Erez Law and Aldarondo & Lopez Bras recently filed a claim against UBS Financial Services, Inc. and UBS Financial Services Inc. of Puerto Rico on behalf of a retired man who suffered approximately $4.2 million in losses stemming from closed-end funds invested in Puerto Rico debt (“CEFs”). Aldarondo & Lopez Bras is a separate law firm only licensed to practice law in Puerto Rico. The retiree was a client of Ramon “Cholo” Almonte and Ricardo Eboli, to whom he entrusted virtually all of his irreplaceable retirement savings. Almonte and Eboli recommended a dangerous and unsuitable concentration of high risk Puerto Rico debt and Puerto Rico-focused UBS funds, according to the Statement of Claim. Almonte and Eboli allegedly compounded the situation by recommending leveraged investment strategies, including repurchase and/or reverse repurchase transactions (“Repo”), margin, and a UBS Bank credit line. Significantly, this is not an isolated incident of wrongdoing by Almonte. Almonte’s CRD shows that he is the subject of at least 20 customer complaints including 7 recently filed complaints involving similar allegations and investments for claims exceeding $20 million.
UBS Puerto Rico was the primary underwriter of 23 CEFs with a total market capitalization of more than $5 billion. The UBS Family of Funds, included: Tax-Free Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Fund II, Inc.; Tax-Free Puerto Rico Target Maturity Fund, Inc.; Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico AAA Portfolio Bond Fund, Inc.; Puerto Rico AAA Portfolio Bond Fund II, Inc.; Puerto Rico GNMA & U.S. Government Target Maturity Fund, Inc.; Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Inc.; Puerto Rico Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV, Inc.; Puerto Rico Fixed Income Fund V, Inc.; and Puerto Rico Fixed Income Fund VI, Inc.
The elderly man primarily was interested in generating income from his investments, and could not afford to lose his irreplaceable retirements savings, according to the Statement of Claim. He had no interest in speculation or high risk investments, yet Almonte and Eboli allegedly recommended that he invest approximately $11.5 million in Puerto Rico debt including bonds and CEFS. This dangerously concentrated the man’s securities holdings in high risk Puerto Rico debt, which allegedly was compounded by the recommendation of several leveraged investment strategies.
First, Almonte allegedly recommended that the retiree purchase Puerto Rico bonds by engaging in Repo. A Repo involves the sale of securities with an agreement for the seller to buy back the securities at a later date at a repurchase price which is higher and includes interest. In effect, the seller is the borrower and the buyer is the lender in what amount to a secured loan with interest. Eventually, the repo transactions were converted to a margin account. This strategy was illicit, because the UBS Funds are not marginable and the strategy was a blatant circumvention of Regulation T of the Federal Reserve Board (“Reg-T”), which prohibits the use of margin in connection with the Funds.
Second, Almonte had recommended that the retiree mortgage his residence and invest the proceeds in his UBS/UBS-PR account, according to the Statement of Claim. When the retiree later informed Almonte that he intended on paying off the remaining balance on the mortgage by withdrawing funds from his accounts, Almonte allegedly recommended that the retiree use a UBS Bank credit line to pay off the mortgage rather than withdraw funds from his accounts. By recommending that the retiree use a UBS Bank credit line to satisfy a mortgage loan which was taken to invest in securities, Almonte violated UBS/UBS-PR policy against using non-purpose loans from UBS Bank to invest in any securities, amongst other things.
Further, UBS Bank was not licensed to do conduct business in Puerto Rico and any recommendation by a UBS/UBS-PR broker to borrow money from UBS Bank was implicitly or explicitly illegal, according to the Statement of Claim. In fact UBS Bank and UBS/UBS-PR acknowledged the illicit nature of the loans by converting all UBS Bank loans to UBS-PR loans in late December 2013. UBS Bank and UBS-PR would not have engaged in this unprecedented action had the loans been legitimate and in accordance with Puerto Rico law.
By recommending the UBS Bank credit line to invest in UBS Funds, Almonte recommended the use of leverage to buy Funds that already were leveraged and as such involved two layers of leverage which compounded the level of risk. Like the repo transactions, using the UBS Bank credit line was a highly leveraged and concentrated strategy, which was not only very risky, but also left little room for error.
Consistent with UBS/UBS-PR’S position, Almonte and Eboli repeatedly recommended that the retiree continue holding his Puerto Rico bonds and UBS Funds, accordingly to the Statement of Claim. In August and September 2013, the value of Puerto Rico bonds and the UBS Funds declined dramatically. The retiree received margin calls, which he was unable to meet. As a result, UBS/UBS-PR sold his Puerto Rico Bonds and Funds. All of the retiree’s equity in his accounts, which represented nearly all of his irreplaceable retirement savings, swiftly was decimated due to Almonte’s speculative and unsuitable recommendations. In addition, the retiree still owes approximately $790,000 for mortgage loans used to invested in Puerto Rico debt at Almonte’s alleged recommendation.
Dozens of other investors have retained Erez Law and Aldarondo & Lopez Bras to pursue claims against the firms who sold the investments to them. While UBS dominates the island’s market through its UBS Family of Funds, some of which are co-managed with Popular Securities, Banco Santander (Santander Securities), Merrill Lynch, Raymond James, Oriental Bank and others also sold investments linked to Puerto Rico’s municipal debt. Claims for investment losses against UBS and other brokerage firms must be arbitrated through the Financial Industry Regulatory Authority (“FINRA”), the largest dispute resolution forum in the securities industry.
If you invested in UBS CEFS, were a client of UBS, or obtained a loan from UBS Bank, and have experienced financial losses, please call us at 888-840-1571 or complete our “contact form.” Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies.