UBS Ordered to Pay Investors Over $47K in Puerto Rico Bond Fraud Case

UBS Group AG (UBS) must pay Obdulio Melendez Ramos, Carlos L. Merced, and Ramon Velez Garcia over $470K for losses they sustained from investing in Puerto Rico bonds/bond funds that lost value. The three men filed their case with the Financial Industry Regulatory Authority. They contend their accounts were over-concentrated in risky Puerto Rico bonds/bond funds. Ramos, Garcia, and Merced had alleged negligent supervision and fraud.

Addressing the panel’s ruling, a spokesperson for UBS called the decision “disappointing” and said that he disagreed with the outcome. In an emailed statement, Gregg Rosenberg contended that that there were specific circumstances involved with this case and its outcome was not a indicative of how other arbitrators might rule in similar cases. However, according to a recent supplement for the firm’s fourth quarter earnings results, since August 2013 drops in Puerto Rico municipal bond prices, as well as in the prices of related proprietary funds UBS manages and distributes, have led to customer complaints, regulatory inquiries, and arbitrations filed against the firm.

Claimed damages against UBS are estimated to total $1.5B. The vast majority of those claims are still outstanding.

Many investors have accused UBS Puerto Rico of inappropriately persuading them to invest in the island’s municipal bonds even though these investments were not appropriate for them. UBS brokers even purportedly encouraged some investors to borrow so that they could become more heavily invested in the bonds. When Puerto Rico bond prices plunged, it was the investors, many of whom were retirees, that suffered.

Puerto Rico continues to struggle under the weight of its $72 billion in debt. Last week, the U.S. Supreme Court heard oral arguments about whether the U.S. territory should be able to restructure part of its debt. At issue is the constitutionality of the island’s Debt Enforcement and Recovery Act of 2014, which sought to establish a bankruptcy-like regime that would allow certain Puerto Rico public corporations to restructure their debt obligations without having to obtain unanimous creditor approval.

A federal district court and the First Circuit both found that the US Bankruptcy Code, which does not allow states to enact laws that tie non-consenting creditors of municipalities to debt restructuring terms, pre-empted the act. The question now is, within the code’s Section 903, is Puerto Rico a State? The First Circuit said yes.
The petitioners before the court, however, are arguing the First Circuit’s ruling has left them with no practical means to restructure the island’s public utilities debt. They contend that, surely, when Congress included Puerto Rico and the District of Columbia under its definition of the term “State” when it was defining who/what can be a debtor under Chapter 9’s bankruptcy protections, it did not mean to leave Puerto Rico and its municipalities subject to the chapter’s preemptive burdens.

For nearly three years, our Puerto Rico muni bond fraud lawyers at Shepherd Smith Edwards and Kantas, have been working with investors on the island and the mainland to pursue their claims against negligent broker-dealers and their brokers. Aside from UBS, Other brokerage firms, including Banco Santander (SAN) and Banco Popular, have also been subject to FINRA arbitration claims by investors seeking to get their money back. Contact us today.

Finra arbitration panel orders UBS to pay for damages over Puerto Rico bond losses, InvestmentNews, March 25, 2016