Erez Law Wins $4.2 Million in Large FINRA Award Against UBS Financial Services Inc. for Losses in Puerto Rico Bonds and Funds
Posted on Friday, June 29th, 2018 at 7:01 am
In June 2018, former clients of UBS Financial Services Inc. (UBS) and UBS Financial Services Inc. of Puerto Rico (UBS-PR) won an award in a FINRA arbitration for compensatory damages for $4.2 million plus post-award interest for losses sustained from investments in Puerto Rico bonds as well as the clients’ proprietary closed-end funds invested predominantly in Puerto Rico bonds. Additionally, UBS is liable for $85,847 in costs and the $600 filing fee.
The causes of action included breach of fiduciary duty; negligence; negligent supervision; fraud; breach of contract; violation of the Puerto Rico Uniform Securities Act; and violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 of the Securities and Exchange Commission. The FINRA arbitration hearing was conducted in San Juan, Puerto Rico and Miami, Florida.
“This is the correct award by the FINRA arbitration panel. The panel rejected all of UBS’s defenses and arguments in which it sought to defend this case. Moreover, the award is for nearly 100% of our clients’ capital losses and is proof that the panel did not hold our clients responsible for the losses caused by Mr. Almonte and UBS,” says the claimants’ attorney Jeffrey Erez, Esq.
Jeffrey Erez, Esq, has been lead the trial counsel on four cases against UBS that have gone to trial and has achieved significant recoveries in every case. Mr. Erez and Erez Law continue to represent investors in Puerto Rico and the mainland U.S. for losses in Puerto Rico bonds.
Erez Law represented a group of Puerto Rico residents who suffered losses due to investments in unsuitable Puerto Rico bonds and closed-end funds. According to the claim filed by the investors, by January 2013, they entrusted the Almonte, Eboli and Goytia team and UBS with their investment accounts, which represented the vast majority of their securities investments and liquid net worth, including retirement savings, IRA accounts and funds earmarked for their children’s college education, among other things. The clients informed Almonte, Eboli and Goytia and UBS that they were generally risk averse investors and not interested in high risk or speculative investments or strategies.
Regrettably, according to the allegations in the claim, Almonte, Eboli and Goytia recommended a reckless and unsuitable concentration in high risk Puerto Rico bonds. Almonte, Eboli and Goytia over-concentrated the clients’ portfolios in high risk and unsuitable Puerto Rico bonds and recommended the use of leverage to purchase even more Puerto Rico bonds. Almonte, Eboli and Goytia represented to the clients that the Puerto Rico bonds they recommended were safe investments that would return all principal at maturity and that they were guaranteed by the Puerto Rico Constitution.
According to the statement of claim filed by the claimants, Almonte, Eboli and Goytia concentrated the clients’ accounts in Puerto Rico bonds, including Puerto Rico Public Finance Corporation (PFC) bonds, which have since defaulted and are nearly worthless. Almonte, Eboli and Goytia also recommended that the clients purchase Puerto Rico bonds by engaging in repurchase and/or reverse repurchase transactions (Repo) in their accounts. 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. By 2011, Almonte, Eboli and Goytia induced the clients to investment in Puerto Rico bonds via the Repo and/or margin strategy by representing to the clients that it was a low risk strategy of borrowing funds on a short-term basis and at a low interest rate. The only risk that Almonte, Eboli and Goytia disclosed was the risk of rising short term rates, which Almonte, Eboli and Goytia represented they would diligently monitor. At no time did Almonte, Eboli and Goytia describe this strategy as high risk or even suggest in any way that the clients’ principal was at risk in this strategy. Almonte, Eboli and Goytia’s strategy of combining an over concentration in high risk Puerto Rico bonds with the excessive use of leverage was speculative and unsuitable.
It is alleged that Almonte, Eboli and Goytia also recommended proprietary UBS closed-end funds (CEFs) that held Puerto Rico bonds. CEFs differ from traditional open-end mutual funds in that open-end funds offer and redeem shares at the fund’s net asset value (NAV). CEF prices can be at a discount or premium to the NAV. The majority of UBS CEFs holdings are concentrated in Puerto Rico debt. These UBS CEFs are not traded on an exchange or quoted on any quotation service and are only available to Puerto Rico residents. Given the very limited amount of qualified buyers for the funds, the illiquidity risk of the funds was always inherently exceedingly high.
Additionally, UBS and UBS-PR pressured its brokers to sell the funds. UBS and UBS-PR employees routinely told brokers that they had to sell the funds and should recommend them to any clients interested in selling the funds against doing so. In September 2015, the SEC and FINRA ordered UBS to pay more than $33 million in disgorgement, penalties, fines and restitution for the same misconduct, related to the same CEFs and during the same time period. In September 2015, the SEC also brought charges against UBS in connection with their practices relating to the funds, and ordered UBS to pay $15 million in disgorgement, interest, and penalties.
And despite UBS’s repeated warnings to its own financial advisors that Puerto Rico bonds were suffering from severe credit issues and to diversify away from Puerto Rico bonds, Almonte, Eboli and Goytia ignored their own firm’s research and recommended that the clients continue with a concentrated strategy with virtually no material diversification. Almonte, Eboli and Goytia failed to adequately disclose their own firm’s negative views of Puerto Rico bonds.
Despite the deterioration of Puerto Rico’s financial condition, which culminated in its debt being downgraded to “junk” status or defaulting, the claimants alleged that Almonte, Eboli and Goytia recommended that the clients continue to hold their Puerto Rico bonds and funds. Almonte, Eboli and Goytia repeatedly rejected any efforts to invest in any investment other than Puerto Rico bonds and funds. When clients voiced concerns over the Puerto Rico market and bond values, Almonte represented that the bonds were sound and that they would get paid in full at maturity of the bonds owed, which was contrary to UBS research.
Puerto Rico suffers from long-term financial and economic deficiencies that rendered its credit increasingly more speculative. The deterioration of Puerto Rico’s financial condition culminated in its debt being downgraded to junk status or speculative (below investment grade). For the past several years, Puerto Rico has been struggling with compounding debt and economic decline. As a result, the value of Puerto Rico’s municipal tax-free bonds has considerably fallen. Since September 2013, when the steep decline in Puerto Rico bond values began, investors holding these bonds have suffered massive losses. In May 2017, Puerto Rico filed for bankruptcy protection from creditors in what is being described as the largest municipal bankruptcy filing in history.
Almonte has been registered with UBS-PR in San Juan, Puerto Rico since 1991. Almonte has also been the subject of 183 customer complaints between 1991 and 2018, according to his CRD report. Most of the customer complaints are regarding Puerto Rico bond investment losses.
Eboli has been registered with UBS-PR in San Juan, Puerto Rico since 2002. Eboli has also been the subject of 65 customer complaints between 2014 and 2018, according to his CRD report, most regarding unsuitability, overconcentration and misrepresentation in connection with Puerto Rico bonds and closed-end funds.
Goytia has been registered BS-PR in San Juan, Puerto Rico since 2002. Goytia has also been the subject of 70 customer complaints between 2011 and 2018, according to his CRD report, most regarding investments in Puerto Rico closed-end funds, Puerto Rico bonds, and unspecified Puerto Rico-related securities, which were unsuitable, over-concentrated, and misrepresented as safe investments.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, UBS Financial Services Inc. and UBS Financial Services Inc. of Puerto Rico may be liable for investment or other losses suffered by Almonte’s, Eboli’s and Goytia’s customers.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.