Articles Posted in Municipal Bonds

A Financial Industry Regulatory Authority (FINRA) arbitration panel says that UBS Financial Services (UBS) must pay $18.6 million to customers Rafael Vizcarrondo and Mercedes Imbert De Jesus for their losses from investing in Puerto Rico closed-end bond funds.  The two investors, both UBS clients, accused the broker-dealer of breach of contract, breach of fiduciary duty, and other securities violations. They claim that UBS placed their money in unsuitable investments and did not properly supervise the broker who worked with them. As part of the award, Impert De Jesus and Vizcarrondo will receive $12.7 million in compensatory damages, $2.5 million of interest, $3.2 million in legal fees and $163,000 in expert witness fees.

Vizcarrondo is a prominent lawyer in Puerto Rico. His legal team said that UBS had attempted to portray him as a “sophisticated” investor, someone who should have known what he was getting involved in when he invested in the territory’s bonds.  The firm described Vizcarrondo as having been “fully informed” when he decided to concentrate his investments in UBS’s Puerto Rico closed-end funds. However, as Vizcarrondo’s attorney noted, not all professionals are “sophisticated investors.” Based on its decision, the FINRA arbitration panel obviously agreed with the claimant.

This is the largest FINRA arbitration award issued over Puerto Rico bond funds to date. There are over a thousand cases still pending. These claims were brought by investors seeking to recover the financial losses they suffered from investing in the island’s beleaguered securities. Although a number of firms, including Banco Santander (SAN), Banco Popular, Merrill Lynch and others have been named in Puerto Rico bond and closed-end bond fraud claims, UBS and affiliate UBS Financial Services Inc. of Puerto Rico (UBS-PR) have been the largest target of these claims. In fact, the TheStreet.com reports that on November 2, UBS AG, the parent company of UBS and UBS-PR, notified the U. S. Securities and Exchange Commission in a filing that about $1.9 billion in Puerto Rico municipal bond funds and closed-end fund claims have been brought against it. The firm has already paid out $740 million to claimants.

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The Financial Industry Regulatory Authority (“FINRA”)  has fined Merrill Lynch, Pierce, Fenner & Smith Inc (“Merrill Lynch”) $6.25 million and imposed a restitution penalty of $780,000 over Merrill Lynch’s inadequate supervision of its customers that employed leverage in brokerage accounts, as well as its failure to supervise the way that these customers were able use the proceeds from their loan managed accounts (“LMAs”). LMAs are credit lines that let customers use the securities in their brokerage accounts as collateral in order to borrow funds from a bank affiliate.  However, these LMAs are not supposed to be used to purchase additional securities.

The $780,000 will go to customers that invested in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds. By settling Merrill Lynch is not admitting or denying FINRA’s findings.

According to FINRA, Merrill Lynch did not have these adequate procedures and supervisory systems at issue in place from 1/2010 through 11/2014. FINRA found that even though Merrill Lynch’s policy and non-purpose LMA agreements barred customers from using LMA proceeds to buy different kinds of securities, there were thousands of times during the relevant period that, within two weeks of getting LMA proceeds, Merrill Lynch brokerage accounts collectively purchased hundreds of millions of dollars of securities. Merrill Lynch also set up over 121,000 LMAs, with Bank of America (“BAC”) extending over $85 Billion in aggregate credit. FINRA said that all of this was able to happen because the firm’s supervisory procedures and systems were inadequate.

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A Financial Industry Regulatory Authority (“FINRA”) panel is ordering UBS Financial Services, Inc. (“UBS”) to pay Puerto Rico residents over $700,000 in damages.  The FINRA panel ordered UBS to pay $549,000 in compensatory damages to a defunct car rental business belonging to Luis Vega, as well as over $165,000 to Teresa Rosas, who is Vega’s former wife. The firm must also pay over $100,000 in costs and hearing session fees.

Vega and Rosas filed their case against UBS accusing the brokerage firm of securities fraud, negligence, recklessness, and deceit. Vega, 87, invested almost $8 million through his Condado Motors with UBS broker Jose Chaves between ’06 and ’11. During that time, Chaves invested approximately 95% of the money in three of UBS’s Puerto Rico close-end funds, even taking out loans to cover some of the costs. The couple’s lawyer claims that Chavez did not disclose any risks involved other than what was noted in the funds’ prospectus.  Additionally, Rosas bought over 17,000 shares of the UBS Puerto Rico Fixed Income Fund III.

The couple saw their investments lose the bulk of their value when the prices for the Puerto Rico bonds and Puerto Rico closed-end funds dropped in 2013. According to their lawyer, Condado Motors lost $3.9 million in value, as well as $823,650 in net out-of-pocket losses, during 2013. The couple said that their financial problems played a part in their decision to get a divorce.

