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Greco & Greco, P.C.

W. Scott Greco

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Greco & Greco's lawyers represent investors to recover losses caused by securities fraud, churning, lack of suitability, negligence, sales of unregistered securities, unauthorized trading, and other misconduct by stock brokers, investment advisors, financial planners and their firms.

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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.

Posted by W. Scott Greco on 10/01/13.
ArbitrationBondsBrokerage FirmsUBS Financial Services Inc. of Puerto RicoFINRAFraudSECSecurities FraudSuitabilityPermalink

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