Puerto Rico Bond Fraud Lawyers
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 late 2016, filings revealed the U.S. territory had defaulted on debt payments for most of the year. Puerto Rico is $70 billion in debt and many forecasters do not foresee crisis relief in the near future. Both US and Puerto Rican individual investors have experienced bond losses totaling hundreds of thousands and even millions of dollars.
Investors seeking recourse for losses in Puerto Rico bonds are required to file their disputes in FINRA arbitration. Erez Law has been retained by over 200 investors to file FINRA arbitration claims against brokerage firms to recover their losses. Our firm has been very successful in making recoveries for our clients that reside in Puerto Rico and the mainland United States.
At Erez Law, many of our clients come to us because of our specialization in Puerto Rico bonds. We use considerable legal resources to help investors who trusted reckless and unethical financial advisors. We have filed over 200 FINRA arbitration cases against large brokerage firms, including UBS, Merrill Lynch, Santander Securities, Morgan Stanley, Oriental Financial Services, Popular Securities and others, holding these firms accountable for dishonest investment advisory practices, unsuitable recommendations, misrepresentation, and over-concentration in connection with Puerto Rico bonds and funds.
If you invested in a closed-end fund that held Puerto Rican debt or a high-risk/high-yield Puerto Rican bond without understanding the risks associated with your investment, you may be able to recoup your losses. Our team of financial securities attorneys have experience with FINRA arbitration, and we know how to hold brokerages and advisers liable for their indiscretions.
Puerto Rico Bonds Suffered Historic Default and Decline
Generally, the financial industry considers government-issued bonds relatively stable investments. They have added appeal for investors because they are tax-free. In the case of Puerto Rico, the bonds’ tax benefits extended to investors outside the commonwealth.
Anyone could invest in Puerto Rican bonds, and brokerage firms capitalized on that fact. Some even pushed their advisors to downplay the risks associated with the bonds, to omit the risks entirely, and to over-concentrate investor assets in these government bonds. Marketing the bonds as secure municipal bonds rather than as downgraded bonds often allowed advisors to invest their clients’ assets in the bonds.
Government overspending, tax law changes, and bankruptcy rights changes all contributed to the Puerto Rican crisis. In part fueled by bond issuance, the U.S. territory began racking up far more debt than it took in via taxes. At one time, risk-tolerant investors might have hoped for an economic rebound. Today, the market outlook leaves investors looking for different ways to recoup their losses.
Puerto Rico’s rapidly deteriorating financial and economic conditions stem a variety of factors:
- High Debt Load – A debt load is a debt to income ratio that analyzes whether there is too much debt. As of February 2017, the amount of debt owed by the government of Puerto Rico is estimated to more than $70 billion, higher than every state except New York and California. In fact, Puerto Rico’s debt per capita is 10 times the average of the 50 states.
- Low Income – Puerto Rico residents’ income is also relatively low. Puerto Rico’s median household income is $19,350, according to the United States Census Bureau. The median household income in the United States is $ 53,889. As a result, Puerto Rico’s debt, measured on the basis of personal income, is approximately 26 times higher than the average of the 50 states.
- Low Labor Force Participation – The labor force participation rate is a measure of the active portion of an economy’s labor force, referring to the number of people employed or actively looking for employment. Commonly during economic recessions, as Puerto Rico has experienced since 2006, people in the workforce cease looking for work, resulting in a decrease in the labor force participation rate. Puerto Rico’s labor force participation rate is abysmally low at 41.2%, meaning that less than half of people who are capable of working are currently employed. This rate is approximately 20% below the rate in the United States.
- Unfunded Pensions – Puerto Rico also has in excess of $30 billion in unfunded pension liabilities, the worst funded pension liabilities in the United States. These unfunded liabilities take into account money set aside for retirement and projected investment earnings on that set-aside money. The issue with unfunded liabilities are the costs that taxpayers will need to cover to fund those pensions in the future, and the fact that those unfunded pensions are not currently earning income on those investments.
- High Unemployment Rates – Puerto Rico has a current population of about 3.59 million people, and suffers from long-standing high unemployment rates around 12%, the highest in the United States.
