Generally, only savvy investors can assess whether or not high-yield investments are worth the financial risk they may face by investing in them. This is why so many investors rely upon the recommendations of investment advisors. It is expected by investors that the level of expertise and integrity of investment advisors/firms is beyond reproach. These are not unrealistic expectations by the investors as each financial advisor and the firms that they represent have a legal obligation to endorse only those investments which meet the investor’s goals and are within the investor’s tolerance for risk. When a financial advisor/broker or a firm fails to act within the best interests of the client, it amounts to fraud. Additionally, if an advisor offers a client misinformation or acts without the knowledge of the client, it can also be considered fraud.
One area of concern pertaining to potential fraud which has been in the media recently is the investment practices of advisors at UBS Puerto Rico who have invested in Puerto Rico municipal bonds. UBS PR is the biggest brokerage firm in Puerto Rico, holding about 49% of all retail brokerage assets, and they employee roughly 230 financial advisors. Since its establishment in 1978, there have been five regulatory events filed against UBS PR, and this is not the most recent incident of regulatory issues filed against them. It has, however, resulted in the largest financial repercussions that have been ordered against the company to date.
In May, 2012, the SEC investigation determined that in 2008 and 2009, the CEO of UBS PR, Miguel A. Ferrer, and its Head of Capital Markets (HCM), Carlos Juan Ortiz-Leon, had both misrepresented and omitted critical facts to its customers regarding the pricing of certain closed-end funds (CEF). The company made claims that these funds were based upon market activity, yet they did not reveal that the prices were actually set by the trading desk.
They were also intentionally vague about the liquidity of these CEFs and although they had disclosed information about the liquidity of these CEFs in prospectuses, this information was not supplied to the secondary market. Additionally, they failed to disclose that as the dominant CEF broker, UBS controlled this secondary market. It was not revealed to investors that any secondary market sales that they may have wanted to make were dependent, to a great degree, upon UBS PR’s successful solicitation of customers.
In an effort to give the appearance of liquidity and stable pricing, in 2008, UBS PR spent millions of dollars to purchase its own CEF shares. Both the CEO and the HCM continued to promote the sale of the CEFs, even though they were aware that there existed a lower demand than there was supply.
By early 2009, UBS PR’s parent company realized the UBS PR’s burgeoning CEF stockpile could pose a large financial risk to the firm. As such, the parent company directed UBS PR to significantly cut its CEF shares. In an effort to do so, UBS PR and the HCM developed a strategy that was referred to in one document as “Objective: Soft Landing.” UBS PR instituted a methodology in which they sold their CEF shares at prices that undermined the pending sell orders of many of their clients.
Over a six-month period in 2009, UBS PR sold off approximately 75% of its CEF inventory to investors, knowing that the profitability of these funds had changed. Even so, they continued to try to sell CEFs without revealing the impact it had on the secondary market prices. The company did not reveal to clients that it had withdrawn its support for this particular market. By the fall of 2009, when UBS PR had cut back on its CEF supply, certain funds had seen a decline of 10 – 15% in market prices.
As part of the judgment of May, 2012, the SEC instituted an Order of Administrative and Cease-and-Desist proceedings (OIP) citing violations of the SEC Acts of 1933 and 1934, as well as violations pertaining to the Investment Company Act of 1940. This OIP speaks to the misrepresentations and omissions committed by Ferrer and Ortiz-Leon, as determined by the SEC investigation of 2008-2009. Even though both men deny culpability, mismanagement is an undeniable factor, as UBS PR has a history of running afoul of both regulatory entities and investors. With four other SEC investigations and three arbitration cases, UBS PR has a history of failure to provide appropriate supervision to its employees, breach of fiduciary duty, omission of facts, and misrepresentation.
As a result of the SEC investigation, UBS PR has been ordered to pay $11,500,000 in disgorgement, $1,109,739.34 in pre-judgment interest, and a civil penalty of $14,000,000. Although UBS PR has neither admitted nor denied the findings of the investigation, they have agreed to pay the disgorgement and fine, and agreed to the cease-and-desist order. The company has also agreed to hire an independent consultant to review its pricing policies and its CEF disclosures.
If you have suffered financial losses as a result of the mismanagement of UBS PR’s investment practices or the mishandling of its CEFs, please call the Blum Law Group for a free consultation at 1-877-STOCK-LAW.