In a complete turnaround, UBS AG (UBS) is now telling clients to step away from Puerto Rico bond funds. Reuters reports that in a recent letter, the firm’s Puerto Rico arm told clients that they would be contacted shortly regarding alternative investments.
Reasons cited for the warning is that the funds can no longer be used as loan collateral in the wake of the U.S. territory’s financial woes. Puerto Rico is currently $72 billion in debt. Concerns over its economy were not eased when Governor Alejandro García Padilla recently asked the island’s debt holders for help in postponing bond payments and restructuring the Commonwealth’s debt.
Reuters also reported that in the letter to UBS customers – issued on July 13 – UBS said the firm would lower the collateral value given to every Puerto Rico closed-end fund share to zero. However, noted the news agency, despite the declaration of zero value for the funds’ shares, the brokerage firm continues to list share prices on its website.
UBS Puerto Rico’s decision to reject the funds as collateral shows just how high risk the firm now views these investments. According to Sam Edwards, a partner in Shepherd, Smith, Edwards & Kantas, who is currently representing dozens of Puerto Rico investors, “UBS came up with the scheme to use the Closed-End Funds as collateral for loans from UBS Bank since they were not eligible for margin loans. It was that leverage against already internally leveraged losses that causes some of the worst losses on the island. UBS is now pulling the plug on its own plan and effectively admitting this was a faulty idea and not only too risky for investors, but now, too risky for UBS, who designed the plan in the first place.”
Once again, the evidence appears to support that UBS is protecting itself at the expense of its customers.
In other UBS news, the financial firm admitted in a recent filing that one of its former employees in Puerto Rico, financial adviser José Ramirez, is currently under criminal investigation by the U.S. Justice Department. Mr. Ramirez, who is nicknamed by many on the island as “Whopper,” was let go from the firm last year.
Ramirez is one of the brokers that investors contend advised them to take loans from the firm to purchase Closed-End Funds from UBS, a direct violation. The broker-dealer also admitted that the Financial Industry Regulatory Authority and the U.S. Securities and Exchange Commission have made related inquiries about the way its clients used loans to purchase the UBS Closed-End funds. In the same filing, the firm said that so far, arbitrations and complaints stemming from its woes with Puerto Rico bonds have resulted in claimed damages exceeding $1.1 billion.
Other brokerage firms, including Banco Santander (SAN) and Banco Popular, have also come under fire for selling Puerto Rico bonds and related products to customers. Many investors sustained unnecessary and excessive losses after the bonds’ value sharply declined two years ago.
If you have lost money in Puerto Rico bonds or related Puerto Rico bond funds, please contact our Puerto Rico muni bond fraud lawyers today. We represent investors in the U.S. and in Puerto Rico.
UBS backs away from its Puerto Rico funds after downgrades, Reuters, July 23, 2015
U.S. Investigates Ex-UBS Puerto Rico Adviser Over Loans for Debt Funds, The Wall Street Journal, July 29, 2015