Articles Posted in Municipal Bonds

A Financial Industry Regulatory Authority panel has awarded five people $521,000 in compensatory damages in their Puerto Rico bond fraud case against UBS Financial Services (UBS) and UBS Financial Services Inc. of Puerto Rico (UBS-PR). The claimants had accused the financial firm of securities fraud, constructive fraud, common law fraud, negligent supervision, breach of fiduciary duty, and violating the Puerto Rico Uniform Securities Act.

UBS has been the subject of hundreds of FINRA arbitration claims brought by thousands of investors who sustained losses from Puerto Rico bonds and closed-end bonds, with many UBS-PR customers contending that they sustained massive losses because these investments were inappropriately recommended to them. To date, the financial firm has been ordered to pay or agreed to pay in settlements hundreds of millions of dollars to investors, with more claims still pending.

For over four years, our Puerto Rico bond fraud law firm has worked with investors on the island and the U.S. to help those investors recover their losses from losses in Puerto Rico securities. Contact Shepherd Smith Edwards and Kantas today to request your free, no obligation consultation.

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According to a recent CNBC investigation, not only did UBS Puerto Rico (UBS-PR) fail to disclose to investors the risks involved in the bond funds UBS pushed on the island’s residents, but also the brokerage firm neglected to fully apprise its own brokers of the incredible risks. While these findings are not new, the CNBC probe digs deeper into the matter.

The majority of these investors were island locals, who have now also been further devastated as a result of Hurricane Maria. Already, UBS has come under fire and paid hundreds of millions of dollars in securities settlements and awards from FINRA arbitration panels over losses investors sustained when these investments failed dramatically more than four years ago. UBS also has settled with regulators, including the U.S. Securities and Exchange Commission and FINRA, and paid over $60 million for its wrongful conduct and abuse of investors. The firm did not, however, deny or admit to wrongdoing.

UBS Executives Purportedly Knew Puerto Rico Bonds Would Fail
CNBC’s investigative team obtained approximately “2,000 pages of confidential documents” that display conversations and the “inner workings” between UBS executives in Puerto Rico and the U.S. mainland prior to the funds’ collapse. According to the documents, as far back as a year before the Puerto Rico funds failed, UBS management already knew that problems were brewing and they discussed what could happen if the firm did not deal with these issues immediately.

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Reuters reports that Senator Investment Group, Monarch Alternative Capital, and Stone Lion LP—all hedge funds—have gotten rid of hundreds of millions of dollars of Puerto Rico general obligation bonds in the wake of the devastation caused by Hurricane Maria. Similarly, another hedge fund, Varde Partners, no longer has $136M of its COFINA debt. Investors have been hoping that the island’s bonds would rebound after the territory filed for bankruptcy earlier this year. Now, however, recovery for Puerto Rico is expected to take longer after the storm. Debt prices have dropped to drastic lows, while Maria has caused tens of billions of dollars in damages.

Meantime, in the U.S. mainland and on the island, investors continue to fight to recoup their losses sustained when Puerto Rico’s bonds and closed-end bond funds plunged in value more than four years ago. Our securities fraud lawyers have been working with investors to get their funds back. Many investors were not properly apprised of the risks involved in investing in these bonds. Quite a number of them should never have invested in these securities at all.

Still, brokers from Banco Popular, UBS Puerto Rico, Santander Securities, and other brokerage firms continued to tout these investments as low risk and profitable. Some financial representatives even encouraged investors to borrow funds so that they could invest more, resulting in further devastating consequences.

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According to The Wall Street Journal, Franklin Resources Inc. (BEN), has sold hundreds of millions of dollars of Puerto Rico bonds in the wake of the devastation of Hurricane Maria. This includes Franklin Mutual Advisers LLC’s decision to sell its $294 million stake in the U.S. territory’s general obligation bonds.

Franklin, also known as Franklin Templeton, is the second largest holder of Puerto Rico bonds among mutual funds. OppenheimerFunds (OPY) is the largest.

