Florida Securities Fraud Lawyer Blog

The SEC has issued a Wells notice to UBS regarding secondary market trading of closed-end funds sold in Puerto Rico in 2008 and 2009.

UBS, a former financial adviser to Puerto Rico's Employees Retirement System that provides pensions for government workers, led the 2008 sale of $2.9 billion in bonds. The sale resulted in $27 million in fees for UBS and its co-underwriters. A UBS manager bought $1.5 billion of the securities and put them into 20 mutual funds. The bonds represented about 17 percent of the funds' $8.9 billion in assets at the time.

The Puerto Rican Employees fund had assets of $1.9 billion and liabilities of $18.9 billion as of June 2009, leaving it 90 percent underfunded.

Mutual fund shareholders sued UBS in February 2010, saying the firm breached its fiduciary duty to investors by reaping fees on the bond offering while charging fund fees including a 4.75 percent commission.

The $368 million Puerto Rico Fixed Income Fund produced an annual return of 5.4 percent to investors in five years. The $411 million Puerto Rico Fixed Income Fund II averaged 5.6 percent returns in the same period.

Funds established in Puerto Rico and sold only to residents need not register with the SEC. The funds are also exempt from the Investment Company Act of 1940.

Independent sources opine that the sale of the closed-end funds by UBS was riddled with conflicts of interest and insufficient disclosures to clients.

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In response to the $6.4 billion lawsuit filed by Irving Picard, the trustee for Bernie Madoff, JPMorgan Chase has stated that it had no legal obligation to discover Madoff was perpetrating a Ponzi scheme. The bank claims Picard is holding the bank to accountability standards not prescribed under the law. In addition to the purported non-existent standard to investigate clients, JPMorgan Chase is also challenging Picard's standing to bring this lawsuit. The bank believes the lawsuit is essentially a class action litigation, which should be in federal district court to be heard by a jury, and not in bankruptcy court.

Picard has alleged in his lawsuit, seeking $1 billion in fees and another $5.4 billion in damages, that the bank knew there were problems with Madoff's accounts. In support, Picard cites to emails and other documents where JPMorgan Chase employees expressed concerns over Madoff's operation and its unusual performance given the performance of the market. Despite these red flags, the trustee maintains the bank willfully ignored the fraud.

On January 28, 2011, the SEC received a court order freezing the assets of a Stamford, Connecticut-based investment adviser and its principal, Francisco Illarramendi, claiming that both misappropriated over $53 million in investor money and used the funds for their own gain.

The SEC claims that Illarramendi defrauded investors in his managed hedge funds by wrongly diverting the investors' money into bank accounts controlled by him. Illarramendi then invested the money for his own benefit or for the benefit of the entities that he controlled, rather than for the benefit of the hedge fund investors.

According to David P. Bergers, the SEC's Boston Regional Office Director, "Illarramendi treated his clients' money like it was his own, diverting millions of dollars that did not belong to him. He abused his position of trust with his clients and breached his responsibilities as an investment adviser."

The SEC's complaint states that Illarramendi is the majority owner of the Michael Kenwood Group LLC -- a holding company for, among other entities, investment adviser Michael Kenwood Capital Management LLC. Via this adviser entity, Illarramendi manages several hedge funds, including a fund with over $540 million in assets. The SEC's complaint claims that Illarramendi misappropriated over $53 million in investor funds out of this particular hedge fund without the investors' authorization.

The SEC requested an asset freeze because it claimed that Illarramendi was about to place more investments using the investor funds without their authorization. Since the filing of the complaint, the U.S. District Judge for the District of Connecticut has held several hearings relating to the SEC seeking emergency relief against Illarramendi and Michael Kenwood Capital Management. The Court then entered an order freezing the assets of the defendants.

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The SEC has charged TD Ameritrade for failing to supervise its brokers who misled clients who bought shares in the Reserve Yield Plus Fund.

Various brokers at the firm violated securities laws when they misrepresented the mutual fund as a money market fund, with the safety of a cash investment and with guaranteed liquidity. They also failed to disclose the nature or risks of the fund when offering the investment to customers.

The SEC found that TD Ameritrade supervisors failed to prevent the misconduct because it failed to establish adequate supervisory policies and procedures.

In settling the case, TD Ameritrade agreed in a settlement to pay approximately $10 million to eligible customers who continue to hold shares of the fund.

TD Ameritrade's customers have received approximately 95 percent of their original principal investments in the fund following distribution of most of the fund's liquidated assets to all of its shareholders.