On May 3, 2017, Puerto Rico filed for a form of bankruptcy protection pursuant to a federal law passed in 2016 known as Promesa. This law allows for Puerto Rico to facilitate a debt restructuring process in court that is akin to U.S. bankruptcy protection. This marks the first time in our nation’s history that a U.S. state or territory has taken such extreme fiscal measures. As it stands, Puerto Rico owes approximately $123 billion in debt and pension obligations, a huge figure that dwarfs the $18 billion bankruptcy filed by the city of Detroit in late 2013.
While some of the investors in Puerto Rico debt include sophisticated banks and hedge funds (many sophisticated investors did not start aggressively snapping up Puerto Rico debt until 2014, when many bonds were already trading at a deep discount), numerous retail investors were solicited by their broker or investment advisor to purchase Puerto Rico bonds due to their tax free nature and hefty yields. While the lure of triple tax exempt income (income on Puerto Rico bonds is exempt from federal, state, and local taxes) helped firms like UBS, Merrill Lynch, Morgan Stanley and Santander in their sales pitch to prospective retail investors, often Mom and Pop investors were left unaware and uninformed as to the significant risks associated with investing in Puerto Rico bonds.
Puerto Rico map with shadow effect presentation
SANTANDER’S ROLE IN THE CRISIS

In late 2015, Banco Santander’s broker-dealer subsidiary, Santander Securities, agreed to pay as restitution $4.3 million to certain of its clients who suffered losses on investments in Puerto Rico bonds. In addition, the Financial Industry Regulatory Authority (“FINRA”) indicated that Santander’s brokerage unit would also be on the hook for $2 million in fines in connection with its failure to properly supervise its employees. FINRA has estimated that, in total, restitution and penalties levied against Santander will total approximately $6.42 million.
Santander’s violations go back to 2012, when Moody’s downgraded Puerto Rico’s General Obligation Bonds to a notch above junk status, in light of the island’s growing fiscal crisis. Only one month prior to this downgrade, Santander had begun selling off its own inventory of Puerto Rico bonds. Despite the fact that Santander recognized the real risks embedded in these Puerto Rico bonds, Santander’s brokers and investment advisors nevertheless continued to push Puerto Rico debt as an appropriate investment to its retail clients.
In ordering Santander to pay fines and restitution for losses incurred by retail investors (retail clients purchased about $180 million of the bonds directly and approximately $101 million through various closed end fund offerings at Santander) FINRA noted that Santander had failed to disclose any of the risks embedded in the bonds to its clients, and moreover, that the bank had failed to supervise the use of margin loans to leverage the purchase of even more bonds. FINRA further noted that this risky use of margin loans resulted in certain retail investors piling margin debt on top of shaky Puerto Rico debt. In some instances, Santander brokers even sold Puerto Rico bonds directly from their own accounts to retail investors.

FINRA ARBITRATION AS AN AVENUE OF RECOVERY

Certain arbitration cases filed with FINRA allege that Santander Securities, and other banks and broker-dealers including UBS, Merrill Lynch and Popular Securities, sold unsuitable Puerto Rico bonds to its retail clients or over-concentrated customer accounts in PR-linked investments. In particular, Santander Securities often concentrated its clients in Puerto Rico closed end bond funds. Even after the 2012 downgrade, Santander and other similarly situated banks and broker-dealers failed to adequately supervise their customer’s purchases of Puerto Rico bonds, the concentration of these investments, and the use of margin by some investors to purchase even more Puerto Rico bonds through leverage.

If you have invested in Puerto Rico bonds and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation. On May 3, 2017, Puerto Rico filed for a form of bankruptcy protection pursuant to a federal law passed in 2016 known as Promesa. This law allows for Puerto Rico to facilitate a debt restructuring process in court that is akin to U.S. bankruptcy protection. This marks the first time in our nation’s history that a U.S. state or territory has taken such extreme fiscal measures. As it stands, Puerto Rico owes approximately $123 billion in debt and pension obligations, a huge figure that dwarfs the $18 billion bankruptcy filed by the city of Detroit in late 2013.
While some of the investors in Puerto Rico debt include sophisticated banks and hedge funds (many sophisticated investors did not start aggressively snapping up Puerto Rico debt until 2014, when many bonds were already trading at a deep discount), numerous retail investors were solicited by their broker or investment advisor to purchase Puerto Rico bonds due to their tax free nature and hefty yields. While the lure of triple tax exempt income (income on Puerto Rico bonds is exempt from federal, state, and local taxes) helped firms like UBS, Merrill Lynch, Morgan Stanley and Santander in their sales pitch to prospective retail investors, often Mom and Pop investors were left unaware and uninformed as to the significant risks associated with investing in Puerto Rico bonds.

