UBS’s Anticipated Defenses in the UBS Puerto Rico Fund Cases

Regardless of the research and industry standards that say that UBS should not have been selling Puerto Rico bonds the way that it was, inevitably UBS will still put forward a vigorous defense to the claims that investors are now bringing forward. Although each case will vary somewhat based upon the particular facts involved, almost surely UBS will raise three major defenses.

First, UBS will claim that the recommendations that its employees made to their clients to invest huge portions of their accounts in Puerto Rico bonds and UBS’s Puerto Rico bond funds was actually suitable and appropriate. According to industry standards, a broker is not actually required to make the “best” recommendation to a client; they just have to make a recommendation that is “suitable,” or essentially “good enough.” For these Puerto Rico bonds, UBS will point out that municipal bonds are generally considered relatively low risk investments, which is true, and that the bonds gave significant tax benefits to investors, which is also true. What this defense fails to account for, however, are very widespread concepts of asset allocation, which is essentially a finance term for “don’t put all your eggs in one basket.”

Secondly, no securities claim would be complete without the broker-dealer claiming that the investor is sophisticated in finance, with great experience and understanding of the intricacies and risks involved. UBS will argue that it disclosed the risks involved in these investments and that it disclosed the conflict of interest that UBS had in many of these transactions. Once again, to some extent these are true. Many, if not most, clients who purchased shares of UBS’s proprietary funds were likely given a prospectus, or formal statement of the security which included somewhere in it a difficult to understand statement of risks, and conflicts that UBS has. However, contrary to this statement, most investors rely heavily on the advice of their brokers, and lack the wherewithal to read and comprehend the risks located in a lengthy prospectus.

Finally, UBS will likely claim, to the extent its brokers were recommending clients take out loans to make additional investments, that UBS had no knowledge of it and couldn’t have found out about it. It is possible, if not likely, that arbitrators might find this argument compelling, in isolated instances. However, the pattern of conduct appears to be so widespread that there is no possible way that UBS management did not know this was going on.

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