SEC Examing Mutual Funds Re: Puerto Rico Bonds

The SEC is conducting nationwide, “limited scope examinations” of certain mutual funds that invest in Puerto Rico securities, according to a document obtained by The Bond Buyer and knowledgeable sources. On-site interviews are being conducted Thursday at an investment management firm with exposure to Puerto Rico through its mutual funds, according to a letter from the SEC’s San Francisco Regional Office. The letter was obtained by The Bond Buyer with the recipient’s name redacted.

The exams, which are being carried out by the SEC’s Office of Compliance, Inspections and Examinations and its regional offices, are intended to make sure the commission is up to speed on how much of Puerto Rico’s $70 billion of outstanding debt is held by funds in the U.S. and what those funds are telling their shareholders about the risks involved.

Our firm has been reviewing claims for investors regarding losses in bonds issued by Puerto Rico and in particular the sales practices of large broker-dealers, including UBS, who may have inappropriately marketed the funds. For more information on our work, visit our web site, or call us at 212-609-6544

For more information - SEC Probing Funds Holding Puerto Rico Debt 

Related articles

• Potential Claims Against Other Brokerage Firms for Investments in Puerto Rico Municipal Bonds 
• SEC Goes Fishing for Fraud in Puerto Rico - Bloomberg 
• UBS Puerto Rico Bond Funds Collapse - Investors Seek Legal Help 
• Puerto Rico Seeks To Calm Rattled Muni Bond Investors 
• UBS Puerto Rico Bond Debacle Continues to Unfold 
• Hedge Funds Revealing Puerto Rico Too Cheap to Fail: Muni Credit 

---
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information contact Mark Astarita at 212-509-6544 or at email us

Puerto Rico Seeks To Calm Rattled Muni Bond Investors

Puerto Rico officials sought to soothe the fears of edgy investors Tuesday as the market continues to price risk into the tropical island’s widely held municipal bonds. “These are not just constitutional obligations, but also moral obligations,” said Governor Alejandro Garcia Padilla in an investor webinar, reaffirming the island’s intent to make good on its debt obligations.

Puerto Rico has roughly $70 billion in outstanding municipal bonds, which hold the lowest investment grade rating from major rating agencies. Its debt has long been held in municipal bond funds because its bonds are exempt from local, state, and federal taxes, but investor concerns have grown.

Another aspect of this bond debacle is marketing of the bonds by some brokerage firms, notably UBS. We are prosecuting and investigating claims against UBS for those practices, as well as other broker dealers, who may not have properly disclosed the risks in the Puerto Rico bonds.

For more information - Puerto Rico seeks to calm rattled muni bond investors

Related articles

• Potential Claims Against Other Brokerage Firms for Investments in Puerto Rico Municipal Bonds 
• Puerto Rico seeks to calm rattled muni bond investors 
• Puerto Rico May Avoid Using Debt Markets After Yields Soar 
• Storm of Puerto Rican Bonds Hits U.S Mainland
• Law Firm Investigations into UBS Puerto Rico Bond Funds

Sallah Astarita & Cox Reviewing Potential Claims Against Other Brokerage Firms for Investments in Puerto Rico Municipal Bonds

Our office has learned that at least one State Attorney General is requesting information from multiple brokerage firms regarding the possible use, or overuse, of municipal bonds from Puerto Rico as part of their proprietary mutual funds. We are following those investigations for potential recovery for investors who have suffered municipal bond losses.

We are currently investigating claims against UBS in its Puerto Rico Bond debacle. That investigation is focused more on sales practices and the use of the bonds, and how same were presented to investors. We blogged about the UBS Puerto Rico Bond Funds earlier in the week.

This new, broader investigation, has a different focus, and involves multiple firms. Puerto Rico bond prices have been in a free fall amid renewed fears about the island's deficits, spending and high unemployment. The S&P Municipal Bond Puerto Rico Index is down 19 percent in 2013. The index is badly under-performing the S&P National AMT-Free Municipal Bond Index, which is down only 3.6 percent this year.

