In May 2012, UBS Financial Services Inc. of Puerto Rico (“UBS PR”) agreed to pay $26.6 million to settle SEC charges that it misrepresented and omitted material facts about its Puerto Rico closed-end bond funds. Misrepresentations and omissions of material facts about securities are one of the more common forms of securities fraud. Investors have the right to rely on brokerage firms’ representations about investments. And when brokerage firms misrepresent the investments or fail to disclose all material facts, investors who lose money may be able to recover their investment losses through binding FINRA arbitration claims against the brokerage firms.

The funds at issue are:

Puerto Rico Fixed Income Fund I, 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.

Puerto Rico Fixed Income Fund VI, Inc.

Puerto Rico Investors Tax-Free Fund, Inc.

Puerto Rico Investors Tax-Free Fund, Inc. III

Puerto Rico AAA Portfolio Bond Fund, Inc.

Puerto Rico AAA Portfolio Bond Fund II, Inc.

Puerto Rico AAA Portfolio Target Maturity Fund, Inc.

Tax Free Puerto Rico Target Maturity Fund Inc.

Puerto Rico Mortgage-Backed & Government Securities Fund, Inc.

Puerto Rico GNMA & US Government, Inc.

The funds represented the largest single revenue source for UBS PR. For example, between 2004 and 2008, the funds generated 50% of annual total revenues for UBS PR and UBS Trust Company combined. That revenue came from advisory and administration fees and commissions.

The SEC alleged that in 2008 and 2009 UBS PR misrepresented the liquidity and pricing of these funds. For example, UBS PR claimed its fund prices were based on general market forces, but failed to disclose that the fund prices actually were set at the discretion of UBS PR’s trading desk. UBS PR also failed to adequately disclose that it controlled the secondary market for the trading of the funds. In reality, investors’ ability to sell their funds was dependant largely on UBS PR’s ability to solicit other customers to buy the shares or UBS PR’s willingness to purchase shares from investors for its own inventory.

In addition to the above issues, during 2008, UBS PR purchased millions of dollars of the funds to be held in own inventory, which gave the appearance of a liquid market with stable prices. [Incidentally, this conduct appears to be similar to UBS’s and other brokerage firms’ misconduct in the $330 billion auction-rate securities market. There, brokerage firms largely controlled the market and bought billions of dollars of ARS for their own accounts, giving the false appearance of a liquid market.] But in the spring of 2009, UBS PR’s parent company decided that UBS PR had taken on too much risk by accumulating large positions in the UBS-affiliated funds. As a result, the parent company directed UBS PR to reduce its inventory of the funds by 75%.

To accomplish this directive, UBS PR sold millions of dollars of its fund holdings at prices that undercut pending customer sell orders, thereby selling its own shares first and preventing customers from selling their shares. In total, between March and September 2009, UBS PR sold about $35 million of its inventory to investors. In short, UBS PR violated a cardinal rule of securities laws and regulations by placing its own financial interests ahead of the interests of its customers. Of course, UBS PR also did not disclose to investors that it was liquidating its own holdings while recommending that customers purchase the funds. Naturally, UBS PR’s the funds ended up dropping value. 

If you lost money in any of these UBS-affiliated funds that you bought from from UBS Financial Services Incorporated of Puerto Rico or through UBS’s USA-based offices, please contact us at (305) 374-1920 for a free consultation to learn how you may be able to recover some or all of your investment losses through the filing of a FINRA arbitration. Dimond Kaplan & Rothstein, P.A. has represented investors throughout the United States, Puerto Rico, Mexico, and Central and South America in cases against UBS.

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