$5 Million Class Action Just One More Headache for Embattled UBS
It is certainly not uncommon to hear about the mishandling of investors’ funds by investment firms. Fraud, whether is it through omission of critical information or misinformation, occurs frequently in the investment industry. Many times acts of fraud are committed by companies few people have ever heard of and at other times, the names of large companies seem to continually arise in relation to misconduct within the investment community.
One such company that we keep hearing about is UBS Puerto Rico. As I discussed in a previous blog, UBS PR was the subject of a Securities and Exchange Commission investigation in 2012. At that time, the SEC determined that in 2008 and 2009, UBS PR had engaged in gross misconduct by misrepresenting the liquidity and value of its closed-end funds (CEF). Two of the company’s high level executives, Juan Carlos Ortiz-Leon and Miguel A. Ferrer, were culpable in obscuring critical information from clients pertaining to these CEFs, including the fact that UBS PR controlled the secondary market. The company also pushed the sale of these funds without revealing to its clients that pricing was set by the trade desk. As a result of this type of nefarious behavior by UBS PR, the SEC has fined the firm nearly $27 million in disgorgement, interest, and penalties as well as an order to cease-and-desist, but the company’s woes don’t end there.
In addition to the issues established by the SEC against UBS PR, another ominous shadow has been cast over the parent company of UBS AG. According to a complaint filed on May 5 in U.S. District Court for the Southern District of New York, a class action has been filed against the titan investment firm on behalf of seven of its investors. This class action, which is seeking more than $5 million in damages, is based upon the claim that UBS AG Wealth Management breached its fiduciary duties through possible conflicts of interest arising from the sale of Puerto Rico municipal bond funds.
These were proprietary products that yielded high commissions for the firm and were touted as tax-free investments that were secure fixed income securities. The investors were also assured that their principal would remain unscathed, yet the funds were largely underwritten by UBS and were intrinsically erratic. According to the complaint, these funds were “cash cows” for the defendants because as the primary or secondary underwriter, UBS gained more than $200 million in underwriting fees in roughly a five-year timespan.
The complaint continues on to say that in addition to the underwriting fees that UBS obtained, the firm also garnered fees for managing the Puerto Rico closed-bond funds which resulted in the company earning additional fees of approximately $50 million. Clients ultimately paid 4.75% in commissions to UBS when they invested in these bonds, a much higher fee than if they had been advised by UBS to invest in individual securities or bonds.
This most recent complaint is just one of many that have been filed regarding these bond funds, as more than 200 arbitration claims have been filed with the Financial Industry Regulatory Authority (FINRA). It is, however, the first time that allegations of breach of fiduciary duty have been the central issue of the complaint, and it is also the first time that the amount of fees that UBS obtained from these transactions have been presented.
“The fee issue in the class actions, and for that matter in arbitrations, will be an extremely important issue,” said one attorney who is representing some of the claimants in these FINRA arbitrations.
Blum Law Group represents clients who have been victimized by brokers or investment firms. If you have suffered financial losses as a result of the mismanagement of UBS PR’s CEFs or the breaches of fiduciary duties of UBS AG, please call the Blum Law Group for a free consultation at 1-877-STOCK-LAW.
Sources: Bloomberg News; Silver Law Firm; previous blog; Investment News