It's been awhile since the news began breaking about the latest debacle with UBS and its sale of closed-end Puerto Rico funds. For those who aren't familiar with the story, here's the short version.
Trouble in Paradise
Puerto Rico and its government-run corporations (i.e., public utilities and departments) are teetering on the edge of insolvency. The U.S. territory is laboring under $73 billion in debts (or as much as $167 billion when interest and deficits are considered, according to newspaper El Nuevo Dia). At the moment, the government of the island has few options. The situation, resulting from decades of misfortune, mismanagement and dependency, does not bode well for municipal and government bonds; such an investment would yield virtually nothing at best. At worst, holders of such bonds could lose everything.
Despite this, financial advisors at UBS and other institutions have been pushing investors to buy these bonds. A UBS Puerto Rico supervisor, Miguel Ferrer, was recorded as he harangued and threatened his employees to sell these investments and start generating commissions or find another job. Another financial advisor, one Ramón “Cholo” Almonte, is on record telling fellow advisers that simply believing the situation is improving will make it so – and instructing them on how to overcome clients' objections to buying into what have turned out to be very toxic investments.
The bottom line: thousands of clients who placed their trust in UBS financial advisers (and had every legal right to expect their advisers to act in their best interests) have lost everything.
Each one of the lawsuits now being filed against UBS represents a real, human being who had plans, goals and dreams for the future – a future that has now been stolen from them by one of the largest, most powerful financial institutions on the planet.
“Maria” is one of them. (Note: names of clients have been changed and specific law firms are not identified in order protect the privacy of all concerned.)
A Young Single Mother Loses Everything
When Maria was twenty-two years old, her father suddenly passed away. Fortunately, he carried a sizable life insurance policy, naming his daughter as a beneficiary. After paying off bills she had accumulated, she made the decision to invest the remainder of the settlement, representing her life savings, in order to provide for herself and her daughter. She went to Ramón Almonte and another adviser at UBS, Juan Goytia. Their recommendation was that she put everything into three types of Puerto Rico municipal bonds:
- Employees Retirement System
- Commonwealth Public Buildings Authority
- Industrial, Tourist, Educational, Medical and Environmental Control Facilities
They also recommended that Maria take out additional loans in order to “leverage” her investments (similar to buying stocks “on margin,” a practice that contributed to the infamous Crash of 1929). That leverage came to around 130%. The entire investment in Puerto Rico's municipal debt was presented to Maria as a safe and secure vehicle that would leave her principal (the initial investment) intact while providing her and her daughter with a steady, non-taxable income.
In the meantime, Puerto Rico's governor cut the public Employees Retirement System by over $98 million in response to a dramatic shortfall in tax revenue. As of June 2013, that fund's unfunded liabilities were close to $23 billion, according to the Commonwealth's quarterly report. At that same time, rating agencies Moody's and Fitch had both downgraded several Puerto Rico bonds. All-in-all, the bonds that UBS had recommended were down around “junk” status.
Of course, Maria was told none of this – and probably wouldn't have understood it if she had been
In the end, following Almonte and Goytia's recommendations cost Maria almost everything she had. In August 2014, a New York law firm filed a securities arbitration case against UBS on her behalf.
“Repo” Costs $4.2 Million Retirement
“Juan Lucas” worked his entire life to build a substantial nest egg for his retirement – and to leave something behind for his family. His primary investment goal was to generate income from his savings – which, despite amounting to several million dollars, he could ill afford to lose. Obviously, he had no wish to engage in risky speculation.
Juan Lucas placed his trust in the advice given him by Almonte and another adviser, Ricardo Eboli. Their recommendation? Invest the entire amount in closed-end funds concentrated in Puerto Rico government debt under a scheme known as “repo.” This is a scheme in which the seller of the securities enters into an agreement to repurchase them at a future date for a higher price, including interest.
Almonte then advised Juan Lucas to leverage his investments by taking out additional margin loans (drawn on a bank operated by UBS itself). He also told Juan Lucas to mortgage his home and invest that money in those funds. The client told Almonte that he would be paying off the mortgage by withdrawing funds from his own account. According to allegations, Almonte recommended that it would be a better strategy to pay off the mortgage using a credit line from – where else? – a UBS bank.
This itself was in direct violation of UBS' own policy, which prohibit the use of “non-purpose” loans (such as a general line of credit) for investment purposes. It goes further than that, however; although UBS operates investor services in Puerto Rico, it is not licensed to do banking there, making the margin loans illegal. It didn't stop there; Juan Lucas' repo transactions were converted into a margin account, an illegal attempt to get around a U.S. Securities and Exchange Commission (SEC) rule. Turning the repo transactions into margin accounts essentially made it possible to sell securities (in this case, bonds) before they had even been paid for. Known as “freeriding,” this practice is prohibited under the Code of Federal Regulations, Title 12. Also called Regulation T, this rule obligates a financial advisor to freeze his/her client's account for three months for violations.
It's a good bet that Juan Lucas was told nothing about Regulation T.
By the time all was said and done, with doubly margined bonds (thereby doubling the risks), the elderly retiree had sunk $11.5 million into concentrated, high-risk investments. Given the state of Puerto Rico's economy, both Almonte and Eboli should have known these bond funds were completely inappropriate for their client, considering his investment goals and low risk tolerance.
Apparently, they didn't consider it at all. In September 2013, the value of Puerto Rico bonds plummeted – and so did the UBS bond funds. Today, all $4.2 million of Juan Lucas' original retirement is gone. To ad insult to injury, he's still on the hook for the $790,000 mortgage he took out on his home on their advice. Since then, he and dozens of others have filed suit against the Swiss-based investment and banking juggernaut.
Tip of the Iceberg
Maria and Juan Lucas' stories represent only two of the hundreds of average working people who trusted their hard-earned savings to an institution with a long history of corruption and fraudulent activity. The advisers and theie supervisors, such as Ramon Almonte and Miguel Ferrer, had not only an ethical obligation to serve their clients' best interests – they were required by law to do so.
And even though UBS clearly violated the law, it is unlikely they will suffer any legal consequences beyond insignificant fines. So far, UBS has been fined a total of $3.5 million and ordered to pay an additional $1.68 million in restitution to certain clients – virtual pocket change to an institution with $1 trillion in assets. As of November 2014, there were two class action lawsuits and 400 arbitration complaints over these closed-end funds.
Hopefully for those who lost everything, it is only the beginning.
For more information regarding the UBS Puerto Rico Bond Litigation, click on Levin Papantonio UBS PR Lawsuit.