An Initial Decision (“Decision”) was rendered by the Honorable Brenda P. Murray, Chief Administrative Law Judge for the Securities and Exchange Commission (“SEC”), dismissing an Order Instituting Administrative and Cease-and-Desist Proceedings filed on May 1, 2012 (“Proceeding”). In the Proceeding, the SEC alleged that two executives of UBS Financial Services, Inc. of Puerto Rico (“UBS PR”), Miguel Ferrer and Carlos Juan Ortiz-Leon, made material omissions and misrepresentations to investors concerning proprietary UBS closed-end funds.
UBS PR is a subsidiary of UBS Financial Services, Inc., which in turn, is wholly owned by Switzerland-based UBS AG. UBS PR is based in Hato Rey, Puerto Rico and is a member of the Financial Industry Regulatory Authority (“FINRA”) and is registered with the SEC. According to the Decision, UBS PR is the largest broker-dealer in Puerto Rico with approximately one-half of the market in assets under management.
Ferrer was Chairman and Chief Executive Office of UBS PR from 2003 to 2009. A few months later, he was re-hired as UBS PR’s Vice-Chairman.
Ortiz-Leon was responsible for UBS PR’s Capital Markets Trading Desk, including UBS PR’s closed-end fund trading desk.
The Decision reflects that 23 closed-end muni bond funds were at issue in the Proceeding (“Puerto Rico Funds”). According to Judge Murray, the Puerto Rico Funds represented about one-third of UBS PR’s total assets under management. Of the Puerto Rico Funds, seven were started in the 1990’s and were co-sponsored by Banco Popular, one of Puerto Rico’s largest banks. The other 16 Puerto Rico Funds began between 2001 and 2008 and were sponsored solely by UBS PR.
According to Judge Murray’s Decision, the stated objective of the Puerto Rico Funds was to provide current income consistent with capital preservation. In addition, the Puerto Rico Funds were required to invest 67% of their assets in Puerto Rico, and were permitted to leverage up to 50% of their assets.
In the Proceeding, the SEC alleged that UBS PR, Ferrer and Ortiz-Leon committed securities fraud in 2008 and 2009 by making material misrepresentations and omissions to UBS PR’s account holders and registered representatives about the Puerto Rico Funds. Specifically, the SEC alleged that clients and financial advisors were misled about the quality of the Puerto Rico muni bonds contained within the Puerto Rico Funds, and about the availability of a market for the Puerto Rico Funds.
The SEC administrative hearing lasted 13 days and included testimony from 29 witnesses. In the Decision, Judge Murray wrote that she did not find that a preponderance of the evidence supported the SEC’s allegation that UBS PR, Ferrer, and Ortiz-Leon acted fraudulently when the trio marketed the Puerto Rico Funds as “profitable, safe, and stable investments.”
A “preponderance of the evidence” is a standard of proof that the plaintiff must meet in civil litigation. It has been described as just enough evidence to make it more likely than not, that the facts the plaintiff seeks to prove are true.
The SEC Proceeding dealt exclusively with misrepresentations and omissions in connection with the Puerto Rico Funds. However, brokers are required to only recommend investments that are suitable for an investor based on the circumstances particular to that customer.
That Judge Murray ruled in favor of UBS PR and the individuals is not an indication that the Puerto Rico Funds were necessarily suitable investments. Many securities attorneys believe that the Puerto Rico Funds were not suitable for a large number of Puerto Rico investors, especially those who purchased the Puerto Rico Funds on leverage.
On the same day the Decision was released, UBS AG announced that it has incurred trading and credit losses totaling $41 million due to loans backed by Puerto Rico municipal bonds. The full 95-page Decision can be viewed by clicking here.
More information about UBS Puerto Rico Family of Funds can be viewed here.