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PROMESA Filing May Give Rise to Claims Against Puerto Rico Brokerage Firms

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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