New York Securities Lawyer Blog
UBS is once again in the midst of legal troubles for the sale and marketing of highly leveraged, risky closed-end bond funds that were heavily invested in Puerto Rican municipal debt, such as the Tax Free Puerto Rico Fund II. According to media reports and lawsuits filed against UBS by investors in Puerto Rico, these closed-end bond funds had a leverage ratio of approximately 50%, which means that for every dollar of customer assets the fund holds, it has approximately another dollar of assets bought with borrowed money. UBS manages other Puerto Rican funds that are similarly leveraged. By way of comparison, an average leverage ratio on funds similar to UBS’s in the U.S. is approximately only 20%. To make matters worse, UBS encouraged clients to borrow money on margin to invest in those funds. According to UBS’s own brokers, UBS lent money to its customers improperly by encouraging them to borrow on credit lines, which caused more investor losses. UBS brokers were incentivized to do so as they received commissions for securities bought on the credit line, and then received more compensation if the customer used the credit line. Most brokerage firms require customers who open a credit line to sign a document that they will not use the credit line to buy securities. According to reports, UBS clients did not sign such documents, in violation of UBS’s policies and procedures. The value of these risky highly leveraged closed-end bond funds managed by UBS have declined in value by approximately 50% or more, resulting in losses to investors. UBS’s clients have been forced to liquidate hundreds of millions of dollars in holdings in the bond funds to meet margin calls. The erosion in government-bond prices in Puerto Rico has also sparked a liquidity problem in shares of these funds.
UBS stated that it is performing an internal investigation into UBS’s lending practices for its top-producing brokers in Puerto Rico. UBS has also reportedly put one of its brokers on administrative leave after claims that he encouraged his clients to buy securities on lines of credit. Numerous lawsuits have been filed against UBS, and many more are expected to come.
Lax & Neville LLP has nationally represented small broker-dealers, investment advisers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers and investors who have suffered losses. Please contact our team of attorneys for a consultation at (212) 696-1999.