- Shifting Population – In recent years, Puerto Rico has been experiencing a shift in demographics as educated professionals are leaving the country to seek professional and economic opportunities elsewhere.
- No Bankruptcy – Finally, Puerto Rico is a territory of the United States and is not legally able to seek bankruptcy relief or bailout from the United States government.
The deterioration of Puerto Rico’s financial condition resulted in a series of credit downgrades by the major ratings agencies in 2012 and 2013. In fact in December 2012, Moody’s Investor Service, a leading provider of credit ratings, research, and risk analysis, downgraded Puerto Rico’s credit rating two notches from Baa1 to Baa3. This is Moody’s lowest credit rating above speculative grade “junk” status. And in March 2013, S&P Global Ratings, which provides high-quality market intelligence in the form of credit ratings, research, and thought leadership, downgraded Puerto Rico’s credit rating to BBB-, its lowest credit rating above “junk” status.
Then in February 2014, after long-term economic deficiencies, Puerto Rico’s debt was downgraded to “junk” status by the leading credit ratings agencies. Junk bonds are speculative and high risk/high yield bonds and bond funds that are below investment grade. While they carry a relatively higher risk of default or devaluation, junk bonds’ draw for investors lies in the fact that they can deliver significantly higher yields than safer, investment grade bonds. Junk bonds themselves are not inherently poor or unsuitable investments, but bond issuers and financial advisors bear an obligation to provide investors with full disclosure about the risks.
Since this time, Puerto Rico has received at least five additional credit rating downgrades. And in 2015, the Puerto Rico Public Finance Corporation became the first Puerto Rico municipal bond issuer to default on its debt. In July 2016, Puerto Rico defaulted on its general obligation bond debt, and S&P downgraded Puerto Rico’s credit to a “D” rating.
As a result of the above factors, the value of Puerto Rico’s municipal tax-free bonds have considerably fallen. Since September 2013, when the steep decline in Puerto Rico bond values began, investors holding these bonds have suffered massive financial losses. In part fueled by bond issuance, Puerto Rico began racking up far more debt than it took in through taxes. At one time, risk-tolerant investors might have hoped for an economic rebound. Today, the market outlook leaves investors looking for different ways to recoup their losses.
Recovering Losses Through FINRA Arbitrations
Investors in the United States and Puerto Rico are filing FINRA arbitration claims against their brokerage firms for investments made in Puerto Rico bonds or bond funds on the advice of their financial advisor. Many of these investors were not adequately warned about the high risk nature of the bonds, and have suffered serious losses as a result. Investors may have a claim against the brokerage firm based on misrepresentation, unsuitability, breach of fiduciary duty and state and federal securities laws.
A broker must have reasonable grounds for each recommendation made to investors considering such factors as the customer’s other securities holdings, financial situation, and risk tolerance. In addition, before a financial advisor recommends a security to his customers, the financial advisor must conduct due diligence, investigating the facts surrounding the security, to confirm that it is suitable for the customer. The suitability of an investment for a particular individual is at the center of the investment process and one of the key duties owed by a broker to the customer. A firm may be held liable for its broker’s failure to recommend suitable investments to its customers.
In addition, 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, the brokerage firm may be liable for investment or other losses suffered by financial advisors who worked for the firm.
In one case against UBS, the client’s claims involved investments in Puerto Rico closed-end funds concentrated in Puerto Rico bonds. The Erez Law clients were awarded $2.5 million. See award.
In Ciordia vs. UBS, Erez Law represented a beneficiary of a trust that sustained significant losses in UBS proprietary closed-end funds that invested predominantly in Puerto Rico bonds. Ciordia alleged that the broker, Carlos Rodriguez and UBS recommended an overconcentrated and unsuitable position in the UBS Puerto Rico funds. The FINRA panel awarded the Claimant $957,796.59. The FINRA Panel awarded attorney’s fees under the Puerto Rico Uniform Securities Act as well as costs. See award.
