Puerto Rico Lawsuit Filed

Puerto RicoAs investors watch and wonder what else can happen with the Puerto Rico closed-end funds, at least one lawsuit has been filed against the government of Puerto Rico. Meanwhile, experts warn that 2014 could be a bad year for investors, who have already reportedly lost a lot of money in the collapse of the Puerto Rico funds.

Morningstar (1/9/14) reports that a teacher’s association in Puerto Rico has filed a lawsuit against the government of Puerto Rico, alleging that changes to the teachers’ retirement system, brought about in response to the financial crisis, are unconstitutional. The pension plan was reportedly switched from a defined benefit plan to a defined contribution system. Morningstar notes that there were threats to downgrade the Puerto Rican bonds to junk status if something was not done to decrease public expenditures.

Teachers argue that the changes would have a huge negative impact on their retirement, including a dramatic decrease in retirement income. In addition to filing the lawsuit, the teachers also reportedly called for a 48-hour strike.

Individual investors also reportedly suffered dramatic losses when UBS Puerto Rico funds dropped in value - in some cases, allegedly losing half their value in two months. Although some may feel that is part of the risky nature of investing, at least some investors allege they were told the investments were safe, fixed investments in which the investor at the least would not lose their initial investment. Unfortunately for investors, however, certain closed-end funds were invested primarily in Puerto Rico government bonds.

Worse for those investors, because they were interested in safe, low-risk investments, they could not financially withstand heavy losses, meaning they may have been advised to invest in funds that were unsuitable for them, given their financial circumstances such as age, risk tolerance and income.

And, to make the situation worse, some investors may have been advised to borrow money from accounts holding the closed-end funds, putting those investors at risk of even higher losses.

Such investors would likely have to file a FINRA (Financial Industry Regulatory Authority) arbitration against UBS, because their contract with any brokerage firm would most likely have an arbitration agreement to solve disputes through FINRA.

(Article edited March 17, 2014, to reflect that the teachers' lawsuit was not in fact a bond lawsuit but a pension lawsuit.)