC press release and Orders can be found here: http://www.sec.gov/news/pressrelease/2015-217.html. The SEC alleged that UBS Financial Services of Puerto Rico (UBSPR) failed to supervise its broker in relation to solicited loans used to purchase additional UBSPR closed end funds, while failing to disclose the risks of this strategy and misrepresenting the safety of the strategy. The SEC further alleged that UBSPR did not implement reasonable supervisory procedures and had inadequate systems in place to prevent and detect this wrongful conduct.
UBS was censured and fined over fourteen million dollars.
FINRA also fined UBSPR for actions related to its Puerto Rico Bond funds - see the press release here (http://www.finra.org/newsroom/2015/finra-sanctions-ubs-puerto-rico-185-million-supervisory-failures) which states the following:
“...for more than four years, UBS PR failed to monitor the combination of leverage and concentration levels in customer accounts to ensure that the transactions were suitable given the customers’ risk objectives and profiles. The firm failed to implement a reasonably designed system to identify and prevent unsuitable transactions in light of the unique Puerto Rican economy, in which retail customers typically maintained high levels of concentration in Puerto Rican assets and often used those highly concentrated accounts as collateral for cash loans. Despite UBS PR’s knowledge of these common practices, it failed to adequately monitor concentration and leverage levels to identify whether certain customers’ CEF transactions were suitable in light of the increased risks in their existing portfolio.”
The above sales practices and lack of supervision have formed the basis of hundreds of FINRA arbitration claims pending against UBS and UBSPR. If you would like to speak to an attorney about possible claims related to UBS of Puerto Rico bond funds, please read more about these claims at Greco & Greco’s website (http://www.securities-lawyers.net/ubs_puerto_rico.html) and contact Scott Greco for a free consultation (http://www.securities-lawyers.net/contact.html).
Posted by W. Scott Greco on 10/09/15.
Closed End Funds ( CEF ) • Puerto Rico • Arbitration • Bonds • Brokerage Firms • UBS Financial Services of Puerto Rico • UBS • FINRA • Mutual Funds • SEC • Securities Fraud • Suitability • Permalink
Success of FINRA Arbitration Claims against UBS regarding Puerto Rico Bond Funds
To date, FINRA Arbitration Panels have issued five awards relating to claims filed by investors against UBS and UBS of Puerto Rico regarding their Puerto Rico Closed End Bond Funds (CEFs).
The Awards (for cases filed after the 2013 crash of the CEF market) are summarized below:
1. Bauza v. UBS Financial Services of Puerto Rico, et al.. Greco & Greco represented the Claimant in this case which resulted in the first award against UBS regarding the Puerto Rico CEFs. UBS claimed that the Claimant only had $8,000 in net losses from the funds, but the panel awarded $200,000.00. The case was tried in Washington, DC.
2. Rosado v. UBS Fin. Serv. of Puerto Rico, et al. Claimant sought $1,033,596 in damages. The arbitration panel issued a written opinion (not common in FINRA arbitrations) making the following findings: a. “In the process of reducing its exposure in the CEFs by some 75%, UBS undertook an internal push for its brokers to sell its inventory to customers;” b. “this account was extremely over-concentrated and clearly unsuitable for Claimant;” and c. “proper and required supervision could have prevented Claimant’s losses or at least limited them greatly.”
The panel Ordered UBS to rescind the sales of the CEFs by repurchasing Claimant’s account for $1,000,000.
3. Ramis v. UBS Fin. Serv. of Puerto Rico, et al. The Claimants in this case requested 2 - 2.5 million dollars in compensatory damages. The panel awarded $250,000 against UBS.
4. Rodriguez Gonzalez v. UBS Fin. Serv. of Puerto Rico, et al. Claimants requested damages at the end of the hearing of 3 to 6 million dollars. The panel awarded $2,545,000.00.
