UBS Puerto Rico is pushing back against a $70 million claim filed against the financial advisory firm by the Association of Commonwealth Government Employees (AEELA by its Spanish acronym).
UBS Puerto Rico defended its work and rejected the claims in AEELA’s filing with the Financial Industry Regulatory Authority (FINRA).
“UBS had no role in AEELA’s losses, which occurred after AEELA sought another investment adviser in 2013,” UBS Puerto Rico CEO Carlos V. Ubiñas said in a statement.
“At various points in time UBS provided advice to AEELA’s board and investment committee that AEELA decided not to follow,” he said.
“In short, AEELA’s claims have no merit whatsoever,” Ubiñas said. “During the period UBS was contracted it provided clear, solid and prudent investment advice and did nothing wrong. UBS will defend itself vigorously against this claim and is confident that AEELA’s claims will be completely rejected in the end.”
The massive claim adds to a flood of filings against UBS by investors in the company’s closed-end funds whose losses reached into the billions after Puerto Rico’s bonds took a beating on the U.S. municipal bond market.
AEELA Executive Director Pablo Crespo Claudio said the claim with FINRA, a Wall Street-funded industry watchdog, was made to protect the savings of its 200,000 members.
Multiple lawsuits and FINRA claims have been filed against market leader UBS and other brokerage firms after a downturn in the value of Puerto Rico government bonds resulted in big losses for local investors, many of whom hold closed-end mutual funds that invest heavily in Puerto Rico government bonds.
The losses were magnified because the closed-end mutual funds employed leverage, or borrowed funding, which financial experts say magnifies the risks and potential losses. Local investments in Puerto Rico bonds and securities fell by about $3.7 billion last year, according to the Financial Institutions Commissioner’s Office.
AEELA’s FINRA filing names UBS Financial Services of Puerto Rico, UBS Financial Services and UBS Trust Company de Puerto Rico. The entity is being represented by the Klayman & Toskes and Osvaldo Carlo law firms.
“UBS was aware of the number of families that benefitted and depended on AEELA’s support but unfortunately decided to enrich itself, while reducing its own holdings of high-risk bonds, instead of watching out for the interests of AEELA,” Crespo said.
Crespo said AEELA had directed UBS to put its money in low-risk investments with fixed incomes. Instead, UBS pushed the acquisition of new bonds that earned the brokerage millions in fees, he added.
AEELA had contracted for consulting services that included managing some $650 million through UBS and the Castillo Group.
Between 2010 and 2012, the amount under management by the Castillo Group surged from $50 million to more than $300 million. Nearly $179 million of that went to Puerto Rico’s high-risk general obligation bonds, according to AEELA.
AEELA’s investments in Puerto Rico bonds jumped from $74 million to $212 million, accounting for about 30 percent of its total investments, according to a report by the Spanish-language Inter News Service.
FINRA is on pace to field more arbitration cases in 2014 than it handled last year as it juggles a mounting number of claims from investors in Puerto Rico bond funds.
The Wall Street-funded broker-dealer watchdog saw 1,101 arbitration cases filed during the first quarter of this year, up from 919 from the same three-month period in 2013 and down from 1,183 in the first quarter of 2012.
A total of 3,714 cases were filed with FINRA in 2013 and 4,299 cases were lodged in 2012.
FINRA has been grappling with a flood of claims by investors in closed-end Puerto Rico bond funds that caused a logjam that prompted it to place an administrative stay on such cases in March that had yet to be assigned to an arbitration panel.
FINRA said last month that it has expanded its pool of arbitrators and is lifting a hold on some cases involving closed-end Puerto Rico bond funds.
The regulator said some 700 arbitrators on its roster have agreed to hear cases in Puerto Rico. FINRA said it expects the majority of the roughly 209 cases it has received as of early April to be heard on the island.
Some investors who suffered losses on the investments claim they were pushed into too risky investments and had too much of their money invested in similar types of investments. Among them is Puerto Rico boxing legend Félix “Tito” Trinidad, who claims he lost tens of millions of dollars earned in the ring over his Hall of Fame career.
FINRA officials said in April they are still looking for more arbitrators willing to serve in Puerto Rico, where a fraction of the expanded roster resides. The watchdog sent staff to the island this month for meetings with professional groups interested in serving as arbitrators.
Scores of cases tied to Puerto Rico bond funds have been filed by investors, and FINRA has said that the number could top 500. Lawyers handling cases for claimants say they could surge higher than 750.
FINRA has said it will not be modifying its existing venue rule, which states arbitration hearings will be held at a location closest to where the investor resides, without the agreement of both parties to change the hearing venue.
Some claimants’ lawyers had pressed for cases to be heard in the southeast region of the mainland U.S., as well as Puerto Rico, to work around the issue of having to send U.S.-based arbitrators to Puerto Rico. UBS had objected to such a move.
FINRA said it will pay for arbitrators’ travel costs to serve in Puerto Rico. The pool of arbitrators is mostly drawn from Texas and the southeast states of Georgia, Florida, Alabama, Mississippi and Louisiana.
At FINRA’s request, UBS and Merrill Lynch have agreed to pay for translation services in which either is involved because Spanish is the primary language in Puerto Rico.
FINRA is seeking similar agreements from other brokerages involved in the cases.
FINRA said more than 60 of the attorneys involved in the 209 cases lodged so far are based in Puerto Rico.