A FINRA arbitration panel in San Juan found UBS Financial Services, Inc., and UBS Financial Services Inc. of Puerto Rico liable to an elderly investor, Juan Burgos Rosado, whose losses in closed-end funds sold by UBS had reached $737,000 four years after the 2011 opening of his account. The arbitration panel held that UBS must buy back the investor’s Puerto Rico bond fund portfolio for $1 million in a unusual lengthy ruling which included several factual findings and criticisms of UBS, including:
- We find that, at the time Claimant first invested (2011), the market for these CEFs, being limited to residents of Puerto Rico, was necessarily thin; that it had been to a large extent saturated and liquidity was limited
- UBS, though not required to do so, had essentially made a market until it determined to reduce its inventory of CEFs
- In the process of reducing its exposure in the CEFs by some 75%, UBS undertook an internal push for its brokers to sell its inventory to customers
- Evidence shows that some other brokers received internal “excessive concentration” memos when concentrations in these securities hit some 50% in their accounts
- [A] memo is not needed for us to determine, as we do, that this account was extremely over-concentrated and clearly unsuitable for Claimant
- [Claimant’s broker] assured [Claimant] that fluctuations in value were expected and normal and that the value would come back
- In the last week of August 2013, a Barron’s cover article about risks in the Puerto Rican economy appeared, and that with several other factors led to a precipitous drop in value of the portfolio of some $205,000.00 plus. Claimant met with his Broker and her branch office manager in early September, when the account balance was some $816,000.00, and among other things the manager explained that even a skinny cow could give milk. Claimant expressed concern that the cow would die, but nevertheless held on and continues to do so, even after the account lost another $310,000.00 in September and any market for the CEFs, already minimal, effectively ceased.
- [Claimant] did not know that UBS was disposing or had disposed of its own inventory; he did not know that brokers were under pressure to sell these CEFs and to encourage customers with them in their accounts to keep them, even to the extent of offering loans against them to customers who needed cash so the securities themselves would not go on the market. Claimant did not know that there was little functional market liquidity and that his portfolio could become locked in and that he might not have ready access to his money. So while we do generally ascribe to the concept of an investor assuming the risk of an account after sufficient notice of its risk, we do not think it applies to this Claimant in the circumstances of April 2013.
- In fact, later that Fall, when Respondents instituted a buy-back program in the absence of a functioning market, Claimant testified he considered selling his portfolio, carried at the time on his statements as worth some $450,000.00. His Broker only offered some $90,000.00 for it and he declined to sell.
- [A] proper effort to know her customer would have revealed that to his Broker; that the account was grossly overconcentrated; that any proper UBS branch office or other review should have detected such obvious unsuitability; and that any proper and required supervision could have prevented Claimant’s losses or at least limited them greatly
- The record instead shows that UBS intentionally transferred some of its risk in its CEF inventory to its customers, one of whom was Claimant we apply what we understand to be a rate of return more commensurate with an appropriate risk to the amount we find to have been lost due to Respondents’ violations of applicable securities industry rules, and include that in our rounded award.
“This award sends a message to UBS that arbitration panels will award significant damages in these cases; many UBS customers that we represent also had portfolios that were obviously over-concentrated in proprietary UBS closed end funds that were sold in part as the result of a business model by UBS to prominently push proprietary closed end funds that they created in part to own bonds that were underwritten by UBS,” said Jeffrey Sonn, Esq. of Erez Law, whose firm represents many customers who are suing UBS in arbitration.
“Evidence of this misconduct includes a tape recording of a sales meeting during which former UBS Chairman Miguel Ferrer and a senior financial advisor Ramon Almonte heavily pushed financial advisors to sell UBS proprietary closed end funds. When you couple that with the decision by UBS to drastically reduce its own holdings of its own closed end funds, it appears that these were poor investments sold in concentrated amounts. As the panel in the Rosado case found, ‘UBS was disposing or had disposed its own inventory’ which could lead a reasonable panel to believe that even UBS was no longer comfortable owning a significant amount of its own product. So when you tell a client that ‘even a skinny cow gives milk,’ what UBS did not tell its client is that not even UBS wants to own the cow that they gave birth to.” added Sonn.
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