5. Lopez Del Valle v. UBS Fin. Serv. of Puerto Rico et al. This case involved a large number of Claimants, however, all but three Claimants settled their claims prior to the final hearing. The orignal Statement of Claim requested ten million dollars in damages, but the award is not clear how much of those damages were requested by the three remaining Claimants. The arbitration panel awarded $2,395,402.00 in compensatory damages, interest from the filing of the Statement of Claim, $50,000 in costs, $5,000 in expert witness fees, and significantly, $479,079.80 in attorneys fees.
In summary, all of the arbitration panels that have heard these cases have issued awards in favor of Claimants, with one also awarding attorneys fees. If you would like to speak to an attorney about possible claims related to UBS of Puerto Rico bond funds, please read more about these claims at Greco & Greco’s website (http://www.securities-lawyers.net/ubs_puerto_rico.html) and contact Scott Greco for a free consultation (http://www.securities-lawyers.net/contact.html).
First FINRA Arbitration Award Against UBS of Puerto Rico Regarding Bond Funds
Greco & Greco is pleased to report the first FINRA Arbitration Award against UBS Financial Services of Puerto Rico relating to the crash of UBS closed end bond funds in 2013 which were sold to Puerto Rico residents. W. Scott Greco represented the Claimant customer in the case of Bauza v. UBS Financial Services of Puerto Rico, et al. The arbitration panel awarded $200,000 in damages to the Claimant, despite claims by UBS that Claimant’s net out of pocket losses were less than $10,000.
The case involved a heavy over-concentration of the Claimant’s UBS account in proprietary UBS closed end bond funds pursuant to UBS’s recommendations. The funds invested heavily in Puerto Rico bonds using leverage (a speculative investment technique), and had significant geographic concentration risk.
Read about the arbitration award in this Reuters article.
If you wish to discuss claims againt UBS involving these funds, please contact Scott Greco for a free consulation.
UBS Puerto Rico Funds Suffering Drastic Losses
Since 1995, UBS Financial Services Inc. of Puerto Rico (UBS PR) has been the primary underwriter for 14 separately organized closed end fund companies and 9 co-managed closed end fund companies. The funds primarily held Puerto Rico municipal bonds and were available only to Puerto Rico residents. Many of these funds’ values have collapsed recently, resulting in massive losses in UBS PR customer accounts.
The background of these Puerto Rico funds can be found here in a SEC cease and desist Order from 2012. The Order, to which UBS PR consented entry, finds that UBS PR “willfully violated Section 17(a) of the Securities Act, which prohibits fraudulent conduct in the offer and sale of securities, and Sections 10(b) and 15(c) of the Exchange Act and Exchange Act Rule 10b-5, which prohibit fraudulent conduct in connection with the purchase or sale of securities.”
UBS Puerto Rico Funds referenced in the SEC Order include:
Puerto Rico Fixed Income Funds I – VI
Puerto Rico Mortgage Backed & US Govt. Fund
Tax-Free Puerto Rico Funds I and II
Tax-Free Puerto Rico Target Maturity Fund
Puerto Rico AAA Portfolio Target Maturity Fund
Puerto Rico AAA Portfolio Bond Funds I and II
Puerto Rico GNMA & U.S. Gov. Target Maturity Fund
Puerto Rico Investor’s Tax-Free Funds I – VI
Puerto Rico Tax-Free Target Maturity Fund I and II
Puerto Rico Investors Bond Fund I
The SEC Order, which was issued in 2012, discusses at length a voluminous number of misrepresentations and omissions in relation to these funds, which purportedly represented “the largest single source of revenue for UBS PR.” The SEC found that the “market values” reported by UBS PR were “misleading” because they were “simply what UBS PR thought they should be, not true market prices.” Despite warnings and concerns in 2008 about the concentration of customer investments in these funds, UBS PR continued to promote the sales of these funds through its financial advisors. In response to high levels of these funds being owned by UBS PR on its own books, the SEC details how UBS PR encouraged sales to customers and reduced its inventory by “undercutting customer sell orders.”
Specific findings made by the SEC in its Order include the following:
Page 3. “Since 1995, UBS PR has been the primary underwriter of fourteen separately organized closed-end fund companies’ CEFs [closed-end funds] with a total market capitalization of approximately $4 billion, and nine co-managed closed-end fund companies’ CEFs with more than $1 billion in total market capitalization.”
