Another legal action targets UBS PR By CB Online Staff cbnews@caribbeanbusinesspr; cbprdigital@gmail A New York City law firm handling arbitration claims on behalf of investors throughout the United States has filed a Financial Industry Regulatory Authority (FINRA) arbitration claim involving a retiree’s investment in a closed-end fund run by UBS Puerto Rico. The arbitration claim filed by the Law Office of Christopher J. Gray, P.C appears to be the second in an expected flood of legal actions against UBS in the wake of deep losses for investors in its closed-end funds in Puerto Rico. CARIBBEAN BUSINESS reporter John Marino broke the news late Wednesday on the first of the legal actions, a statement of claim filed with FINRA by the Puerto Rico-based law firm of Cuebas & Ficente on behalf of retired auto industry executive Víctor M. Gómez Jr. and his family members seeking at least $30 million in restitution for investment losses, punitive damages, attorney fees and other expenses. Attorney Harold Vicente told CARIBBEAN BUSINESS the firm is preparing legal actions on behalf of as many as 18 clients. Many suits are expected to be filed as a downturn in the value of Puerto Rico government bonds this year has resulted in big losses for local investors, many of whom hold closed-end mutual funds that invest heavily in Puerto Rico government bonds. The funds leverage their investment portfolios by financing about half of their total assets, which magnifies the risks for investors, many of whom also used additional loans to buy closed fund share assets. UBS spokeswoman Karen Byrne said that UBS is reviewing the issue of the loans and has put one financial adviser on administrative leave, pending further review. UBS has a longstanding requirement that clients must sign documents attesting they will not use non-purpose loans for securities purchases before those monies are disbursed, she added. “General weakness in municipal markets across the U.S. and Puerto Rico and apprehension about the direction of interest rates have led to steep declines in Puerto Rico municipal bond and closed-end fund prices and a lack of liquidity for these securities,” Byrne said. UBS Puerto Rico, a unit of the Swiss banking giant UBS AG, operates 23 closed-end mutual funds that had a total market capitalization of about $4 billion, and the suit states that the funds represent about half the firm’s revenue. Since their inception, many of these funds have lost 50 percent or more in value. Since Jan. 31, 2013 island mutual fund investments in Puerto Rico securities, including government bonds, have lost $1.648 billion in value, totaling $9.191 billion as of Aug. 31, according to the Office of the Financial Institutions Commissioner (OFIC). Attorneys and securities industry experts put local investor losses in the “hundreds of millions” of dollars, and the erosion in government-bond prices has sparked a liquidity problem in shares of closed-end mutual bond funds, with virtually no buyers for shares. The New York Times Dealbook blog reports that some UBS customers were encouraged by its brokers to borrow money to invest in these funds and that in some cases, money was lent improperly, exacerbating current losses. A number of UBS clients have reportedly been forced to liquidate hundreds of millions of dollars in holdings in these funds to meet margin calls. Robert Mulholland, the head of wealth management advisers in the Americas for UBS, reportedly characterized the closed-end fund issue as “the perfect storm” in a meeting in San Juan last month. The arbitration claim filed by the Gray law firm focuses on the Puerto Rico Fixed Income Fund structured by UBS Puerto Rico. The arbitration claim alleges that Fund I was sold by Merrill Lynch as one of a group of safe mutual funds that were largely invested in municipal bonds issued by the Puerto Rico government. The closed-end funds such as Fund I are solely for sale to residents of Puerto Rico and have reportedly been heavily marketed there by UBS and other brokerage firms (including Merrill Lynch) for at least the past five years. Several of the 23 closed-end funds in question have reportedly lost over half their value, despite being marketed as safe investments. The UBS closed-end funds at issue were heavily exposed to Puerto Rico government-issued bonds that carried substantial risks. Now that the underlying municipal bonds have lost value, the closed-end funds have lost significant value due to their leveraged exposure to the underlying municipal bonds as well as selling pressure in the market for the funds. Shares that steadily paid dividends and appeared to maintain their value for several years have suddenly collapsed in value. In the case of Fund I, shares were shown on customer statements as worth $8.55 a share as late as July 2013. By early September 2013, the value of the Fund I shares had dropped from $8.55 a share to $6.06. As of October 1, 2013, the price of Fund I shares had dropped further to $3.738. Other UBS closed-end funds are believed to have suffered similar drops in value.
Posted on: Fri, 04 Oct 2013 16:54:48 +0000
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