In another case, WRI Vending Machines, Inc. v. Santander Securities, LLC and Oriental Financial Services Corp., an investor was recommended the use of margin to invest in Puerto Rico bonds and agency bonds. The unsuitable and speculative investment strategy led to margin calls and forced liquidations in 2013. Erez Law obtained an award against Oriental Financial for $1,046,556, and the claim against Santander Securities., LLC was settled prior to the commencement of the final hearing. See award.
As of February 2017, investors that have filed FINRA arbitration claims and proceeded to a trial have a high win rate of 83.33% – 25 wins and just 5 losses – compared to the national average of 40%, according to FINRA.
According to the FINRA website, “Since 2014, FINRA has received an influx of arbitration case filings relating to Puerto Rico bonds from Claimants, almost all of whom reside in Puerto Rico. As of January 31, 2017, nearly 1900 cases involving Puerto Rican bonds have been filed; of these, more than 1100 cases are pending and over 30 have been decided by award.” FINRA estimates that there should be at least 5,000 more cases to be filed in the future.
As of February 2017, 742 cases have been settled for $162.5 million. Thirty cases have gone to final arbitration and have resulted in 25 awards totaling $64.2 million. In more than 99% of cases filed, investors have obtained settlements or awards.
During the 2014 to 2016 time period, more than 70% of all cases that were either settled or adjudicated were settled, and 40% of customers won final awards. However, claimants in these Puerto Rico bond arbitrations have twice the success rates of those that typically file a FINRA claim. Additionally, there is a lower proportion of cases Puerto Rico residents as the claimant than those in the United States that go to a hearing, suggesting that many settle rather than go to a hearing.
Of the 1,900 cases filed as of February 2017, 79% of the cases (or 1,476 cases) have been filed against UBS Financial Services Inc. of Puerto Rico (UBS-PR). UBS-PR has settled or arbitrated 637 cases, and 12 have been withdrawn, leaving 827 cases pending. Ten percent of the cases (or 189 cases) have been filed against Santander Securities LLC, of which 60 cases have been settled or arbitrated and 1 was withdrawn, leaving 129 cases still pending. Five percent (or 93 cases) of reported cases were filed against Popular Securities LLC, of which 31 cases were settled or arbitrated, 3 were withdrawn and 59 remain open. Merrill Lynch has had 3.4% (or 64 cases) filed to date, of which 28 have been settled or arbitrated, 2 were withdrawn and 34 remain open. Just 2.8% of cases filed (or 52 cases) have been filed against Oriental Financial Services Corp., of which 16 were settled or arbitrated, 1 was withdrawn and 35 remain open.
Puerto Rico Residents Were Sold on Concentration in Puerto Rico Bonds
Residents of Puerto Rico were sold investments in Puerto Rico bonds and closed-end funds concentrated in Puerto Rico bonds and many have experienced losses due to such investments. Financial advisors in Puerto Rico often concentrated their customer’s portfolios in Puerto Rico bonds and funds. Financial advisors and the brokerage firms that employ them have attempted to justify the high levels of concentration based on the tax benefits offered by the bonds and funds. In reality, tax benefits can never justify the real risks of overconcentration. In addition, many financial advisors recommended the use of margin or credit lines to invest in even more Puerto Rico bonds and funds using leverage. The results have been devastating. Erez Law represents investors in claims against brokerage firms including UBS Financial Services, Popular Securities, Santander Securities, Merrill Lynch and Oriental Financial Services. Many investors trusted their investments to their advisors only to lose all or most of their assets during the territory’s continued decline. Erez Law is currently investigating the following financial advisors who have allegedly sold Puerto Rico bonds:
- Sean J. McElduff, Hennion & Walsh, Inc.
- Dennis Coral, International Assets Advisory, LLC
- Robert Alfred Dennison, Morgan Stanley
- Angel Edgardo Aquino-Velez, Morgan Stanley
- Tom Abel Puentes, Morgan Stanley
- Samuel Kluft Koltun, RBC Capital Markets, LLC
- Enrique Pascual, Oriental Financial Services Corp.