The Wall Street Journal said that Franklin is not the only one trying to get rid of its Puerto Rico bonds. According to sources, a “swath of mutual funds and hedge funds” have finally given up on the island’s securities, too. For example, Merced Capital and Varde Funds sold their $172 million in Puerto Rico municipal bonds to other bondholders.

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The financial fallout caused by Hurricanes Irma and Maria is being felt not just on the island of Puerto Rico, but in the U.S. mainland as well. Puerto Rico bonds, which were already in trouble prior to the storms because of the island’s faltering economy and bankruptcy, are expected to take even more of a hit. Moody’s Investors Service assesses the future of the bonds, which were already at a Caa3 rating, as negative. The ratings agency said that the “disruption of commerce” caused by hurricanes will drain Puerto Rico’s “already weak economy” further. All of this is expected to impact not just the Puerto Rico bonds but also the mutual funds based on the U.S. mainland that hold them, which means that investors will be impacted.

According to InvestmentNews, Morningstar stated that 15 municipal bond funds, “14 of them from Oppenheimer Funds (OPY),” have at least 10 % of their portfolios in the island’s bonds. The 15th fund is from Mainstay. Morningstar reported that through September 28, the funds lost a 1.57% average for the month. The Oppenheimer Rochester Maryland Municipal Bond (ORMDX), which has 26% of its portfolio in Puerto Rico bonds, was considered the worst performer. In addition to Oppenheimer and Mainstay, other U.S.-based funds that are losing money from Puerto Rico bonds, include, as reported by The New York Times:

· Paulson & Co., which has invested billions of dollars in Puerto Rico securities. The Wall Street firm is run by hedge fund manager John A. Paulson.

According to InvestmentNews, there are six pending FINRA arbitration claims against Morgan Stanley (MS) and its former broker Angel Aquino-Velez (Aquino-Velez) concerning his selling Puerto Rico investments. The claimants are alleging misrepresentation and unsuitability regarding the sale of Puerto Rico closed-end funds and bonds they purchased through Aquino-Velez, who is based in Miami, and the brokerage firm.

InvestmentNews also reports that according to FINRA’s BrokerCheck database, Morgan Stanley has already resolved four FINRA arbitration claims valued at $2.4 million related to Aquino-Velez and Puerto Rico municipal bond investments. Aquino-Velez, who left Morgan Stanley a few months ago, was recently selling Puerto Rico COFINA bonds, which are securities backed by the U.S. territory’s sales tax revenue. Prior to working at Morgan Stanley, Aquino-Velez was with UBS Financial Services (UBS) and Merrill Lynch (BAC).

Puerto Rico Bond Fraud Losses
At Shepherd Smith Edwards and Kantas, LTD LLP, our Puerto Rico bond fraud lawyers have been working hard these past four years to help investors who sustained serious losses when the island’s municipal bonds began to fall in value in 2013. For many of our clients, their portfolios should not have been so heavily concentrated in Puerto Rico bond funds and bonds, if at all, except that they were given bad investment advice. Many investors lost everything.
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MarketWatch reports that with the power out for what could be months in Puerto Rico in the wake of Hurricane Maria, this could mean that investors holding $9 billion of Puerto Rico Electrical Authority (PREPA) bonds may end up never seeing the money they invested in the US territory’s electrical authority. Meantime, Puerto Rico’s residents must now also grapple with recovering from the physical devastation caused by the heavy rains, winds and flooding from Hurricane Maria.

The power outage comes just three months after PREPA filed for bankruptcy protection and the financial oversight board appointed to deal with the territory’s $74 billion of debt turned down a restructuring deal between the electrical authority and a group of insurers and bondholders. For many Puerto Rico investors, Hurricane Maria comes just four years after they sustained major losses from investing in Puerto Rico bonds and closed-end bond funds—securities that brokerage firms such as Santander Securities (SAN), Banco Popular, UBS Puerto Rico (UBS-PR), Oriental Financial Services and others touted as low risk, safe investments, even to customers who did not have the portfolio to handle the actual, higher risks involved.

