The big boys at UBS are probably popping bottles of bubbly today to celebrate what appears to be a big legal victory for the firm. An administrative law judge for the Securities and Exchange Commission ruled on Tuesday that the SEC failed to prove that two high-ranking UBS Puerto Rico executives committed fraud by promoting a series of closed-end, municipal bond funds as good investments to clients.
The judge’s decision is based on sales of the same proprietary, Puerto Rico muni bond funds this blog has been closely following for the past several weeks. There’s a key difference between that complaint and what we are currently learning and hearing each day from investors burned by the UBS Puerto Rico Muni Bond funds.
What investors who have seen their life savings obliterated by the funds need to keep in mind is that this week’s decision stems from an SEC case focused on what UBS Puerto Rico revealed to investors about the Muni Bond funds back in 2008 and 2009. It has nothing to do with the crisis the UBS Puerto Rico Muni Bond holders currently face.
Indeed, UBS Puerto Rico is undoubtedly elated, but this blog is recommending that the UBS boys keep the champagne on ice. It will still face a rash of complaints from investors, who have suffered a jaw dropping $4.5 billion in losses so far this year, according to a report in Reuters from an unnamed reporter in San Juan.
As we see it, there are several significant facts that UBS Puerto Rico Muni Bond Fund investors must focus on.
For the most part, the administrative law judge’s decision has little, if any relevance to the current issues plaguing the Puerto Rico bond market.
The SEC complaint, filed in 2012, focused on whether disclosures of specific trading strategies at UBS were adequate. That is not the issue in our cases. Unlike 2008 and 2009, the Muni Bond market in Puerto Rico right now is collapsing. We believe UBS didn’t disclose that the funds it was selling and managing held bonds that were approaching “junk” status.
Furthermore, many of UBS PR’s clients were improperly encouraged by its brokers to borrow against their UBS Puerto Rico Muni Bond holdings.
Most importantly, our cases are about suitability. The question is, should retirees and ultra-conservative investors have been invested in volatile, quasi-junk instruments like this? Absolutely not.
Some in the investment profession have been pointing to a potential collapse in the municipal bond market for years. In 2010, Meredith Whitney famously called for the potential of a wave of municipal defaults. Was anyone at UBS listening?
Part of the defense by the two executives in the case they won this week was that the Puerto Rico Municipal Bond funds, with their high yields and tax-exempt status, were terrific, highly suitable investments for “certain investors,” according to the decision.
What they meant was investors with an extraordinary appetite for risk.
Unfortunately, the Mom and Pop investors of Puerto Rico and elsewhere who bought these funds were anything but high-risk investors. Considering how many investors who do not fit that description and ended up in these bond funds anyway – let’s just say that UBS has a great deal of explaining to do.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions, including UBS.