The bonds have been popular with portfolio managers because they are triple tax exempt - they are exempt from federal, state and local income tax in all US states. However, questions are now being raised as to whether the Puerto Rico bonds were over-used in the mutual fund portfolios, and whether investors were advised of the additional risks being incurred by the inclusion of the Puerto Rico bonds in the portfolio.

Investigators are looking into the disclosures by US brokerage firms as to the use of the bonds. It is believed that some funds have over 15% of their portfolio in Puerto Rico municipal bonds.

Investors who have suffered losses in a municipal bond portfolio are encouraged to contact our office for a no-obligation review of their holdings and potential claims. Email our office at info@sallahlaw.com, or call us at 212-509-6544.Related articles

• UBS Puerto Rico Bond Funds Collapse - Investors Seek Legal Help 
• Puerto Rican Munis Among Most Heavily Traded In The World In Sept. 
• UBS Facing Legal Fight Over Puerto Bonds Gone South

UBS Pays $885 Million Dollar Mortgage Fraud Penalty

UBS has agreed to pay an $885 million fine to U.S. mortgage regulators to settle allegations it defrauded the government. UBS is the third of 18 banks sued by the Federal Housing Finance Agency (FHFA) to settle but the first whose fine payment is known. Citigroup and General Electric paid undisclosed amounts to resolve FHFA litigation earlier this year.

 

The suits, filed in 2011, accuse banks and other mortgage underwriters of misleading Fannie Mae and Freddie Mac, two FHFA agencies, about pooled mortgages totaling over $200 billion in value. The firms systematically overstated the financial health of the pooled loans when selling them, the suits allege. UBS sold Fannie Mae and Freddie Mac a total of over $6 billion worth of mortgage-backed securities. Citi, GE, and UBS account for a relatively small portion of the total amount in question, at around $10 billion combined. Other firms whose alleged fraud was much larger are likely to continue fighting the lawsuits. Bank of America is on the hook for over $40 billion worth of misrepresentations to the government because of its purchase of Merrill Lynch and Countrywide.

 

For more information - Big Bank Pays $885 Million Fine For Mortgage Fraud

UBS Willow Fund Investors Filing Arbitrations

UBS WILLOW FUND

A CLASSIC CASE OF RISKY DERIVATIVE BETS GONE BAD

In October 2012 investors were informed that the Willow Fund would be liquidated, after having sustained substantial losses. In a recent New York Times article on the UBS Willow Fund, it was reported that the fund had suffered losses of approximately 80% in the first three quarters of 2012 after its manager made a radical change in investment strategy and “piled into some colossally bad derivative trades.” “The investors, some of whom hadn’t realized they were holding a portfolio filled with risky bets against the debt of European nations, were stunned,” says the article.

The Willow Fund’s exposure to credit default swaps began to significantly increase, and by the end of 2008 while corporate bonds amounted to only 6% of the portfolio, the value of credit default swaps rocketed to 25% of the portfolio, from only 2.6% in 2007. By 2009, credit default swaps amounted to 43% of the Willow Fund’s portfolio composition, the article claims. In 2012, the Willow Fund posted an 89% decline and, as the fund was being wound down, UBS reported that approximately 70% of its losses derived from exposure to credit default swaps – a stunning fact.

It has been reported that UBS Willow Fund investors are expected to receive pennies on the dollar after liquidation of the fund.

Various press reports have stated that the Willow Fund’s radical change in investment strategy through its increasing exposure to credit default swaps, and commensurate decrease in exposure to corporate bonds, transformed the fund into a highly speculative and aggressive gamble on, in essence, the debt of European nations. Did Willow Fund investors really understand what they were invested in and the magnitude of risk to which they were exposed and, if they did, would they have agreed to invest or remain invested?

Investors seeking to file arbitrations will allege that securities brokerage firms, like UBS, have a legal obligation to ensure that when offering and selling an investment, like the Willow Fund, it makes full, complete and accurate disclosures of all material facts to its customer, and ensures that the recommendation to purchase is suitable. The failure to do so is a violation of securities laws and securities industry rules and may give rise to liability for losses sustained.

