Judge dismisses SEC complaint involving UBS Puerto Rico bonds
Plaintiff’s attorney still sees silver lining in decision; plenty of room for arb claims
By Bruce Kelly
Oct 31, 2013 @ 12:49 pm (Updated 2:57 pm) EST
By Bruce Kelly and Trevor Hunnicutt
In a win for UBS Financial Services Inc., a Securities and Exchange Commission administrative judge this week dismissed allegations that two leading executives in Puerto Rico committed fraud in 2008 and 2009 when making statements to clients and UBS financial advisers about the quality of Puerto Rican bonds and the market for them.
In May 2012, the SEC accused Miguel Ferrer, senior officer of UBS Financial Services Inc. of Puerto Rico, and Carlos Ortiz, the head of the firm’s closed-end fund trading desk, of duping thousands of clients into buying hundreds of millions of dollars of municipal debt through closed-end funds created by UBS.
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“I do not find the preponderance of the evidence supports the division’s allegation that UBS PR, Ferrer and Ortiz engaged in a fraudulent course of conduct or a scheme to mislead customers and [financial advisers] when they represented the funds as profitable, safe, and stable investments and that supply and demand were responsible for fund prices,” chief administrative law judge Brenda P. Murray wrote in her decision.
Ms. Murray also wrote that UBS Puerto Rico did not make material misstatements or omissions regarding its inability to make a market for the proprietary municipal bond funds, which have declined in value because of Puerto Rico’s fiscal crisis, with economic stagnation and huge pension obligations.
UBS has a major presence in the financial advice industry in the Commonwealth of Puerto Rico. According to the SEC, it has about half of the market as measured by assets under management. Its 140 financial advisers had sold more than $10 billion of proprietary, closed-end municipal bond funds to clients through the end of last year.
Meanwhile, the rest of the financial advice industry is watching the $70 billion Puerto Rico municipal debt market closely. Regulators have begun making inquiries into mutual fund companies, including OppenheimerFunds Inc., in an attempt to understand their investors’ exposure to Puerto Rico municipal debt.
As of Wednesday, the S&P Municipal Bond Puerto Rico Index had declined 17.2% over the past 12-month period. Year-to-date, it is down 15%, with the drop starting near the end of June, about a month before Detroit filed for bankruptcy.
“UBS Puerto Rico is pleased with [Tuesday’s] decision, which relates to a period of significant turmoil in the global financial markets between 2008 and 2009,” spokesman Gregg Rosenberg said in a statement. “As the firm has maintained since first disclosing this investigation in 2010, the allegations against Mr. Ferrer and Mr. Ortiz were meritless, and the judge's decision confirms our position.”
One plaintiff’s attorney acknowledged the decision to be a victory for UBS, but he cautioned that attorneys filing arbitration claims on behalf of UBS clients who owned the closed-end bond funds and individual Puerto Rico municipal securities will focus on the specific transactions with UBS clients.
“It’s a win for UBS, no question, but the SEC complaint dealt only with misrepresentations and omissions,” said attorney Andrew Stoltmann. “Those are issues related to risk disclosure made to investors and has nothing to do with the suitability of transactions. That’s what every [Financial Industry Regulatory Authority Inc.] arbitration claim will be about.”
Ms. Murray’s decision is weighty, at 95 pages. The hearing lasted 13 days, and a total of 29 witnesses testified, including brokers, clients, and two experts.
Some UBS clients had considerable exposure to the bond funds, according to the decision. One client, Carmen San Miguel, was 52 when she placed her retirement savings and funds from a severance package totaling $344,000 with UBS Financial Services Puerto Rico. Sixty-five percent, or $223,000, was invested in Puerto Rico fixed-income and bond funds.
One UBS adviser, Wilson D. Colberg-Trigo, was a top-producing rep with about $700 million in assets under management. The Puerto Rico bond funds were 50% or more of the assets held by about 164 of his 700 clients, according to the decision.
Mr. Stoltmann said the volume of information in the decision would, in the end, help attorneys seeking to file complaints against UBS.
“The decision provides a crystal-clear road map for discovery in the Finra claims,” he said. “The e-mails that are referenced, the names of the individual brokers and what the policies and procedures were at UBS — that sort of information is invaluable for those of us fashioning discovery requests.”
The concentration of the fund in Puerto Rico securities has been well- documented, as well as the leverage rates for each fund, Mr. Rosenberg said.
“Muni bonds and/or closed end funds have long been a suitable part of many Puerto Rico investors' portfolios and matched their objectives,” he said. “Clients were aware of the concentration of assets in muni bonds or closed-end funds.”
The decision by Ms. Murray came the same day that UBS AG put a cost of $41 million on its brokerage’s bet on Puerto Rico.
In its third-quarter earnings report, UBS said it took a $20 million trading loss and $21 million in credit losses connected to loans that were backed by Puerto Rican municipal securities and “related funds.”
Bruce Kelly covers the securities industry, with a focus on independent broker-dealers; please contact him if you have news, information or industry scuttlebutt to discuss.
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