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A Financial Industry Regulatory Authority (FINRA) arbitration panel has ordered UBS Financial Services (UBS) to pay Ana Elisa Ciordia-Robles almost $1 million, including  $751,000 in compensatory damages and additional sums for legal fees and costs. Ciordia-Robles accused UBS of negligent supervision, breach of fiduciary duty, fraud, negligence, breach of contract, and violations of the Puerto Rico Uniform Securities Act, the Securities and Exchange Commission’s Rule 10b-5, and the Securities Exchange Act’s Sections 10(b). More specifically, Ciordia-Robles claimed she sustained losses from investing in UBS Puerto Rico (UBS-PR) closed-end bond funds.

When Puerto Rico muni bonds dropped in value in 2013, many investors on the island and in the mainland sustained huge investment losses. In the last few years, UBS and UBS-PR       have been the subject of thousands of customer complaints over their sale of Puerto Rico municipal bond and proprietary bond funds. Claimants are alleging that these investments were unsuitable, that high concentrations of these investments were recommended, and that UBS never apprised them of the risks involved in the closed-end bond funds that they were sold. Many of these investors have since realized that their portfolios were never equipped to handle these risks.

It was just last  year that UBS consented to pay about $34 million to US regulators to settle allegations related to its supervision of the sale of the Puerto Rico bond funds and use of leverage against those closed-end funds. UBS has already settled a number civil claims brought by investors through FINRA arbitration.  At Shepherd Smith Edwards and Kantas, LTD LLP our securities lawyers have been working hard to help quite a number of these investors  recoup these losses.

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A battle of hedge funds, and their competing interests, has erupted in Puerto Rico over the last few weeks.  This week, hedge funds Tilden Park Capital Management LP, Whitebox Advisors LLC, Merced Capital LP, and GoldenTree Asset Management LP filed a motion asking a court to impose a legal stay that would delay the lawsuit filed by general obligation bondholders that want Puerto Rico to stop directing sales-tax revenue away from the general fund. These hedge funds that submitted the motion collectively hold about $2 billion of tax revenue bonds, which are called COFINA bonds, locally.

Meantime, the general obligation bondholders that filed the lawsuit are also hedge funds. They include entities under the management of Aurelius Capital Management, FCO Advisors, Autonomy Capital, Covalent Partners, Monarch Alternative Capital, and Stone Lion Capital Partners. Earlier this month, they asked a court to stop the island from using sales-tax revenue to pay back COFINA debt. Those funds believe that the sales tax revenue should pay back the general obligation bonds first because Puerto Rico’s constitution states that general obligation should be repaid before other debt. However, the hedge funds holding the COFINAs that are requesting the legal stay are arguing that COFINA’s share of the sales-and-use-tax should not be “subject to clawback” in the event of a payment shortfall of the general obligation bonds. 

This fight is playing out at the same time the U.S. Government is trying to help the U.S. Commonwealth with its financial crisis.  PROMESA, which stands for the Puerto Rico Oversight Management and Economic Stability Act, is the new law that includes the legal stay that the CONFINA holders want imposed. The stay postpones creditor lawsuits against the island until February 15, 2017 in order to give Puerto Rico time to work out how to repay the $70 billion of debt it owes.   Although Puerto Rico is way overdue on $1.8 billion of principal plus interest payments, this includes what the island owes on general obligation bonds, the Commonwealth paying back COFINAs.
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A number of hedge funds with Puerto Rico general obligation bonds want a court to stop the U.S. territory from using its sales-tax revenue to pay back other debt. Those hedge funds say that such an action is a violation of the Commonwealth’s constitution.

To date, the Commonwealth owes nearly $13 billion of general obligation bonds. Under its constitution, Puerto Rico is required to pay back its general obligation bonds before paying off other expenses. According to the plaintiffs, part of the territory’s’ sales tax revenue is supposed to go toward that repayment.

The plaintiffs sued Puerto Rico Governor Alejandro Garcia Padilla to stop the territory from moving money away from bondholders, which they say violates the new federal law concerning Puerto Rico, called PROMESA. The hedge funds submitted their amended complaint last week, in which they added the Puerto Rico Sales Tax Financing Corp., commonly called COFINA, as a defendant. The plaintiffs include entities under the management of Aurelius Capital Management, Covalent Partners, Autonomy Capital, Monarch Alternative Capital, FCO Advisors, and Stone Lion Capital Partners. 

