Brokerage firms almost always defend FINRA arbitration cases in the same way – (1) the disclosure defense, (2) blaming you, and (3) blaming the economy. Firms never take responsibility for their own actions but will spend tons of time talking about how the investor should take responsibility for their actions.
The following is a brief overview of these three anticipated defenses to the wave of litigation being filed against UBS Puerto Rico as a result of the firm’s selling of its proprietary UBS Puerto Rico bond funds:
(1) The Disclosure Defense
When firms sell investments the offering documents (whether they be a prospectus or PPM or some other offering document) always disclose all manner of risks. For example, here are some of the disclosures that UBS made about the Puerto Rico Fund investments in their marketing material:
“Risks applicable to all funds
– Shares of the funds are not bank deposits and are not guaranteed or insured by any bank, government entity or the Federal Deposit Insurance Corporation. An investment in the funds is not guaranteed and you may lose money if you invest in the funds.
– Yields on the funds will fluctuate.
– The share price of the funds will fluctuate.
– There is no guarantee that a fund will be able to achieve its investment objectives.
– The funds may be required to invest at least 67% of their portfolio in Puerto Rico securities. As such, the funds are more sensitive to economic, political, regulatory or other factors adversely affecting Puerto Rico issuers than a fund that is not concentrated in Puerto Rico issuers. A concentration in Puerto Rico issuers may cause funds with different investment strategies to react negatively to the same market conditions.
– The funds engage in transactions, such as securities purchase and sales transactions and repurchase agreement transactions, directly with UBS Puerto Rico and possibly other affiliates.
– A relatively high percentage of the funds’ total assets may be invested in the obligations of a limited number of Puerto Rico issuers, so that the conditions in the Puerto Rico market may result in a greater increase or decrease in the funds’ net asset value than that of more diversified funds.
– The funds will be impacted by the risks associated with the funds’ underlying investments; if one of the fund’s investment sectors suffers a loss in value, this will most likely affect the overall value of the fund.
– The risks discussed herein may be magnified for investors choosing to concentrate their portfolios in the funds.
Additional risks applicable to closed-end funds
– The funds may use leverage or borrow money to make investments in securities. Using leverage may reduce the dividend the funds pay or reduce the value of your fund investment.
– The market price of fund shares is based on relative demand and supply of the shares as well as other factors, including the general market and economic conditions discussed in the Prospectus. Accordingly, the value of your investment in the funds will fluctuate and the price that you are able to obtain for your fund shares may be less than the net asset value of the shares and may be less than the price that you paid in purchasing fund shares.
– While UBS Puerto Rico currently intends to maintain a market in fund shares, it is under no obligation to do so. Therefore, there may be occasions when you will be unable to sell your shares or will be able to sell at a loss or at times at a significant loss.”
The problem with the disclosure defense is that the language is so boiler plate and voluminous that most investors either don’t read the disclosures or cannot understand them. Also, the disclosure defense completely ignores the oral representations that the sales agent is making to induce the investor to buy the investment. These representations can be more significant to FINRA arbitration panels because arbitrators have bought investments before and have likely glossed over the disclosures just like most investors.
(2) Blaming You
In virtually every case, brokerage firms defend cases by trying to portray the investor as extremely sophisticated. Firms will use discovery to try to determine every investment the investor has ever made, what education and work background the investor had, all in the hopes of portraying the investor as experienced and savvy. In the case of the UBS Puerto Rico Funds, it appears that most of the investors in these products were unsophisticated, retirees. Nonetheless, it is likely that the firm will still try to portray these investors as super sophisticated and argue that the investors were suitable for the investor.
Here is the firm’s actual suitability requirement – pursuant to FINRA Rule 2111:
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
(b) A member or associated person fulfills the customer-specific suitability obligation for an institutional account, as defined in Rule 4512(c), if (1) the member or associated person has a reasonable basis to believe that the institutional customer is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies involving a security or securities and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the member’s or associated person’s recommendations. Where an institutional customer has delegated decision making authority to an agent, such as an investment adviser or a bank trust department, these factors shall be applied to the agent.
So regardless of the firm’s defense, UBS will still have to demonstrate that it complied with FINRA Rule 2111 in recommending the UBS Puerto Rico funds and given the risks involved, the SEC settlement, and the obvious conflict of interest the firm had, we believe the firm will have difficulty proving that the investments were suitable – particularly if the investor’s profile includes retired or conservative.
(3) Blaming the Economy
When all else fails, firms will blame the economy. In the context of the UBS fiasco, UBS will likely say that the only reason investors suffered losses is because of the poor economy in Puerto Rico. This defense completely ignores the SEC findings which alleged that UBS saw the writing on the wall and instructed their advisors to sell the firm’s inventory of these funds to the firm’s retail clients. To the extent that the SEC’s findings are true, the fact that the economy in Puerto Rico may be poor does not appear to be a strong defense to the losses in these funds.
If you invested in UBS’s family of Puerto Rico Funds and would like to discuss your litigation options, please call the securities attorneys of The White Law Group at 561-807-6804.
The White Law Group is a national securities fraud, securities arbitration, investor protection law firm with offices in Boca Raton, Florida and Chicago, Illinois.
For more information on The White Law Group visit http://www.whitesecuritieslaw.com.