Investors Pursue UBS’s Puerto Rico Brokerage Over Closed-End Bond Funds

The Financial Industry Regulatory Authority is reporting that roughly 400 claims have already been filed against UBS Financial Services Inc. of Puerto Rico (UBS) and other brokerage firms over the fallout of municipal bonds and bond funds related to the Commonwealth of Puerto Rico. As the U.S. territory’s bonds continue to drop in price, more investors are likely to file cases.

According to Securities Attorney Sam Edwards, one of the partners at Shepherd, Smith, Edwards & Kantas currently representing dozens of investors who lost money in these investments, “”The recent drop in Puerto Rico bond prices have resulted in Puerto Rico bonds, and the bond funds holding Puerto Rico bonds, to give back most, if not all, of the gains of the last nine months. Bond prices have largely returned to the lows suffered in the Fall of 2013.” Mr. Edwards continues, “This is likely to result in new groups of clients coming forward as the rally in Puerto Rico debt appears to have been short-lived.”

Investors, many of them locals, took huge financial losses when two dozen Puerto Rico bond funds sponsored by UBS and Popular Securities, Inc. (Banco Popular) declined in value last year. Many of the investors are retirees and other senior investors that have now lost their life savings. However, they are not the only ones impacted.

Even investors who did not directly invest in Puerto Rico bonds are feeling the effects. That is because there are many single-state and nationally marketed municipal bond funds in the U.S. that also got involved in the island’s debt. Many of the bond funds that were constructed for residents of different states hold Puerto Rico bond funds because of their advantageous tax status. However, with that tax advantage came significant risks.

Franklin Templeton Investments (BEN) and Oppenheimer Funds offer the 10 bond mutual funds with the most exposure to Puerto Rico bonds. Recently, these two fund managers filed a lawsuit seeking to have a new Puerto Rico law, known as the Public Corporation Debt Enforcement and Recovery Act, struck down.

The law, which lets parts of the U.S. territory restructure its debt, is causing investors to worry about significant losses to principle. The funds are arguing that the law violates the U.S. Constitution because it lets the territory impair certain contracts. They contend that the federal government is the only entity allowed to make bankruptcy law.

Puerto Rico is now asking a federal court to throw out the lawsuit, arguing that states are only barred from making bankruptcy law if this conflicts with federal law. It says that contracts are allowed to be impaired if this means fulfilling an “important government purpose.” Puerto Rico also noted that existing bankruptcy laws are not applicable to the island.

Additionally, the U.S. territory argues, the lawsuit was not timely because the specific local bonds at issue are from the Puerto Rico Electric Power Authority (PREPA) and the electric authority has not yet attempted to restructure its debt. The fund managers collectively hold around $1.7 billion in PREPA debt.

At Shepherd Smith Edwards and Kantas, LTD LLP, our Puerto Rico bond fraud law attorneys are representing many Puerto Rico residents. We have already filed more than 20 case against UBS and others, with dozens more pending. We represent investors in the U.S. and in the Commonwealth.

The first securities arbitration hearings will likely happen sometime this year. FINRA arbitrators will hear most of the muni bond fraud cases in Puerto Rico.

If you are an investor who has suffered losses from investing in these Puerto Rico bonds or bond funds holding Puerto Rico debt, please contact us today. There is still time to try to get your money back.



A Deluge of Legal Claims Hit UBS’ Puerto Rico Unit Over Closed End Bond Funds, The Wall Street Journal, July 21, 2014
Puerto Rico seeks dismissal of U.S. bond funds’ lawsuit, Reuters, July 21, 2014

Puerto Rico Electric Power Authority

More Blog Posts:

OppenheimerFunds, Franklin Templeton Sue Over Puerto Rican Debt Law, Stockbroker Fraud Blog, July 2, 2014

UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales, Stockbroker Fraud Blog, June 21, 2014

Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013