Designed to Fail: How UBS Misused Leverage and Maximized Risks For Investors | Levin Papantonio Rafferty - Personal Injury Law Firm

Designed to Fail: How UBS Misused Leverage and Maximized Risks For Investors

Levin, Papantonio lawyer Peter Mougey recently filed a claim on behalf of 125 UBS Puerto Rican investors in UBS bond funds, which claim reveals how UBS knowingly and methodically mishandled, misrepresented , over-leveraged and over-promised the people who offered them their trust. Thousands of Puerto Rican investors have now lost a lifetime of savings. Through the FINRA arbitration system, these investors seek to recover their life savings.

By Peter Mougey

At Levin, Papantonio, my colleagues and I work every day to ensure that justice is done for people whose trust has been violated. When cases such as the one I write about below are brought to my attention, I realize again just how important it is to provide the people who have been wronged a strong voice.

What you’ll read here is a synopsis of the claim we have filed on behalf of UBS Fund customers. I will write more about this in the coming days as the case unfolds.

High Risk Funds Marketed As Safe, Secure Bond Funds

UBS was the primary underwriter of twenty-three closed-end funds that were marketed by UBS as bond funds. These funds were marketed to offer consistent income with minimal risk. In reality, the funds carried significant risks and were not suited for the people involved, especially in the concentration recommended.

The funds were distributed, sponsored, administered, and advised by UBS and/or its affiliates, which included UBS Asset Managers of Puerto Rico. UBS-PR (Puerto Rico) was an underwriter and dealer for the UBS funds, and of course received compensation for acting in this role. This was the largest single source of income for UBS—PR, generating over 50% of the annual total revenues for UBS-PR and UBS Trust combined.

Of course, none of this risk was brought to the attention of the individuals Levin, Papantonio are representing in this case. Instead, the UBS Funds were characterized as consistent and secure, offering income without high risk.

In reality, the UBS Funds were illiquid, and were heavily invested in esoteric bonds with significant risk. Those risks were, in fact, compounded by the use of leverage. Thus, UBS had a profound financial interest in selling the UBS Funds to its clients and preventing its clients from selling their shares.

Limiting The Pool, Building The Risks

As closed-end funds, the UBS funds had a finite amount of shares that could be distributed, which means a limited number of investors could be involved.

The value of the assets in this kind of fund can be affected by supply and demand. With more investors to purchase shares and bolster the fund, the greater the return. In this case, however, the UBS Funds were riskier than typical closed-end municipal funds because they were not traded on an exchange or quoted on any quotation service, and were not registered with the Securities and Exchange Commission ("SEC").

In order to maintain their exemption from registration with the SEC, the UBS Funds could be sold only to Puerto Rico residents. This is a much smaller pool than is generally available to a typical large, closed-end mutual fund.

Once outside of Puerto Rico, there would be no market for the UBS Funds. All in all, the strength and value of the funds depended on a very limited number of qualified buyers who were residents of Puerto Rico.

The Higher They Leverage, The More They Profit

Most closed-end funds are limited to 33% maximum leverage ratio. Not so for this UBS-PR Fund. Under the Puerto Rico Investment Company Act, the Fund was able to take advantage of a leverage ratio of up to 50%. The truth of that number is more complex, however, and in the end the use of this ratio doubles the impact that security losses have on fund investors. UBS-PR Funds, while setting up its investors with this kind of enormous risk, was positioning itself well to receive more advisory fees as a result of the amount of total assets under management due to this overleveraging.

The story goes on, and reads like a step-by-step guide on how to blatantly work to legitimize and maximize UBS profit, with disregard to the investor. A few key points:

  • They concentrated these bonds in fragile streams of investment, in fact in just two Puerto Rican Issuers, which challenges the notion of “diversified funds” in the extreme.
  • They invested in Puerto Rico, whose battered economy magnified the risk of this very limited portfolio.
  • UBS had a wealth of conflicts of interest – they’re too deep and long to adequately explain here. I will write more in coming days about these conflicts.
  • The firm simply failed to diversify across different asset classes or diversify each claimant’s portfolio. Interestingly, in their own marketing materials, they pointed out how important diversification was for the UBS Funds. They represented it as “critical”, in fact.


The reality is these funds carried profound risks and were not suitable for the people we represent in this claim, particularly in the amounts recommended to them. The governing bodies, including the SEC, FINRA (Financial Industry Regulatory Authority) and the NASD, all have provisions stating that although there may be disclosures on prospectus and/or sales literature, when the disclosures are accompanied by oral representations by sales people that contradict the disclosures the oral representations control. Without these governing regulations, sales people could make elaborate over- promises, cushioned by the safety of small print in their literature.

Investors Place Their Trust In Bonds – And UBS. When It Is Abused, We All Suffer.

I’ve only just skimmed the surface here; the discovery we’re doing on this case continues to disturb. It is a story that deserves to be told. A story of trust betrayed, knowingly and quite deliberately.

Our Investment Fraud Lawyers Can Help

Levin, Papantonio, Thomas, Mitchel, Rafferty & Proctor, P.A. is recognized as one of the most successful trial law firms in the nation, with verdicts and settlements exceeding $3 billion. Our securities lawyers are committed to seeking justice for the victims of investment fraud and misconduct. We have represented more than 1,500 investment fraud victims in state and federal courts across the nation and in securities industry arbitration.

If you have lost savings because of investment fraud or other broker misconduct, please contact our fraud attorneys today at 855-345-1554 for your free confidential consultation. We serve clients nationwide.

For more information regarding the UBS Puerto Rico Bond Litigation, click on Levin Papantonio UBS PR Lawsuit.