SANTANDER’S ROLE IN THE CRISIS

In late 2015, Banco Santander’s broker-dealer subsidiary, Santander Securities, agreed to pay as restitution $4.3 million to certain of its clients who suffered losses on investments in Puerto Rico bonds. In addition, the Financial Industry Regulatory Authority (“FINRA”) indicated that Santander’s brokerage unit would also be on the hook for $2 million in fines in connection with its failure to properly supervise its employees. FINRA has estimated that, in total, restitution and penalties levied against Santander will total approximately $6.42 million.
Santander’s violations go back to 2012, when Moody’s downgraded Puerto Rico’s General Obligation Bonds to a notch above junk status, in light of the island’s growing fiscal crisis. Only one month prior to this downgrade, Santander had begun selling off its own inventory of Puerto Rico bonds. Despite the fact that Santander recognized the real risks embedded in these Puerto Rico bonds, Santander’s brokers and investment advisors nevertheless continued to push Puerto Rico debt as an appropriate investment to its retail clients.
In ordering Santander to pay fines and restitution for losses incurred by retail investors (retail clients purchased about $180 million of the bonds directly and approximately $101 million through various closed end fund offerings at Santander) FINRA noted that Santander had failed to disclose any of the risks embedded in the bonds to its clients, and moreover, that the bank had failed to supervise the use of margin loans to leverage the purchase of even more bonds. FINRA further noted that this risky use of margin loans resulted in certain retail investors piling margin debt on top of shaky Puerto Rico debt. In some instances, Santander brokers even sold Puerto Rico bonds directly from their own accounts to retail investors.

FINRA ARBITRATION AS AN AVENUE OF RECOVERY

Santander Securities, and other banks and broker-dealers including UBS and Merrill Lynch often sold unsuitable Puerto Rico bonds to its retail clients. In particular, Santander Securities often concentrated its clients in Puerto Rico closed end bond funds. Even after the 2012 downgrade, Santander and other similarly situated banks and broker-dealers failed to adequately supervise their customer’s purchases of Puerto Rico bonds, the concentration of these investments, and the use of margin by some investors to purchase even more Puerto Rico bonds through leverage.
If you have invested in Puerto Rico bonds and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation. The attorneys at Law Office of Christopher J. Gray, P.C. are admitted in New York and New Jersey but will also accept cases in other jurisdictions, including Puerto Rico, often working with co-counsel who are admitted in those jurisdictions.

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On May 3, 2017, Puerto Rico filed for a form of bankruptcy protection pursuant to a federal law passed in 2016 known as Promesa, thereby allowing Puerto Rico to facilitate a debt restructuring process in court akin to U.S. bankruptcy protection.
As recently reported in Barron’s, Puerto Rico’s bonds backed by sales tax revenue, known as COFINAS, witnessed significant price depreciation since initiation of the bankruptcy-like proceeding in early May 2017. And on May 30, 2017, U.S. District Judge Laura Taylor Swain ordered that interest payments on COFINAS be suspended, pending anticipated litigation concerning whether holders of Puerto Rico’s General Obligation Bonds (“GOs”) or COFINAS should receive first claim to any payments ordered through a debt restructuring. Amey Stone, Puerto Rico’s Cofina Bond Payments Suspended by Judge, May 31, 2017.
San Juan, Puerto Rico Coast

The Puerto Rico Urgent Interest Fund Corporation, also known as the Puerto Rico Sales Tax Financing Corporation (or Corporacion del Fondo de Interes Apremiante – COFINA in Spanish) issues bonds that are attached to Puerto Rico’s sales tax revenue. Specifically, Puerto Rico’s ‘Sales and Use Tax’, charges a 7% fee on many different transactions occurring on the Island. The revenue raised through COFINA is allocated in the following manner:
• 21.4% of the COFINA tax revenue is allocated to local municipal government;
• 39.2% of the COFINA tax revenue is allocated to state government; and
• 39.2% of the COFINA tax revenue goes to COFINA bondholders.