- Randy Lee Bostick, Janney Montgomery Scott LLC
- Robert Spencer Cavanagh
UBS Puerto Rico Bond Fraud
UBS was the most dominant financial services firm in Puerto Rico. UBS often concentrated its clients’ portfolios in its proprietary closed-end funds invested in Puerto Rico bonds and in Puerto Rico bonds as well. The UBS closed-end funds (CEFs) were the single largest source of revenue for UBS. In a settlement with UBS, FINRA found that UBS failed to implement a reasonably designed system to identify and prevent unsuitable transactions in light of the unique economy of the territory. Retail customers typically maintained high levels of concentration in Puerto Rico assets and often used those highly concentrated accounts as collateral for cash loans. UBS-PR failed to monitor the combination of leverage and concentration levels in customer accounts to ensure that the transactions were suitable given the customers’ risk objectives and profiles. FINRA censured and fined UBS-PR $7.5 million for failures related to suitability of transactions in Puerto Rico closed-end fund (CEF) shares. FINRA also ordered UBS-PR to pay approximately $11 million in restitution to 165 customers who suffered losses on their CEFs.
The UBS Puerto Rico funds include:
- Puerto Rico Investors Tax-Free Fund, Inc.
- Puerto Rico Investors Tax-Free Fund, Inc. II
- Puerto Rico Investors Tax-Free Fund III, Inc.
- Puerto Rico Investors Tax-Free Fund IV, Inc.
- Puerto Rico Investors Tax-Free Fund V, Inc.
- Puerto Rico Investors Tax-Free Fund VI, Inc.
- Puerto Rico Tax-Free Target Maturity Fund, Inc.
- Puerto Rico Tax-Free Target Maturity Fund II, Inc.
- Puerto Rico Investors Bond Fund I
- UBS IRA Select Growth & Income Puerto Rico Fund P.R. Fixed Income Portfolio
- UBS IRA Select Growth & Income Puerto Rico Fund U.S. Equity Portfolio I
- UBS IRA Select Growth & Income Puerto Rico Fund U.S. Equity Portfolio III
- UBS Trust Company of Puerto Rico
- UBS IRA Select Growth & Income Puerto Rico Fund P.R. Equity Portfolio
- UBS IRA Select Growth & Income Puerto Rico Fund U.S. Equity Portfolio II
- UBS IRA Select Growth & Income Puerto Rico Fund U.S. Equity Portfolio IV
Popular often concentrated its customers in Puerto Rico CEFs and bonds. Popular Securities co-managed the Investors Funds listed above with UBS. FINRA fined Popular Securities $125,000 for failure to establish, maintain, and enforce a supervisory system and procedures reasonably designed to identify and review concentrated securities purchases, including Puerto Rico municipal bonds and Puerto Rico closed-end funds.
When Puerto Rico general obligation was downgraded, the firm’s customers continued purchasing concentrated positions of Puerto Rico securities. The firm did not have procedures in place to review its customers’ securities purchases for concentration in a single security, substantially similar securities, or securities of a single geographic region.
Santander Securities often concentrated its customer’s portfolios in proprietary CEFs and Puerto Rico bonds. FINRA ordered Santander Securities to pay $4.3 million in restitution to customers who were sold Puerto Rican Municipal Bonds, as well as $121,000 as restitution to buy back the securities sold to other customers impacted by the firm’s failure to supervise employee trading. FINRA censured and fined the brokerage firm $2 million for supervisory failures related to sales of Puerto Rican Municipal Bonds and Puerto Rican closed-end funds, and for failing to reasonably supervise employee trading in its Puerto Rico branch office. FINRA found that Santander did not ensure that its product risk-classification tool accurately reflected market risks of investing in PRMBs and failed to adequately supervise its customers’ use of margin and concentrated positions in their accounts, especially after the credit downgrades in December 2012.
The Santander Securities CEFs include:
- First PR Tax Exempt Target Maturity Fund II
- First PR Tax Exempt Target Maturity Fund III
- First PR Tax Exempt Target Maturity Fund IV
- First PR Tax Exempt Target Maturity Fund V
- First PR Tax Advantaged Target Maturity Fund I
- First PR Tax Advantaged Target Maturity Fund II
- First PR TM Income Opportunities Fund I
- First PR TM Income Opportunities Fund II
- First PR AAA Target Maturity Fund I
- First PR AAA Target Maturity Fund II
- First PR Tax Exempt Target Maturity Fund VII
Oriental Financial Services Corp.