“The CEFs represent the largest single source of revenue for UBS PR. For example, between 2004 and 2008, the CEF business generated 50% of annual total revenues for UBS PR and UBS Trust Company combined, which included Fund advisory and administration fees, and primary and secondary market sales commissions.”
Page 2. “During 2008 and 2009, UBS PR, its former CEO (“CEO”) and its Head of Capital Markets (“HCM”) made misrepresentations and omissions of material facts to numerous retail customers in Puerto Rico regarding the secondary market liquidity and pricing of UBS PR-affiliated, non-exchange-traded closed-end funds (“CEFs” or “Funds”). For example, UBS PR claimed CEF prices were based on market forces such as supply and demand. However, UBS PR did not disclose that CEF prices were set solely at the discretion of the trading desk. Moreover, although UBS had certain disclosures about liquidity in prospectuses (not supplied to secondary market customers) and on its website, it did not adequately disclose, among other things, that as the dominant CEF broker-dealer, UBS PR controlled the secondary market. In reality, any secondary market sales investors wanted to make depended largely on UBS PR’s ability to solicit additional customers or willingness to purchase shares into its inventory.”
“As UBS PR, the CEO and the HCM promoted CEF sales throughout 2008, they knew investor demand was significantly declining relative to supply. For much of 2008, UBS PR purchased millions of dollars of CEF shares into its own inventory while promoting the appearance of a liquid market with stable prices, without disclosing UBS PR’s actions were propping up prices and liquidity.”
“But in the spring of 2009, UBS PR’s parent firm determined UBS PR’s growing CEF inventory represented a financial risk to the firm. The parent company directed UBS PR to substantially reduce its inventory of CEF shares. To accomplish the reduction, UBS PR and the HCM executed a plan, dubbed “Objective: Soft Landing” in one document, in which UBS PR routinely offered and sold its CEF shares at prices that undercut pending customer sell orders.”
“During this period, numerous UBS PR customers were also attempting to sell their holdings but UBS PR’s actions effectively prevented certain customers from selling their CEF shares. Between March and September 2009, UBS PR sold about $35 million, or 75%, of its inventory to investors. At the same time, UBS PR increased its efforts to solicit sales of CEFs while continuing to misrepresent how it was setting secondary market prices and the liquidity of the market. UBS PR also did not disclose its withdrawal of market support. By September 2009, when UBS PR completed its CEF inventory reduction, the market price of certain funds had declined by 10-15%.”
Page 4. “The CEF share prices in UBS PR customers’ monthly account statements were similarly misleading in that they described “market values.” As with the newspaper prices, these prices were simply what UBS PR thought they should be, not true market prices.”
Page 6. “Notwithstanding his knowledge of the weak demand for CEF shares in the secondary market, the CEO repeatedly misled UBS PR’s financial advisors throughout the fall of 2008 into continuing to promote CEF sales. In numerous e-mails, he repeatedly misstated the strength, stability and liquidity of the CEF market. The CEO did not disclose to the sales force the liquidity issues in the secondary market, or that UBS PR was keeping the CEF prices high by increasing its CEF inventory.”
Page 9. “UBS PR did not disclose to its customers it was substantially reducing the use of its inventory to support the CEF market. UBS PR also continued to accept customer limit orders without disclosing that it was undercutting those limit orders to sell UBS PR’s shares first. UBS PR also failed to disclose the conflict of interest created by recommending CEFs to investors while selling its own shares.”
Page 11. “UBS PR willfully violated Section 17(a) of the Securities Act, which prohibits fraudulent conduct in the offer and sale of securities, and Sections 10(b) and 15(c) of the Exchange Act and Exchange Act Rule 10b-5, which prohibit fraudulent conduct in connection with the purchase or sale of securities.”
Page 12. “UBS PR shall, within 14 days of the entry of this Order, pay disgorgement of $11,500,000.00, prejudgment interest of $1,109,739.94, and a civil money penalty of $14,000,000.00 to the Securities and Exchange Commission.”
