The UBS Puerto Rico family of funds consists of 14 closed-end funds, sold exclusively through registered representatives and brokers with UBS Financial Services Inc. of Puerto Rico. During the past decade through the end of 2012, UBS reportedly has sold roughly $10 billion worth of these funds. Now the values of the funds are in free-fall.
According to securities regulators and news sources, the value of Puerto Rican municipal bonds has declined for two reasons. First, Puerto Rico’s economic stagnation and its huge pension obligations have left the island facing a staggering financial crisis. Second, many investors bought the Puerto Rican muni bonds and bond funds on margin, and as the values of the bonds decreased, brokerage firms made margin calls, leading to forced sell-offs of investors’ bonds or bond funds. This deluge of margin calls further pushed down prices.
Anecdotal evidence indicates that UBS brokers engaged in a pattern of conduct, convincing retirees or near-retirees to invest in highly concentrated portfolios of these muni bonds and bond funds. The brokers were pressured by UBS to reduce UBS’ inventory of and exposure to these products by pitching them to Puerto Rican investors and touting them as safe tax-exempt investments for residents of Puerto Rico.
But the recommendations of the funds often were unsuitable and inappropriate. Many of the funds are leveraged funds, meaning that for every dollar of customer assets the fund holds, it has roughly another dollar of assets bought with borrowed money. UBS clients were not always made aware of the risks associated with these sorts of leverage ratios. Moreover, many UBS brokers advised clients to purchase additional shares of the leveraged funds by taking out lines of credit, often secured by the clients’ homes or brokerage account assets. The loans, coupled with the leveraged nature of the funds, resulted in many UBS clients experiencing credit problems or suffering margin calls.
It also appears that UBS’ Puerto Rican investors will not be the only ones to feel the pain.
Most municipal bond funds in the U.S. own debt issued by Puerto Rico. But according to a recent article in Kiplingers, “one-quarter of open-end municipal bond funds have at least 5% of their assets invested in Puerto Rican bonds.” Many have 20% or more. These funds have recorded large losses in the past several months due to concentration in Puerto Rican municipal bonds, and it’s likely that many purchasers were unaware of the risk posed by these large holdings. Funds with high concentrations of Puerto Rican bonds include:
Franklin Double Tax-Free Income Fund; Oppenheimer Rochester VA Municipal A; Oppenheimer Rochester MD Municipal A; Oppenheimer Rochester AZ Municipal A; Oppenheimer Rochester MA Municipal A; Oppenheimer Limited Term NY Municipal A; Oppenheimer PA Municipal A, Rochester Municipals A; Oppenheimer Rochester Michigan Muni A; Wells Fargo Advantage WI Tax-Free Inv; HighMark WI Tax-Exempt A; Oppenheimer NJ Municipal A; Oppenheimer Rochester AMT-Free NY Muni A; and Oppenheimer Rochester Ohio Municipal A.
If you’re an investor who was burned by UBS’ sales of Puerto Rican bonds or bond funds, you may have a right to seek damages from UBS in FINRA arbitration. Likewise, you may have a claim if you are the owner of shares in a municipal bond fund sponsored by Oppenheimer or another fund sponsor and recently have seen your investment incur large losses due to the presence of Puerto Rican bonds in its portfolio. But the only way to find out for sure is to promptly seek out securities lawyers who understand what to look for. Call us. Contact Hugh Berkson at (866) 932-1295, or reach us through the consultation form on the right of this page. We’ve helped hundreds of aggrieved investors. Talk to us about how we can help you.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.