Oriental Financial often concentrated its clients portfolios in Puerto Rico focused CEFs and Puerto Rico bonds. According to FINRA, Oriental Financial failed to establish, maintain and enforce a supervisory system and procedures reasonably designed to identify and review concentrated securities purchases, including Puerto Rico Municipal Bonds and Puerto Rico closed-end funds. Oriental consented to FINRA’s sanctions and findings that if failed to disclose approximately $2.9 million in markups and markdowns on customer trade confirmations. According to FINRA, Oriental Financial’s registered representatives sold the municipal bonds and closed-end funds even after the municipal bond rating had been downgraded to junk status. Oriental Financial was fined $245,000 and sanctioned to submit to FINRA a proposed methodology of how it will identify, review and remediate unsuitably concentrated Puerto Rico securities purchased.
Merrill Lynch, Pierce, Fenner & Smith Inc.
Merrill Lynch often concentrated its customers in Puerto Rico CEFs and bonds. According to a FINRA settlement, Merrill Lynch offered loan management accounts (LMAs) that allowed its customers to borrow money using the securities held in their brokerage accounts as collateral for concentrated investments in Puerto Rico bonds and leveraged closed-end bond funds. Merrill Lynch was fined $6.25 million from FINRA and had to pay $780,000 for restitution for inadequately supervising its customers’ use of leverage in brokerage accounts. FINRA found that Merrill Lynch lacked adequate supervisory systems and procedures regarding its customers use of LMAs, which allowed the firm’s customers to borrow money from an affiliated bank. FINRA also found that Merrill Lynch lacked adequate supervisory systems to ensure the suitability of transactions in certain Puerto Rico securities, including municipal bonds and closed-end funds, where customers’ holdings were highly concentrated in such securities and highly leveraged through either LMAs or margin.
US Investors Have Recourse to Recover Losses in Puerto Rico Bonds
Erez Law has represented and is retained by investors based in the contiguous United States that invested in Puerto Rico bonds on the advice of their financial advisors. They were not adequately warned about the high risk nature of the bonds, and have suffered serious losses as a result. Investors who worked with financial advisors at firms including UBS, Morgan Stanley, Merrill Lynch, Wells Fargo, RBC Securities, or other brokerage firms, who recommended investing in Puerto Rico bonds may have a claim against the brokerage firm based on misrepresentation, unsuitability, or breach of fiduciary duty.
Certain financial advisors dangerously concentrated their customers’ investment portfolio in high risk and unsuitable Puerto Rico bonds, resulting in hundreds of thousands to millions of dollars of losses. Erez Law represents investors that invested in the following bonds:
- Puerto Rico Public Finance Corporation (PFC)
- Puerto Rico Sales Tax Financing Corporation (COFINA)
- Puerto Rico Aqueduct and Sewer Authority (PRASA)
- Government Development Bank for Puerto Rico (GDB)
- Puerto Rico Employees Retirement System (ERS)
- Puerto Rico Electric Power Authority (PREPA)
- Puerto Rico Highways & Transportation Authority (PRHTA)
- Puerto Rico Housing Finance Authority (PRHFA)
- Puerto Rico Industrial Development Company (PRIDCO)
- Puerto Rico Infrastructure Financing Authority (PRIFA)
- Puerto Rico Public Buildings Authority (PBA)
Contact Us for a Free Consultation
If you have experienced investment losses or financial irregularities as a results of Puerto Rico bonds or funds, we are here to help. We are not afraid of taking on corrupt firms, and we can and will combat some of the largest brokerage firms in Puerto Rico and the United States. Count on our experience to successfully take you through the FINRA arbitration process.
Please call us at 888-840-1571 for a free consultation or complete our contact form to investigate your recourse for losses in Puerto Rico bonds and funds. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. If you have more questions about investment fraud, you can visit our securities fraud frequently asked questions page, or contact our firm to speak with one of our qualified fraud attorneys.