This is bad news for a lot of investors, as about 70 percent of U.S. municipal bond funds currently hold some portion of Puerto Rico bonds and those funds that are required to hold investment-grade bonds will be forced to sell the Puerto Rico bonds at significant discounts. According to stock fraud lawyers, this selling pressure may result in bond holders seeing significant price drops. In addition, the downgrade could throw a wrench in Puerto Rico’s plan to borrow $1-2 billion in the near future. Puerto Rico would likely have to agree to a much higher interest rate for investors to accept the risks associated with the bonds.

Puerto Rico bond investors suffered losses of more than 20 percent in 2013, with even higher losses for investors who were exposed to the internal leverage (or borrowing of money to buy additional municipal bonds) in UBS Puerto Rico bond funds. Investors who were 50 percent leveraged reportedly experienced losses of around 40 percent. In addition, securities fraud attorneys say that many investors were convinced to use a margin account, a second mortgage or a bank loan to borrow more money for larger investments. Both of these recommendations carried significant risk and were unsuitable for many investors.

Under FINRA rules, firms have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance.

If you received an unsuitable recommendation of Puerto Rico bond funds (either by UBS Puerto Rico or another brokerage firm) and suffered significant losses as a result, you may be able to recover your losses through securities arbitration. To find out more about your legal rights and options, contact a stock fraud lawyer at Law Office of Christopher J. Gray at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

In one claim already filed by stock fraud lawyers, the claimant, one of Lugo’s clients, seeks to recover approximately $15 million. According to the allegations in this claim and others, Lugo reportedly recommended that his clients invest significant portions of their accounts in UBS proprietary Puerto Rico municipal bond funds and Puerto Rico municipal bonds. In addition, the amount invested frequently represented large concentrations of the total net worth of the client. Reportedly, these investments were marketed and sold as low-risk and clients were told they would be paid high, tax-advantaged dividends.

Lugo’s clients also allege that they were not warned that the UBS bond funds were highly leveraged. Lugo also allegedly recommended a UBS margin account in order to borrow funds to increase his clients’ Puerto Rico municipal bond investments. While this investment strategy was highly speculative and posed a high risk of principal loss, Lugo allegedly did not warn his clients of the risks and made unsuitable recommendations.

Reportedly, UBS Financial Services offered to buy back some shares of the Puerto Rico closed-end bond funds last month, following the funds’ significant decline in value. However, the shares will be repurchased at net asset value or below and a cap has been placed on the fund to prevent any more than 25 percent of the outstanding shares to be repurchased. According to securities fraud attorneys, the buyback program may be an attempt to discourage individual arbitration claims and actual investor recovery could be much lower than the shares’ net value.

If you suffered significant losses in UBS Puerto Rico bond funds because of the unsuitable recommendations of David Lugo or another UBS representative, you may be able to recover your losses through securities arbitration. To find out more about your legal rights and options, contact a stock fraud lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.netfor a no-cost, confidential consultation.