Currently, there are thousands of Puerto Rico bond fraud and closed-end bond fraud cases awaiting arbitration hearings before the Financial Industry Regulatory Authority (FINRA). Our Puerto Rico bond fraud attorneys at Shepherd Smith Edwards and Kantas have been representing investors on the island and the US mainland in helping them try to recover these investment losses.

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In an effort to fight a $20 million coverage lawsuit brought by insurance carriers over Puerto Rico bond fraud cases, UBS Financial Services, Inc. (UBS) argued in court that the exclusions at issue cannot be applied to these investors’ claims. The plaintiffs in the case include XL Specialty Insurance Co., Hartford Fire, and Axis.

According to Law360, a Securities and Exchange Commission filing notes that as of last year UBS is contending with $1.9 billion in claims – including civil, arbitration, and regulatory cases – over its Puerto Rico closed-end bond funds, and to date has already paid $740 million to resolve some of those claims. The bank has come under fire for the way it handled $10 billion of these closed-end bond funds, including claims that they pushed the securities onto investors who could not handle the risks involved and, in some cases, encouraged them to borrow funds to buy even more.

The bank wants coverage under new subsidiary policies that the insurers agreed to even though it includes a specific exclusion for claims that involve the closed-end fund debacle in any way. In its opposite brief, submitted to Puerto Rico federal court, UBS argued that the plaintiffs have not made much of an effort to argue how the exclusion could preclude every related claim, of which there are more than 1600. UBS noted in its brief that insurance law in the U.S. territory mandates that an insurance company defend the whole action even if just one claim is potentially covered.
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Two years after the Financial Industry Regulatory Authority (FINRA) barred former UBS Financial Services of Puerto Rico (UBS-PR) broker Jose Ramirez, nicknamed the Whopper, our UBS Puerto Rico fraud attorneys are continuing to provide representation to investors who sustained losses because they took his and other UBS-PR brokers’ advice to borrow from credit lines in order to invest in even more securities. If you are one of these investors and you would like to explore your legal options, please contact Shepherd Smith Edwards and Kantas, LTD LLP today.

It was in 2015 that the US Securities and Exchange Commission (SEC) brought charges against Ramirez accusing him of fraud in the offer and sale of $50 million of UBS-PR affiliated, non-exchange traded closed-end mutual funds. The former UBS broker allegedly enriched himself by advising certain customers to use non-purpose credit lines that a firm affiliate, UBS Bank USA, was offering so that they could buy even more shares.

These customers were not, in fact, allowed to use credit lines to buy the securities and Ramirez allegedly knew this. He is accused of getting around restrictions by telling customers to move money to a bank that had no affiliation with UBS and then re-depositing the funds to their UBS Puerto Rico brokerage account in order to buy additional closed-end mutual funds or Puerto Rico bonds. Such a scheme was a violation of numerous rules and regulations and, if misrepresented to the investors as the SEC has alleged, would have been a major legal violation.

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In the United States District Court in San Juan, the hedge fund Aurelius Capital has filed a lawsuit seeking to have Puerto Rico’s bankruptcy case dismissed. Aurelius Capital is the holder of more than $470 million of Puerto Rico General Obligation bonds (“GO Bonds”). All Puerto Rico GO bonds were supposed to have been guaranteed under the Commonwealth’s constitution. Now, however, GO bonds are subject to a five-year plan that could force bondholders to take substantial reductions on what they are owed upon repayment.

Puerto Rico filed for Title III bankruptcy protection in May. Although bankruptcy protection was not originally available to Puerto Rico, under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), the law was changed to allow for Puerto Rico to file a bankrupt-like procedure if it could not resolve all of its debt with bondholders.

As with other bankruptcies, the island has been granted a “stay” from creditors. Now, Aurelius wants the federal court to lift the stay, which has prevented it and other creditors from suing the Puerto Rican government.

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