UBS’s continual, massive sale of Puerto Rico municipal bonds and UBS’s proprietary Puerto Rico bond funds involves a number of failures of its legal duties, some of which vary by the individual facts of each investor. According to the SEC investigation, UBS Puerto Rico was ordered by its parent company to massively sell off its inventory of Puerto Rico bond securities. In order to accomplish that, UBS Puerto Rico continually and intentionally undercut sell orders from its customers in these securities, ensuring that UBS’s securities sold, while other customers were unable to get out of their positions.
Despite the fact that UBS knew that these securities were becoming more and more illiquid, the SEC investigation indicates that UBS continued to sell massive amounts of the securities to its clients, in large part to ensure that UBS could offload its own holdings of the bonds before the bottom fell out of the market. This means that UBS was recommending that its clients buy securities that it knew were rapidly becoming difficult to sell, and which UBS knew had a seriously likelihood of significant value declines at the same time.
Many UBS clients were also being told to purchase these Puerto Rico bonds and bond funds in huge concentrations in their accounts. Many clients had 100% of their account in these securities. This type of investing violates very clear industry norms which require brokers to recommend that their clients diversify their portfolio, so that the failure or decline of one issuer or security, such as Puerto Rico, does not have a cataclysmic effect on the client’s entire account.
Many UBS clients were also told to borrow additional money so that they could make even larger purchases in these UBS Puerto Rico bond funds. The money came from a few different ways that we have seen so far, including margin loans, loans from UBS’s private bank, and home equity loans. Although the form of the loan makes a difference for the potential liability on UBS for recommending it, the end result is the same; buying securities with borrowed money is called using leverage. It significantly increases the risks the investor is taking, and many UBS clients were not appraised of, and did not understand, the huge risks that many of them were agreeing to. This type of recommendation also violates applicable regulations and industry standards.