Articles Posted in Puerto Rico municipal bond funds

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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

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Securities and Exchange Commission (“SEC”) Administrative Law Judge Brenda P. Murray recently issued an Initial Decision in In re Ferrer and Ortiz, Initial Decision Release No. 513, Administrative Proceeding File No. 3-14862.  In the decision Judge Murray declined to order remedial action against former UBS Puerto Rico employees Miguel A. Ferrer and Carlos Juan Ortiz-Leon and also found that certain conduct by Messrs. Ferrer and Ortiz did not violate the federal securities laws. The charges of wrongdoing, which Judge Murray rejected, involved allegedly misleading statements that Ferrer and Ortiz made about the value of UBS PR closed-end funds, as well as certain UBS PR practices with respect to the pricing of UBS PR closed-end funds. 

While no action was taken against Messrs. Ferrer and Ortiz, the SEC judge’s decision does not necessarily mean that investors in UBS Puerto Rico closed end funds do not have valid claims.  The conduct charged in the SEC proceeding occurred during 2008 and 2009, and the decision was largely limited to addressing charges that Mr. Ferrer and Mr. Ortiz violated federal securities laws by making misleading statements concerning the value of UBS PR closed-end funds during the 2008-09 time frame. The full text of the SEC judge’s decision is accessible on this page.
UBS ADMIN DECISION

Investors may have valid claims that are different from those rejected in the SEC judge’s decision.  Some investors reportedly received unsuitable recommendations to purchase the UBS PR closed-end funds based on representations by individual brokers.  Some investors reportedly chose to buy the funds based on the representation that the funds paid a steady yield of dividends, but were safe, and that investors’ principal was not at risk because of the secure municipal bonds backed by the Puerto Rico government in which the funds invested.  Such investors would be asserting claims under a completely different legal standard set forth in Financial Industry Regulatory Authority (“FINRA”) rules, and also may be complaining of conduct that occurred after 2009- even as late as August and September, 2013.  Therefore, the decision in the SEC case against Ferrer and Ortiz  does not mean  that individual investors cannot pursue claims against brokers who sold them UBS Puerto Rico closed-end fund shares.  

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Law Office of Christopher J. Gray, P.C. has filed a Financial Industry Regulatory Authority (“FINRA”) arbitration claim involving a retiree’s investment in a closed-end fund known as Puerto Rico Fixed Income Fund I (CUSIP No. 744907106, hereinafter “Fund I”).  The fund was structured by UBS Puerto Rico, a unit of the Swiss banking giant UBS AG (NYSE:UBS).  The case is pending in Miami, Florida.

Investors have reported that financial advisors in Puerto Rico sold them closed-end funds based on the representation that the funds paid a steady yield of dividends, but were safe and that investors’ principal was not at risk because of the secure municipal bonds backed by the Puerto Rico government in which the funds invested.

However, Puerto Rico municipal bonds have been anything but secure of late.   Since 2000, the Commonwealth has experienced an imbalance between recurring government revenues and total expenditures.  In 2009, the deficit reached a record $3.306 billion.  Further, as of June 2010, the unfunded public employees’ retirement accounts reportedly had an actuarial shortfall totaling approximately $25 billion.  As a result of these poor fundamentals, investors are concerned about the creditworthiness of the Puerto Rico government and as a result the prices of some Puerto Rico government bonds have dropped.  Reportedly, certain ten-year Puerto Rico general obligation bonds had a yield of 4.89% as of September 30, 2013 (bond yields rise as bond prices fall).     

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Law Office of Christopher J. Gray, P.C., 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 known as Puerto Rico Fixed Income Fund I (CUSIP No. 744907106, hereinafter “Fund I”).  The fund was structured by UBS Puerto Rico, a unit of the Swiss banking giant UBS AG (NYSE:UBS). The case is pending in Miami, Florida. 

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 5 years.  Several of the 23 closed-end funds in question have reportedly lost over half their value, despite being marketed as safe investments. 

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.  

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Investment fraud lawyers are currently investigating claims regarding UBS Securities. UBS Securities has agreed to pay almost $50 million to settle charges that it violated securities laws regarding certain collateralized debt obligation, or “CDO”, investments. The charges apply to the firm’s structuring and marketing of ACA ABS 2007-2 — a CDO, or collateralized debt obligation. Allegedly, UBS failed to disclose the fact that it retained millions in upfront cash while acquiring collateral. The SEC officially charged UBS on August 6, 2013.

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The collateral for the CDO was managed by ACA Management and reportedly was primarily consisted of CDS on subprime RMBS, or residential mortgage-backed securities. According to securities arbitration lawyers, the CDO — as the “insurer” — received premiums from the CDS collateral on a monthly basis. Then the premiums were used for CDO bondholder payments. According to the SEC, ACA and UBS agreed that the collateral manager would seek bids for yield that contained both a fixed running spread and upfront cash in the form of “points.”

According to the SEC’s findings, UBS collected upfront payments totaling $23.6 million while acquiring collateral and, instead of transferring the upfront fees at the same time as the collateral, UBS kept the upfront payments and chose not to disclose this information. In addition to retaining the undisclosed $23.6 million, it also retained a disclosed fee of $10.8 million. Investment fraud lawyers say the decision not to disclose the retention of the upfront points was inconsistent with prior UBS deals and the industry standard. Allegedly, UBS’ head of the U.S. CDO group stated, “Let’s see how much money we can draw out of the deal.”

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