UBS Puerto Rico Bond Funds
Dozens of investors have contacted our law firm concerning their investment losses in UBS Puerto Rico closed-end-bond funds and other Puerto Rico municipal debt. Many investors were recommended by their financial advisors to heavily invest in these funds and have watched their accounts be sent into free fall as a result. Moreover, many of our clients now tell us that their advisors have little to no advice concerning their present options and some say their advisors rarely return their inquiries.
As a background, Puerto Rico's 3.7 million residents have accumulated a public debt of over $87 billion, approximately $23,000 of debt per resident. To put Puerto Rico’s debt in perspective, only the states of California (population of 38 million) and New York (population of 20 million) have greater amounts of debt than Puerto Rico (population 3.7 million). Recently, Puerto Rico’s governor proposed a legal means to relieve the debt of some its largest public corporations such as those that provide services like electricity. While the new law is meant to alleviate concerns about Puerto Rico’s inability to file for federal bankruptcy protection many experts have interpreted the proposal as meaning that Puerto Rico’s agencies could falter soon. In addition, the picking and choosing of which debt obligations to meet and which to negotiate is likely to reduce confidence in the island’s credit generally.
Our representation of clients focuses on UBS’ sales tactics and recommendations to its customers to invest in 23 proprietary closed-end funds. The Puerto Rico bond funds represent the single largest source of revenue for UBS in Puerto Rico. UBS earns fees from the funds through administration fees as well as primary and secondary market sales commissions. Between 2004 and 2008, the mutual fund business generated half of UBS’s total annual revenues and the Funds also comprised one-third of UBS’s assets under management.
The UBS Puerto Rico bond funds contained substantial risks that allegedly were downplayed by the firm’s advisors in order to generate sales. One of the funds’ risks is the excessive amount of leverage the funds employ. UBS leveraged up to 100% of the funds’ investments to raise additional cash, or the borrowing of a dollar for every dollar of capital invested in the funds. U.S. based funds by contrast are not allowed to take on such large leverage risk.
In addition, it has been alleged that UBS brokers encouraged clients to borrow even more money to invest in the funds through the use of margin and bank loans against the firm’s own compliance policies. The steep declines in the funds’ values have caused UBS clients to become forced to liquidate hundreds of millions of dollars in holdings in order meet margin calls on those loans.
U.S. authorities have also begun probing UBS for criminal fraud after a former broker, Jose Ramirez, allegedly directed clients to improperly borrow money to buy the funds. At issue in the criminal probe is whether UBS executives knew proceeds from the loans were used in a way that violated its own lending rules. Because these loans use the borrower's investment portfolio as collateral, their proceeds cannot be used to buy securities since changes to the portfolio could devalue the collateral.
As losses continue to mount investors who have come forward to our firm to tell very similar tales about how their assets were allocated with UBS. In many cases these retirees or near-retirees invested as much as 100% of their portfolios in the UBS Puerto Rico closed-end funds, some through additional margin or bank loans.
The 23 funds include the Tax-Free Puerto Rico Fund I-II; Tax-Free Puerto Rico Target Maturity Fund; Puerto Rico AAA Portfolio Target Maturity Fund; Puerto Rico AAA Portfolio Bond Fund I-II; Puerto Rico GNMA & U.S. Government Target Maturity Fund; Puerto Rico Mortgage-Backed & U.S. Government Securities Fund; Puerto Rico Fixed Income Fund I-VI; Puerto Rico Investors Tax-Free Fund I-VI; Puerto Rico Tax-Free Target Maturity Fund I-II; and the Puerto Rico Investors Bond Fund.