Securities arbitration attorneys are presently reviewing cases for investors against UBS for their purchases of the Willow Fund. UBS customers who purchased the Willow Fund can contact our office  to explore whether they can recover their Willow Fund losses. All calls handled on a confidential, no obligation basis. Cases taken on a contingency fee basis, meaning no attorney’s fee owed to the law firms if no recovery. Call 212-509-6544 for additional information regarding Willow Fund arbitrations, or email us at info@beamlaw.com

UBS Pleads Guilty, Fined $1.5 BILLION

When does this end? Another major fine - in fact, a historic fine - against UBS as it pleads guilty to allegations that it engaged in a multiyear scheme to manipulate interest rates.
According to the New York Times, the cash penalties represented the largest fines to date related to the rate-rigging inquiry. The fine is also one of the biggest sanctions that American and British authorities have ever levied against a financial institution, falling just short of the $1.9 billion payout that HSBC made last week over money laundering accusations.
The UBS case reflects a pattern of abuse that authorities have uncovered as part of a multi-year investigation into rate-rigging. The inquiry, which has ensnared more than a dozen big banks, is focused on key benchmarks like the London interbank offered rate or Libor. Such rates are used to help determine the borrowing rates for trillions of dollars of financial products like corporate loans, mortgages and credit cards.
According to the NYT story, the wrongdoing occurred largely within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with Yen denominated Libor and bolster their returns. During the 2008 financial crisis, UBS managers also “inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of +UBS’s creditworthiness,” according to authorities.
UBS Pleads Guilty, UBS Pays $1.5 Billion Over Rate Rigging - NYTimes.com.

Related articles, courtesy of Zemanta:

• UBS Bankers Face Criminal Charges Over LIBOR

UBS' Track Record of Averting Prosecution Coming to an End?

In recent years UBS has increasingly gained a reputation for being an bad firm.  The latest Libor rate scandal, which affected an untold number of customers, and their brokers, is just the most recent example.

The New York Times has picked up the story, and urges the Justice Department to consider the record of the Swiss banking giant. UBS is one of more than a dozen banks being investigated for manipulating interest rates for their own benefit. As the NYT correctly points out, at UBS, a series of immunity, nonprosecution and deferred prosecution agreements in recent years seems to have had scant, if any, deterrent effect.

As the article points out, UBS is not alone in its seemly never ending string of violations and charges, but in many ways, UBS is in a league of its own given its track record for scandals. UBS was deemed "too big to fail" in the financial crisis and had to be bailed out after a $50 BILLION write-down on mortgage backed securities.

The NYT has summarized its ability to escape criminal prosecution, presumably because of its status. However, the continued impact of its conduct on the investing public, its own brokers and employees, and the markets in general, cannot, and should not be ignored.

•  UBS obtained a deferred prosecution agreement in 2009 for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud. UBS bankers trolled for wealthy clients susceptible to tax evasion schemes at professional tennis matches, polo tournaments and celebrity events. One UBS banker smuggled diamonds in a toothpaste tube to accommodate a client. In return for the deferred prosecution agreement, UBS agreed to pay $780 million in fines and penalties and disclose the identities of many of its United States clients. At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker-dealer and investment adviser to American clients and paid a $200 million fine. In October 2010 the government dropped the charges, saying UBS had fully complied with its obligations under the agreement. 

• In May 2011, UBS admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution. An S.E.C. official called UBS’s conduct “a ‘how to’ primer for bid-rigging and securities fraud.” UBS landed a nonprosecution agreement for that behavior, and the Justice Department lauded the bank’s “remedial efforts” to curb anticompetitive practices.

• In what the S.E.C. called at the time the largest settlement in its history, in 2008 UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities, which were sold by UBS as ultrasafe cash equivalents even though top UBS executives knew the market for the securities was collapsing. Seven of UBS’s top executives were said to have dumped their own holdings, totaling $21 million, even as they told the bank’s brokers to “mobilize the troops” and unload the securities on unsuspecting clients. As Andrew M. Cuomo, who was New York’s attorney general then, put it: “While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman — one of the company’s top executives — used insider information to take the money and run.” Besides reimbursing clients and settling with the S.E.C., UBS paid a $150 million fine to settle consumer and securities fraud charges filed by New York and other states. It again escaped prosecution. 

