October 20, 2013 Comments (0) Blog, Securities Fraud

UBS Puerto Rico Fund SEC Complaint

(Last Updated On: July 17, 2015)

The White Law Group is investigating the liability that FINRA registered broker-dealers may have for recommending risky closed-end municipal bond fund investments like the UBS Puerto Rico Family of Funds

According to a recent Investment News report, UBS’s proprietary closed-end bond funds in its Puerto Rico family of funds have suffered significant decreases in value.  The Investment News’ report quotes a UBS spokesperson that stated, “General weakness in municipal markets in the U.S. and Puerto Rico, and apprehension about the direction of interest rates have led to steep declines in Puerto Rico municipal bond and closed-end fund prices, and a lack of liquidity for these securities.”

The Securities and Exchange Commission (the SEC) has actually been monitoring this situation for some time.  In 2012, the SEC charged UBS Financial Services Inc. of Puerto Rico and two executives with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.

UBS Puerto Rico agreed to settle the SEC’s charges by paying $26.6 million that will be placed into a fund for harmed investors.

According to the SEC’s order instituting settled administrative proceedings against UBS Puerto Rico, the firm knew about a significant “supply and demand imbalance” and discussed the “weak secondary market” internally. However, UBS Puerto Rico misled investors and failed to disclose that it controlled the secondary market, where investors sought to sell their shares in the funds. UBS Puerto Rico significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market.

The SEC’s charges state that UBS Puerto Rico also later withdrew its market price and liquidity support in order to sell 75 percent of its closed-end fund inventory to unsuspecting investors.

According to the SEC’s order, starting in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance.

The SEC’s Order also states that UBS Puerto Rico’s parent firm determined in the spring of 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk, and directed the firm to reduce its inventory by 75 percent to reduce that risk and “promote more rational pricing and more clarity to clients . . . [so] prices transparently develop based on supply and demand.” To accomplish the reduction, UBS Puerto Rico executed a plan dubbed “Objective: Soft Landing” in one document, which included:

  • Undercutting numerous marketable customer sell orders to “eliminate” those orders and liquidate UBS Puerto Rico’s inventory first, preventing customers from selling their shares.
  • Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
  • Soliciting customers to sell recently purchased primary offering shares back to the closed-end fund companies, so UBS Puerto Rico could then sell closed-end funds to those customers from its highest inventory positions.

The SEC further alleged that UBS Puerto Rico increased solicitation efforts to further reduce its inventory while making misrepresentations and failing to disclose UBS Puerto Rico’s withdrawal of secondary market support.

UBS Puerto Rico agreed to settle the SEC’s charges and to pay $11.5 million in disgorgement, $1.1 million in prejudgment interest, and a penalty of $14 million.

In addition to the monetary relief, the SEC’s order censures UBS Puerto Rico, directs it to cease-and-desist from committing or causing any further violations of the provisions charged, and orders the firm to comply with its undertaking to retain an independent consultant at UBS Puerto Rico’s expense.

The White Law Group’s investigation into the improper sales of UBS Puerto Rico closed-end funds includes, but is not limited to, recommendations to invest in the following closed-end funds:

UBS Puerto Rico Fixed Income Fund I, Inc.

UBS Puerto Rico Fixed Income Fund II, Inc.

UBS Puerto Rico Fixed Income Fund III, Inc.

UBS Puerto Rico Fixed Income Fund IV, Inc.

UBS Puerto Rico Fixed Income Fund V, Inc.

UBS Puerto Rico Fixed Income Fund VI, Inc.

UBS Puerto Rico Investors Tax-Free Fund, Inc.

UBS Puerto Rico Investors Tax-Free Fund II, Inc.

UBS Puerto Rico Investors Tax-Free Fund III, Inc.

UBS Puerto Rico Investors Tax-Free Fund IV, Inc.

UBS Puerto Rico Investors Tax-Free Fund V, Inc.

UBS Puerto Rico Investors Tax-Free Fund VI, Inc.

UBS Puerto Rico AAA Portfolio Bond Fund, Inc.

UBS Puerto Rico AAA Portfolio Bond Fund II, Inc.

UBS Puerto Rico AAA Portfolio Target Maturity Fund, Inc.

UBS Puerto Rico Tax-Free Target Maturity Fund I, Inc.

UBS Puerto Rico Tax-Free Target Maturity Fund II, Inc.

UBS Tax Free Puerto Rico Fund, Inc.

UBS Tax Free Puerto Rico Fund II, Inc.

UBS Tax Free Puerto Rico Target Maturity Fund, Inc.

UBS Puerto Rico Mortgage-Backed & Government Securities Fund, Inc.

UBS Puerto Rico GNMA & US Government, Inc.

If you are concerned about your investment in a UBS Puerto Rico Fund or another closed-end municipal bond fund investment and would like to speak to a securities attorney about whether you have a potential FINRA dispute resolution claim, please call The White Law Group’s Boca Raton, Florida office at 561-807-6804 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.  For more information on The White Law Group’s UBS Puerto Rico Fund investigation visit http://www.whitesecuritieslaw.com/2013/10/14/update-on-securities-fraud-investigation-involving-ubss-family-of-puerto-rico-funds/.

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