Investment News (1/13/14) reports that the nail in the coffin, as it were, for UBS Financial Services and its portfolio of municipal closed-end funds came in July of last year when the City of Detroit filed for bankruptcy protection. That’s when the market bottomed out for the funds, and for Puerto Rico’s municipal debt, which is valued at $70 billion.
In various lawsuits, UBS Financial Services is accused of failing to disclose the true nature of the risk to investors. There are also allegations that products were sold to investors for whom such products made little sense financially or from a position of risk tolerance. The allegation is of shareholder fraud.
Investment News reports that UBS Financial Services Inc. of Puerto Rico remains a major player in the municipal debt for the commonwealth, with 70 percent of the portfolios for the funds invested in Puerto Rican securities. According to the report, proprietary closed-end bond funds were packed up and sold in the 10 years beginning in 2002, and were valued at $10 billion over that time.
According to financial blogger Edward S. O’Neal, a principal with Securities Litigation & Consulting Group (SLCG), the percentage losses for the worst-performing UBS Puerto Rico Closed-End Funds ranged from 38 to 48 percent. The expert later said in an interview that overconcentration of assets in the securities of two Puerto Rico municipal issuers - The Employees Retirement System of the Government of the Commonwealth of Puerto Rico and its Instrumentalities, and the Puerto Rico Sales Tax Financing Corporation - represented the biggest component of the losses.
According to O’Neal, under Puerto Rican rules diversified funds can invest no more than five percent of a portfolio in a single issuer, with non-diversified funds limited to hold no more than 25 percent in a single issuer. However, UBS is reported to have lobbied the Puerto Rican government to waive those rules and allow for a higher ceiling and thus, higher concentrations.
A spokesperson for UBS, Gregg Rosenberg, flatly denied that assertion.
“The funds are required to hold at least 67 percent of their assets in Puerto Rico assets, including Puerto Rico municipal bonds, in order to maintain their tax-advantaged status for retail investors,” Rosenberg wrote in an e-mail to Investment News. “The temporary relief obtained by the funds and inaccurately cited by SLCG waives the 67 percent requirement, thereby permitting the funds to reduce their concentrations in Puerto Rico bonds.”
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O’Neal writes that the Standard & Poor’s Municipal Bond Puerto Rican Index fell 17 percent during the first nine months of 2013.
However, those investors thinking in terms of potential shareholder fraud will best remember the headline and the number: $1.66 billion. Most, but not all of the funds, were sold to citizens of Puerto Rico, so the losses are concentrated there. And regardless of where an investor is located, the age of the investor will impact whether or not there is time to make up those losses before the funds need to be accessed for retirement.
Such is the impetus for a securities lawsuit, in order an attempt to claim damages and reverse the losses incurred.