In light of Judge Taylor Swain’s recent order to stay further payments on COFINAS, bondholders are now left in the lurch, holding Puerto Rico debt instruments that have suffered severe price deterioration and that no longer provide the coupon payments sought by fixed income investors. If you have invested in COFINAS, or other Puerto Rico bonds including bonds issued by the Puerto Rico Electric Power Authority (known as PREPAs) and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration.

Arbitration cases filed with the Financial Industry Regulatory Authority (FINRA) have charged that certain stockbrokers and investment advisors in Puerto Rico have over-concentrated customer accounts in Puerto Rico bonds and other securities including closed-end funds (CEFs), leading to unnecessary losses. Firms named in some of these arbitration cases include UBS, Merrill Lynch, and Popular Securities, among others.

If you believe that you may have a claim relating to recommendations of Puerto Rico COFINA or PREPA bonds, or other securities, you contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation. The attorneys at Law Office of Christopher J. Gray, P.C. are admitted in New York and New Jersey but will also accept cases in other jurisdictions, including Puerto Rico, often working with co-counsel who are admitted in those jurisdictions.

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Private Placements- Know the Risks Before Investing

July 27, 2017

With increasing frequency retail investors are encountering scenarios in which they are offered an opportunity to invest in a private placement. A private placement – often referred to as a non-public offering – is an offering of a company’s securities that are not registered with the Securities & Exchange Commission (“SEC”). Under the federal securities […]

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LPL Fined by State of NH for Alleged Unsuitable REIT Sales

June 1, 2017

For some time we have been blogging about non-traded REITS (and the real risks associated with investing in these complex investment vehicles.  Many investors are familiar with exchange traded Real Estate Investment Trusts (“REITs”).  Pursuant to federal law, these companies which own and typically operate income-producing real estate, are required to distribute at least 90% […]

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Non-Traded REITs – Investors Should Proceed with Caution!

May 23, 2017

With increasing frequency, given the current low interest rate environment, retail investors are steered into investing in products appearing to offer more advantageous yields than are available in traditional interest-bearing investments such as money market funds and CDs.  One example is the publicly registered non-exchange traded real estate investment trust (“REIT”) or “non-traded REIT.”  While […]

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State of Illinois Charges Thrivent Over Variable Annuity Switching

May 22, 2017

The State of Illinois Securities Department (“Department”) recently initiated enforcement proceedings against Thrivent Investment Management, Inc. (“Thrivent”) (CRD #18387) for allegedly violating the Illinois Securities Law of 1953 in connection with sales of unsuitable variable annuity (“VA”) products to certain of its clients who already held Thrivent VA’s. Specifically, the Department alleges that Thrivent violated […]

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Former NEXT Financial Broker Douglas P. Simanski Barred for Alleged Theft

October 13, 2016

  Financial Industry Regulatory Authority (FINRA) records indicate that Douglas P. Simanski (Simanski), a former stockbroker who was associated with NEXT Financial Group, has been permanently barred from the brokerage industry.  Simanski’s record also shows 4 currently pending customer disputes, 1 prior final customer dispute and a recent employment separation after allegations. FINRA is the agency that licenses and regulates […]

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Platinum Partners Hedge Funds Under Scrutiny

October 13, 2016

Platinum Partners LP Funds are under scrutiny after federal agents reportedly raided the funds’ New York offices in July 2016.  Hedge fund entities sponsored by Platinum Partners include the Platinum Partners Value Arbitrage Funds, the Platinum Partners Credit Opportunities Fund, Platinum Credit Holdings LLC, Platinum Credit Management LP, Platinum Partners Value Corp., and Platinum Management […]

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FINRA Fines Investors Capital Over Unit Investment Trust Sales

October 13, 2016

The Financial Industry Regulatory Authority (FINRA) recently fined Investors Capital Corporation $250,000 over the sale of unit investment trusts (UITs).  Investors Capital did not admit or deny the allegations leading to the fine, but also agreed to pay $841,500 in restitution to customers, bringing its total payment to over $1 million. FINRA alleged that certain […]

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FINRA Fines Merrill Lynch Over Sales of Strategic Return Notes

October 6, 2016

The Financial Industry Regulatory Authority (FINRA) fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for alleged negligent disclosure failures in connection with the sale of five-year senior debt notes to retail customers. In particular, Merrill Lynch allegedly failed to adequately disclose certain costs, making it appear that the fixed costs were lower than they […]

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