There is more at the New York Times, read the entire article.
UBS’s Track Record of Averting Prosecution

FINRA Fines Citi, Morgan, UBS and Wells $9.1 Million for ETFs

FINRA announced that it has fined Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

We have represented investors who lost significant sums of money in leveraged ETFs, which are securities which seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms' registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

 More...

SEC charges UBS With Overstating Prices

Yet another problem at UBS. What is going on over there? - SEC Charges UBS with Overstating Prices of Securities - some by 100%!

SEC charges UBS advisory arm with overstating prices of securities in three mutual funds - Securities Technology Monitor. - Financial Planning

UBS Trader Loses 2 BILLION Dollars

I really thought it was going to be Merrill Lynch that would be the next firm to have problems, given the disaster known as Bank of America, but I might have been wrong.
Then again, no one could really expect me to know, or even guess, that UBS would allow a trader to lose 2 BILLION dollars. Now, it is UBS that is in the news, and the target of rumors and speculation regarding how long it can hold on.
In just the last few days:
Trader scandal may hamstring UBS' recruiting  - apparently the wealth management business is getting hurt by the losses. Quite frankly, there is a serious disconnect here, if wealthy individuals are staying away from UBS because a trader in Europe lost 2 BILLION dollars, but apparently that is happening.

UBS 'business model is gone' — and rich clients could follow - according to this analysis, Ermotti will have" to rebuild investor confidence shaken by the failure of the bank's risk controls. He will have to shrink an investment bank to conserve capital as well as bolster the bank's wealth management operations, which generate about 41 percent of the bank's revenue. There, he will have to prevent wealthy clients from pulling funds from the country's largest wealth manager."

New UBS boss: U.S. brokerage not for sale -not an unexpected rumor, but interesting that there was a denial.

UBS Chief Resigns Over Rogue Trader Affair - this might have been overkill, but bravo! for taking responsibility for mistakes made during your watch.

Court Confirms Scope FINRA Arbitration Jurisdiction

The federal appellate court in New York has rules that an issuer who used UBS' auction rate securities services can force UBS to arbitrate a dispute over those services under the mandatory arbitration provisions under FINRA's rules.

The securities industry is the only industry in the United States where its firms and employees are forced to arbitrate disputes with their customers, and between themselves, by government regulation. This decision clarifies the scope of that requirement, which only requires a firm to arbitrate disputes with "a customer."

Some commentators, including my friends at the ADRProfBlog, are calling the decision an expansion of FINRA arbitration jurisdiction. I don't agree, and do not believe there was ever a serious dispute over the definition of "customer" in the FINRA rules. As the Court pointed out, every definition of "customer" is basically one who purchases goods or services. The Isssuer in the case was clearly purchasing UBS' services in connection with the maintenance and operation of its auction rate securities auctions, and as an underwriter, was a customer.

There is a more interesting aspect to this decision however. The Issuer filed a FINRA arbitration against UBS alleging fraud in connection with the auction rate securities program organized and operated by UBS. UBS is losing arbitration claims left and right, over auction rate securities and Lehman Principal Protection Notes. UBS did not want to go to a FINRA arbitration, and filed in Court to stop the arbitration. The Federal District Court denied the request, ruling that the Issuer is a customer. UBS appealed again, to the Second Circuit, which again ruled that the Issuer was a customer. Which, as noted above, was the only answer that the Court could reach under these circumstances.

Is this a case of UBS attempting to run up its adversary's legal costs in order to achieve a result to which it would not obtain from a court? Perhaps, and in this case the adversary had the funds to fight. What happens when they engage in such conduct with an employee, or a customer? 