The risk in the funds was also increased by leverage within the funds, and according to news reports, leverage within customer accounts. According to this New York Times article, UBS customers in the funds “were encouraged by its brokers to borrow even more money to invest in those funds.” Such leverage of already leveraged investments can lead to increased risk as well as increased losses.
If you have suffered losses in the above funds with UBS PR, and wish to speak to an attorney with our firm at no charge to discuss your legal options, please contact Greco & Greco.
Consent Order in Maryland Case Against Joseph Giordano
The Securities Commissioner of Maryland entered a Consent Order against former FINRA registered representative Joseph A. Giordano in May, 2013. The Order can be found here.
According to the Consent Order, Giordano violated the Maryland Securities Act by “misrepresenting or omitting to disclose material facts to investors, and making unsuitable recommendations.” The investments at issue were Empire bonds and debentures.
Giordano was a FINRA registered securities salesperson with Capital Investment Group, Inc. from October, 1992 to June, 2012. Mr. Giordano’s FINRA Brokercheck report states that he was terminated for cause by Capital Investment Group for “selling away and making false and misleading statements to the firm.” The Consent Order states that Capital Investment Group raised issues of concern regarding Empire Corporation debentures in 2006.
Greco & Greco regularly represents investors in “selling away” cases such as this where the broker sells unauthorized securities away from his firm. Customers may attempt to recover their losses in FINRA arbitration by demonstrating firms’ failures to supervise, failure to follow up on red flags, and by arguing the firm is responsible for the acts of its agent under the legal theories of respondeat superior and vicarious liability. Federal and state securities laws also mandate liability of control persons (such as brokerage firms) if certain requirements are met. If you are the victim of a fraudulent sale of securities by a FINRA registered broker, please contact one of our attorneys for a free consultation.
Posted by W. Scott Greco on 09/09/13.
Arbitration • Bonds • Brokerage Firms • Capital Investment Group, Inc. • FINRA • Fraud • Securities Fraud • State Regulators • Maryland • Suitability • Unregistered Securities • Permalink
SEC Releases Financial Literacy Study
Pursuant to the Dodd-Frank Act, the Securities and Exchange Commission (SEC) was required to conduct a study identify the financial literacy of retail investors in the U.S. The study can be found here.
Not surprisingly, the study showed that retail investors consistently lacked financial literacy of basic investment issues, and lacked critical knowledge about investment fraud. The report states: “... studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation. Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns.”
Despite most individuals’ lack of financial literacy, and the fact that most individuals rely on investment professionals due to their own lack of investment knowledge, a standard defense raised by brokerage firms in FINRA arbitrations is to blame the victim and claim that the investor understood the risks involved in following the broker’s advice. This study refutes the common defense that almost every individual is a “sophisticated investor” capable of understanding the risks involved. If you suffered losses due to the wrongful acts of a broker, advisor, or brokerage firm, please contact one of our attorneys for a free consultation.
FINRA Fines Northern Trust for CMO Sales
FINRA recently fined Northern Trust Securities Inc. $600,000 for supervisory failures related to sales of Collateralized Mortgage Obligations (CMOs) to customers. As set out in this FINRA release: “from October 2006 through October 2009, Northern Trust failed to monitor customer accounts for potentially unsuitable levels of concentration in CMOs, in large part because it used an exception reporting system that failed to capture or analyze substantial portions of the firm?s business, including all CMO transactions, certain trades of 10,000 equity shares or more, and certain trades of 250 or more of fixed-income bonds.”
The Letter of Acceptance, Waiver, and Consent which can be found on the FINRA website discusses the risks of CMO’s and states that the flaw in the system was first raised in an arbitration filed by an investor who had almost 50% of her total liquid net worth invested in a Countrywide CMO that had lost significant value.
If you have incurred losses from CMOs which were unsuitable for you or were overconcentrated, or if you are the victim of other broker misconduct and you would like to discuss legal options with an attorney, please contact Greco & Greco for a free consultation with one of our lawyers.
