Elderly clients win $700K arbitration against UBS

Register now

UBS was dealt another loss stemming from its sale of Puerto Rican bonds and closed-end funds by an arbitration panel, which ordered the firm to pay over $700,000 to a pair of clients.

The wirehouse has been defending itself in a number of arbitration cases from clients claiming damages related to the firm's sale of Puerto Rican bonds. According to the firm’s latest earnings report, total claimed damages sought by clients are approximately $1.9 billion, of which $740 million has been resolved through settlements, arbitration or withdrawal of the claim.

In the latest case, three arbitrators found UBS liable of negligence in its management of the clients’ investments, and awarded $549,000 in compensatory damages to Condado Motors, a now-defunct car rental business owned by Luis Vega, and $165,288 to Vega’s ex-wife Teresa Rosas.

UBS was also ordered to pay $62,241 in costs and $39,200 in hearing session fees, but will not be responsible for attorney’s fees as requested by the clients.

The award may be a legal defeat for the wirehouse, but it dodged a much bigger penalty as the clients had asked for over $5 million for securities fraud, deceit and recklessness in addition to negligence, according to a record of the award.

UBS denied all claims made by the couple, and further requested that FINRA fees and costs be paid by them. It also asked for the removal of all arbitration records from the FINRA-operated CRD system related to its employee, and the clients’ adviser, Jose Chaves, which the arbitrators rejected.

“It was a good outcome and a victory, but the FINRA process allows a lot of discretion to the arbitrators who are accustomed to contemplating damages that are not adequate for this type of lawsuit.," says Luis Minana, the attorney representing Vega and Rosas, and who was referring to the practice of assessing damages based on net out-of-pocket loss, rather than gross capital loss.

Minana, whose law firm Luis E. Minana & Associates is based in San Juan, says the result is that the firm ends up benefiting.

Still, UBS is unsatisfied with the outcome.

“Although the arbitrators awarded far less than the full damages claimants requested, UBS is disappointed with the decision to award any damages, with which we respectfully disagree,” a spokesman said via email. “UBS notes that the decision in this case was based on the facts and circumstances particular to this individual claimant and is not indicative of how other panels may rule with regard to other customers who invested in similar products.”

Between 2006 and 2011, Vega, 87, invested close to $8 million through Condado Motors with Chaves, according to Minana. Chaves allegedly did not diversify the assets, and instead put about 95% in three of UBS’ Puerto Rican closed-end funds, the attorney says.

The adviser, who is still working for UBS, according to FINRA BrokerCheck records, also allegedly failed to disclose any risks beyond what was included in the funds’ prospectus, including that a significant portion of the proceeds was leveraged in the commonwealth island’s municipal bonds, Minana says.

Chaves’ clients took out loans to pay for some the investment, which added to their exposure, according to the attorney.

Vega’s wife at the time Rosas, now 72, also purchased 17,040 shares of the UBS Puerto Rico Fixed Income Fund III.

When market prices of the bonds and closed-end funds plummeted in the summer of 2013, the couple’s investments lost much of their value.

Other clients in Puerto Rico have pursued claims similar to those of Vegas and Rosas again UBS in arbitration.

Minana estimates that Condado suffered $3.9 million in gross capital loss, just under half of the initial investment, and $823,650 in net out-of-pocket loss. The latter is what Minana says FINRA used to calculate the $549,000 awarded to Condado.

As for Rosas, UBS was ordered to buy back all of the shares at $9.70 a share, without deduction for any sales expenses, which amounted to $165,288 and represents a full return on her investment, according to Minana. He says the discrepancy stems from the arbitrators’ observation that she is a financial novice, “wholly in the hands of her broker,” whereas Vega is a “successful, financially literate individual.”

Money is not all that the couple lost however. The couple divorced because of the emotional stress from losing half of their assets, which they were counting on to support them, Minana says.

For reprint and licensing requests for this article, click here.
Law and regulation Compliance Wirehouses Fixed income Munis FINRA UBS Puerto Rico