 

 

 

Second Circuit expands FINRA’s arbitration jurisdiction

Faith in UBS Goes Rogue

Can someone explain how a major international bank can be the victim of fraudulent trades by an employee that cause losses of 2 BILLION dollars? How does that happen? Where are the internal controls that would prevent a trader from placing trades of the size or frequency that could result in losses of that magnitude?

You would think we were talking about Bank of America, but no, this time it is UBS, another bank that cannot run a brokerage firm or investment bank.

UBS has proven itself to be a disaster, and it is amazing that more individual at UBS have not gone to jail, or at least been banned from the securities industry. From Auction rate securities, Lehman Principal Protection Notes, Tax Evasion, rigging municipal bond transactions in 36 states, UBS has been accused of all sorts of fraud in the past few years, and the fines alone have totaled millions of dollars. One can only imagine the losses that some of this activity caused to its clients.

Now its own employee has caused losses of 2 BILLION dollars.

 

 

 

HEARD ON THE STREET: Faith in UBS Goes Rogue - WSJ.com

Faith in UBS Goes Rogue

More Fraud Charges Against UBS

The hits just keep on coming.  UBS has paid huge fines for Auction Rate Securities fraud, Principal Protection Note fraud, and tax fraud, as well as losing case after case to its own investors who purchased Lehman Principal Protection Notes. Now it has settled fraud charges with the SEC which accused the firm of fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.

UBS has agreed to pay $47.2 million that will be returned to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.

SEC Charges UBS with Fraudulent Bidding Practices Involving Investment of Municipal Bond Proceeds; 2011-105; May 4, 2011

UBS To Reward Reps for Loyalty and Growth

Competition for brokers - or rather their assets - has intensified over the past two years as firms consolidate. My firm has seen a significant increase in the number of broker transition cases we are handling, both in brokers who are being forced out of their positions, and in those who are voluntarily changing firms.

UBS was one of the firms that was aggressively luring brokers from the competition, at one point in time offering over two times their trailing 12 months gross commissions to join UBS. Of course, those checks came with significant handcuffs - promissory notes with up to 9 years of forgiveness.

UBS is apparently trying to insure that they don't lose those reps. Registered Representative is reporting that the firm has unveiled a new compensation program that will reward the firm's biggest financial advisors for loyalty and growth.

The program applies to advisors who have at least $500,000 in revenue in 2010, which apparently applies to approximately 3,000 of UBS’s network of 7,000 advisors. Those brokers would receive 65% of their gross production for 2010, structured as a seven-year forgivable loan.

More>>>

Lehman Note Investor Obtains 1/2 an Award

A FINRA arbitration panel has awarded damages against UBS in favor of an investor who purchased Lehman principal protected notes.

While the WSJ is presenting the award as a significant win for the investor, and an indicator of the outcome of other cases relating to the Lehman notes, I am not so sure this is that big a win. According to the details contained in the article, the investor obtained 1/2 of the claimed damages, plus interest, costs and an undetermined amount for attorneys fees.

Some would say that any recovery is a good recovery, but is this really a win for the investor? The Lehman notes are worthless.

As in most arbitration awards, the three-person arbitration panel didn't give reasons for its findings. According to the WSJ, the investor argued  that the notes were "speculative derivative securities" and were "unsuitable" for unsophisticated investors. Investors, and brokers, need to be careful in these cases.

I addressed these issues in my column, Lehman Principal Protected Note Arbitrations. While 1/2 the loss is better than a total loss for the customer, it is not necessarily a win for the customer, nor should it be the standard for the other Lehman Note cases that have been filed.

I do not know the details of the case, but if the investment was unsuitable, then it was unsuitable, and the investor should receive compensation for the loss. In addition, suitability cases are fact specific and investor specific. You simply can't attribute the parameters of an award in one case to other cases.

I will continue to update the blog as new awards become available.

More>>>

[Edited and updated 12/8/09]

Merrill Exec to Head UBS Wealth Management

After months of speculation, UBS today named Robert McCann as its new head of wealth management in the Americas.

Mr. McCann, the former head of the brokerage business at Merrill Lynch & Co., left Merrill in January after the acquisition by Bank of America. More>>>