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According to Bloomberg, the retirement system of Puerto Rico has joined a lawsuit against UBS Financial Services, Inc. (UBS) for poor returns that the retirement system received on $3 billion the it borrowed on UBS’s recommendation. Six beneficiaries originally brought this Puerto Rico bond fraud case in 2011 against UBS and two smaller broker-dealers.UBS was the underwriter of bonds sold by the judiciary retirement systems and employees eight years ago.  UBS also served as investment consultant, adviser, and bond fund manager. The bond proceeds were supposed to earn a positive return as compared to the interest paid on the bonds.  According to UBS, this would help Puerto Rico resolve some of its pension shortfall.  However, UBS, according to the complaint, put too much of the bond proceeds toward low-yielding accounts that made “negative income.”

Now, Puerto Rico’s pension funds are in financial trouble and could go broke as early as 2018.  System administrator Pedro R. Ortiz said that the system’s board is looking to obtain a  “significant recovery” for pensioners and participants.

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The Financial Industry Regulatory Authority announced that UBS Financial Services and its Puerto Rico subsidiary (UBS) must collectively pay three investors $750,000 in damages for losses they sustained from investing in UBS’s proprietary Puerto Rico closed-end bond funds and Puerto Rico bonds. The claimants are Jenny Robles Adorno, Desarrollos Jarra SE, and Jose A. Rivera.

The investors accused UBS of recklessness, fraud, and negligence. They sought compensatory damages, punitive damages, and reimbursement of commissions that they said were unlawful. In San Juan, the FINRA arbitration panel awarded Rivera $562,500, Robles $30,000 and Jarra $157,500. UBS said it was “disappointed” with the panel’s decision to award any damages to the claimants.

This is not the first Puerto Rico bond fraud arbitration case in which UBS has been ordered to pay investors. Just this March, the firm had to pay over $470,000 to three investors who said their accounts were over-concentrated in the same Puerto Rico focused investments. The claimants in that case alleged negligent supervision and fraud. Similarly, UBS was ordered to pay a former television executive over $1,400,000 in the fall of 2015 for over-concentrating the former customer in UBS’s proprietary funds and misrepresenting the risks of those investments.

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The U.S. Securities and Exchange Commission said that BOK Financial Corporation subsidiary BOKF NA will pay over $1.6M to resolve charges accusing the Oklahoma-based bank of ignoring signs that businessman Christopher F. Brogdon was engaged in suspect activates related to his management of municipal bond offerings for investors. Brogdon was charged by the regulator with fraud last year and he must pay back investors $85M.
The federal government accused him of collecting almost $190M through private placement offerings and muni bond offerings. Investors thought they would earn interest from money made by assisted living facilities, nursing homes, or another retirement community project. Instead, Brogdon commingled accounts and redirected investor funds to other ventures and his own expenses.

According to the regulator, BOKF and ex-senior VP Marrien Neilson found out that Brogdon was taking money out from reserve funds for the muni bond offerings and not replacing the money. They also became aware that he had neglected to file annual financial statements for the bond offerings.

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The White House has appointed seven people to the Fiscal Control Board tasked with helping Puerto Rico deal with its $70B of debt. The appointees, named by President Obama, include: Jose Ramon Gonzalez (Federal Home Loan Bank of NY CEO/President), Arthur Gonzalez (Ex-bankruptcy Judge), Ana Matosantos (Ex-California Dept. of Finance Director), Carlos Garcia (Ex-Puerto Rico Government Development Bank president and CEO/Founder of BayBoston Managers LLC), Jose Carrion III (Puerto Rico insurance executive), Andrew Biggs (Scholar) and David Skeel (University of Pennsylvania Law Professor). Three of these board member are Democrats, four are Republicans. The eighth member of the board is Puerto Rico’s governor Alejandro Garcia Padilla. He is an automatic member because of his position but does not have a vote.

The creation of the federal control board was part of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The legislation was passed by the U.S. Congress to help the U.S. territory with its financial woes. Puerto Rico has been defaulting on its debt payments that have been due. Just last week, the Government Development Bank of Puerto did not pay almost $10 million of interest that was due on it outstanding bonds. According to a recent report by the ReFund America Project, which has been investigating the U.S. territory’s debt, approximately $1.6 billion of the island’s debt are the fees earned by Wall Street firms, such as Citigroup (C), UBS (UBS), Barclays Capital (BARC), and Goldman Sachs (GS). Even worse, the ReFund America Project said that about $323 million of the money paid to Wall Street firms was for “scoop and toss” deals involving UBS as the main underwriter.

The report also stated that close to half of the $134 million in debt Puerto Rico and its public corporations have issued over the last 16 years is refunding debt. Puerto Rico’s financials purportedly show that the territory had been putting out new refunding bonds to pay back bonds that had been issued earlier. The use of refunding bonds to delay current debt payments for later is what is involved in “scoop and toss” financing.

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