Some Auction Rate Securities to be bought back at discount
The Missouri Higher Education Loan Authority announced this week that it would begin buying back a portion of its auction rate securities at a discount on the Restricted Securities Trading Network. See the related news stories in Forbes and the St. Louis Business Journal.
This news is a mixed blessing for investors stuck with these or other auction rate securities. While such a buy-back will finally allow them to escape from these investments, they will probably have to take a loss on the investment if it is bought back at a discount on a secondary market. Many investors around the country were sold auction rate securities by major brokerage firms who incorrectly claimed they were safe, liquid, cash equivalents. This has turned out to not be the case as evidenced by the collapse of the auction markets earlier this year. Such sales practices can form the basis for claims of federal and state securities fraud among other causes of action.
If you are an investor who was sold Auction Rate Securities, and you would like to discuss your legal options with an attorney, please Contact Greco & Greco.
Auction Rate Securities Failures
Auction Rate Securities and Auction Rate Preferred Securities (ARS) are securities made up of long term bonds or preferred stock with variable interest rates and yields. The yields are periodically reset through Dutch auctions. ARS are often marketed and sold by a single dealer with the only resale market being through a successful auction. Problems have arisen in recent months as a result of the failures of the auctions, leaving investors in the lurch and unable to redeem the security. As set out in this SmartMoney article, ARS have been marketed as a safe, liquid alternative to money market funds. Investors believing they had their money in a safe liquid investment are understandably concerned by the failures in the marketplace for these securities, and our firm has been monitoring the situation closely and discussing the matter with concerned individuals and businesses. Misrepresentations and omissions in the sale of a security can form the basis for a claim for securities fraud as well as other legal claims for recovery of damages.
As recently as 2006, the SEC censured 15 of the largest brokerage firms for sales and auctions of Auction Rate Securities. As stated by the SEC in its press release, “since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks associated with certain securities.” The SEC further stated that “the firms violated Section 17(a)(2) of the Securities Act of 1933, which prohibits material misstatements and omissions in any offer or sale of securities.” The fifteen firms which were censured were Bear, Stearns & Co., Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated/ Morgan Stanley DW Inc., RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc., Morgan Keegan & Company, Inc., Piper Jaffray & Co., SunTrust Capital Markets Inc., Wachovia Capital Markets, LLC, and Banc of America Securities LLC. Read the SEC Order here.
UBS appears to be the first firm to actually begin lowering the values of auction rate securities on its customers’ statements, as reported by many news sources on March 29 including this Reuters article. Citing a Wall Street Journal article, Reuters reported that the markdowns could exceed 20 percent for some customers. Additional concessions from other firms may be forthcoming as the first quarter of 2008 ends.
State Regulators, including Massachusetts, have also begun investigations of the auction rate securities market with Massachusetts reportedly issuing subpoenas to UBS, Merrill Lynch, and Bank of America.
The Financial Industry Regulatory Authority (FINRA) released an Investor Alert on March 31, 2008 regarding auction rate securities which purports to set out various options for investors stuck with these products. FINRA, which claims to be a “trusted advocate for investors,” notably fails to mention contacting an attorney or filing an arbitration claim as options. If you are an investor who was sold Auction Rate Securities, and you would like to discuss your legal options with an attorney, please Contact Greco & Greco.
Posted by W. Scott Greco on 03/03/08.
Auction Rate Securities (ARS) • Bonds • Brokerage Firms • A.G. Edwards • Banc of America • Bear Stearns • Citigroup • Deutsche Bank • Ferris Baker Watts • Lehman Brothers • Merrill Lynch • Morgan Keegan • Morgan Stanley • Piper Jaffray • RBC Dain Rauscher • Suntrust • UBS • Wachovia • FINRA • State Regulators • Massachusetts • Suitability • Permalink
Morgan Stanley fined for corporate bond overcharges
As set out in this FINRA press release Morgan Stanley was fined and forced to pay restitution to retail customers for overcharging for corporate bond sales and for “having an inadequate supervisory system for monitoring the pricing of corporate fixed income securities sold to customers.”
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