WASHINGTON UBS is facing more than $600 million in damage claims filed by Puerto Rico investors in closed-end bond funds, the bank said in its second quarter earnings report Tuesday.
FINRA has a huge list of arbitration claims related to closed-end Puerto Rico bond funds on its plate as investors seek damages for what they claim was misleading advice. The claims were mostly filed against UBS Financial Services of Puerto Rico but also include Merrill Lynch, Banco Popular, Santander Securities, and Oriental Financial Services.
UBS, Switzerland's largest bank, acknowledged the financial danger the many claims against it could pose.
"Declines in the market prices of Puerto Rico municipal bonds and of UBS Puerto Rico sole-managed and co-managed closed-end funds since August 2013 have led to multiple regulatory inquiries, as well as customer complaints and arbitrations with aggregate claimed damages exceeding [$]600 million filed by clients in Puerto Rico who own those securities," the report explains.
The investors making these claims said the financial services firms over-concentrated their assets in these funds, which caused them to suffer losses when the value of the commonwealth's bonds dropped.
In November, UBS offered to repurchase some shares of its Puerto Rico bond funds after they had record losses of 16%. A month prior to that, a Securities and Exchange Commission administrative law judge dismissed SEC claims against two UBS Puerto Rico executives for allegedly misleading mutual fund investors. Both FINRA and the Municipal Securities Rulemaking Board have rules requiring dealers to have a reasonable basis for believing that their recommendations are suitable for their customers, but lawyers for the claimants said that UBS employees sold Puerto Ricans of diverse economic backgrounds on the closed-end funds without regard to whether they were a good investment for them.
The funds are for Puerto Rico residents and are structured to produce income exempt from Puerto Rico taxes. UBS has said it kept fund investors aware of the risks of their investments.
Jake Zamansky, a New York-based attorney, said his clients' claims against UBS will start to be heard by FINRA arbitrators in the first quarter of 2015 and will continue almost weekly through 2016.
"We filed over 100 cases," Zamansky said. "North of $100 million in claims."
Other firms in New York, Chicago, Puerto Rico, and elsewhere have also filed arbitration claims.
UBS' total net lending exposure to Puerto Rico muni bonds and closed-end funds was $660 million as of June 30, the quarterly report states. That is down from $814 million at the end of the prior quarter, primarily due to the share buy-backs by some of the closed-end funds. UBS has been preparing to meet liabilities stemming from its problems in the financially volatile island commonwealth, but the outcome and the damages are uncertain, the report warns.
"As in the case of other matters for which we have established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provisions that we have recognized," the report states.
Kyle Glazier covers the securities beat and economic indicators for The Bond Buyer in Washington, D.C.
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