“UBS Puerto Rico structured these closed-end funds, which are mutual funds that do not trade on the public stock market, and caused those funds to be invested largely in municipal bonds issued by the Puerto Rico government or other Puerto Rico government entities,” Gray says. “They reportedly heavily marketed these closed-end funds as being a relatively safe, fixed-income investment, where the client would likely not lose their principal, or their initial investment. It turned out these closed-end funds were internally leveraged and heavily invested in Puerto Rico government bonds. When the bonds owned by the funds lost value, the funds lost even greater value, relative to the initial investment.”
According to Gray, some investors lost 60 percent or more of their investments in just a short time. And some of those investors could not afford to lose that much of their investment, meaning the closed-end funds were unsuitable for them.
“In some instances, these closed-end funds were recommended to investors who could not afford to take a risk,” Gray says.“A recommendation has to be suitable for the investor’s circumstances, taking into account their age, income, risk tolerance and ability to withstand losses. In some cases, these funds were either not suitable for the investor or the recommendation may have been that the investor place a large amount of their savings into these types of funds, so there may have been over-concentration into one asset class that turned out to be quite risky.”
Because the claims involve investments, complaints must be brought to FINRA (Financial Industry Regulatory Authority) arbitration. FINRA is the organization that regulates brokerage firms in the United States and Puerto Rico, and when investors sign contracts with brokerage firms, they sign an arbitration agreement that says disputes will be resolved through FINRA arbitration.
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The funds were only available to investors who lived in Puerto Rico at the time of purchase, but investors may have lived in Puerto Rico, purchased the funds and then moved to the US. In other words, a person does not have to still be living in Puerto Rico to file an arbitration concerning the closed-end funds.
“A red flag for investors that they probably have a case is if the broker advised them to borrow money from an account where these funds were held, or linked a line of credit to the account,” Gray says. “That would be a red flag, because the client would be more exposed to losses if the accounts lost value.”