UBS hit with record $18M payout in Puerto Rico fund case: FINRA
UBS was ordered to pay more than $18 million to settle the latest dispute stemming from client losses tied to Puerto Rico's massive debt crisis, according to FINRA.
A FINRA arbitration panel concluded that the financial services giant and its Puerto Rican arm had failed meet their obligations to the two clients who brought the case -- husband and wife Rafael Vizcarrondo and Mercedes Imbert De Jesus -- determining that UBS must pay the claimants $18.58 million in compensatory damages, interest, attorneys' fees and other costs.
That award, the latest in a string of setbacks for UBS and other firms who steered clients into Puerto Rican closed-end funds, is the largest to date in cases involving funds on the island, according to FINRA spokeswoman Michelle Ong. UBS, which had been a high-volume trader in Puerto Rico funds, has been fighting back waves of claims brought by clients accusing the firm of negligence, breaching its fiduciary duty, breach of contract and other failings.
The wirehouse alleges two arbitrators failed to disclose key information about their professional and personal histories.
The wirehouse has served as a major banker for the island commonwealth, which has been defaulting on a growing share of its debt and has been placed under federal financial oversight.
In the latest in a series of cases, an arbitration panel has sided with a client against UBS, ordering the wirehouse to pay nearly $1.5 million in damages related to UBS' sale of Puerto Rican bonds and closed-end funds.
The firm suffered another arbitration loss this week to clients seeking damages related to the firm's closed-end funds of Puerto Rico municipal bonds.
In an emailed statement, UBS spokesman Peter Stack notes that the award the arbitration panel granted was less than what the claimants initially had been seeking, but adds that "UBS is disappointed and strongly disagrees with the decision to award any damages."
"Mr. Vizcarrondo was an experienced investor who made a fully informed decision to concentrate his portfolio in UBS Puerto Rico closed-end funds because of their long history of providing excellent returns and substantial tax advantages," Stack says. "UBS is considering its options to overturn the award."
Timothy Dennin, an attorney for the claimants, takes a dim view of UBS' prospects for reversing the FINRA panel's determination, noting that the only path for overturning an arbitration award involves convincing a federal judge to strike down the decision, where "the standards are extremely high in order to have a successful motion to vacate."
"It's very, very, very rare that that would happen," Dennin says. "I don't think that there's any sufficient basis here."
The claimants had been seeking compensatory damages of $19 million and a refund of $1.2 million in commissions and fees that they had paid to UBS. De Jesus and Vizcarrondo accused UBS Financial Services and its Puerto Rican affiliate, along with several firm employees, of breach of fiduciary duty, breach of contract, negligence and negligent supervision, unsuitable recommendations and supervisory failures, as well as violations of some of Puerto Rico's own financial statutes.
The three-person arbitration panel reduced the damages somewhat in its final award, but Dennin says that he is pleased with the determination, which recouped for his clients all of the losses they had incurred through their investments in closed-end funds.
FINRA award summaries do not contain details about the arguments that the arbitrators found persuasive, and Dennin says that over the course of several months, both sides debated numerous issues, including UBS' supervision of a brokerage shop on the island and the suitability of the recommendations.
Another major line of argument that UBS advanced held that Vizcarrondo, an attorney at a prominent law firm in Puerto Rico, was a sophisticated professional and savvy enough to know what he investing in.
Dennin pushed back on that characterization, and he says he is "very grateful" that the arbitration panel ultimately rejected the "blame the client" defense.
"He may be a sophisticated attorney or professional in terms of his business, but he's not sophisticated in his investments," he says. "I think they saw through that -- they saw that he wasn't sophisticated in investments."