UBS Posts Losses of $41 Million in Connection with Bet on Puerto Rico Debt

UBS AG released its third-quarter earnings report, in which it reported a $20 million trading loss and $21 million in credit losses connected to loans that were backed by Puerto Rican municipal securities “and related funds.” The UBS Puerto Rico Family of Funds consists of 14 closed-end funds sold exclusively through registered representatives and brokers with UBS Financial Services Inc. of Puerto Rico. UBS dominates the island’s tax free bond market, and sold more than $10 billion of the funds through the end of 2012. Banco Santander (Santander Securities), Merrill Lynch, Raymond James, Oriental Bank and others also sold investments linked to Puerto Rico’s municipal debt.

Puerto Rico’s tax free bonds have declined sharply due to concerns about the island’s sluggish economy and large debt, which led several US money managers to sell off the bonds at a loss in September. The downturn has been exacerbated by investors who purchased Puerto Rico tax free bond using margin or other loans, which forced investors to sell their holdings and lock in losses. UBS and Wells Fargo cautioned their brokers not to recommend Puerto Rico debt to clients, according to The New York Times.

Many of the investors who lost money are retired and elderly people, whose brokers recommended that they invest most, if not all, of their retirement savings in the UBS Family of Funds, including: Tax-Free Puerto Rico Fund, Inc.; Tax-Free Puerto Rico Fund II, Inc.; Tax-Free Puerto Rico Target Maturity Fund, Inc.; Puerto Rico AAA Portfolio Target Maturity Fund, Inc.; Puerto Rico AAA Portfolio Bond Fund, Inc.; Puerto Rico AAA Portfolio Bond Fund II, Inc.; Puerto Rico GNMA & U.S Securities Fund, Inc.; Puerto Rico Fixed Income Fund, Inc.; Puerto Rico Fixed Income Fund II, Inc.; Puerto Rico. Government Target Maturity Fund, Inc.; Puerto Rico Mortgage-Backed & U.S. Government Fixed Income Fund III, Inc.; Puerto Rico Fixed Income Fund IV, Inc.; Puerto Rico Fixed Income Fund V, Inc.; and Puerto Rico Fixed Income Fund VI, Inc.

Claims for investment losses against UBS and other brokerage firms must be arbitrated through the Financial Industry Regulatory Authority (“FINRA”), the largest dispute resolution forum in the securities industry. Sonn Law Group and Aldarondo & Lopéz Bras have been retained by numerous investors to pursue FINRA arbitration claims regarding their losses. Investors have described sales pitches in which they were assured that the distributions from their Puerto Rico tax free bonds would not change. Such reassurances were false. Distributions from the UBS closed-end Puerto Rico tax free bonds now have decreased by approximately 25%, and it appears likely that those distributions will not recover at any point.

In addition, investors were encouraged to use margin or other loans to invest in Puerto Rico bonds and Puerto Rico-focused closed-end funds. Thus, investors used borrowed money to invest in closed-end funds which, in turn, were using borrowed money – or leverage – to make investments. When the value of the investments dropped, investors then received margin calls, which forced them to liquidate their Puerto Rico bond or closed-end bond funds in a vicious cycle of compounded risk and loss. As a result, investors who have been forced to sell their UBS Puerto Rico tax free bonds to meet margin calls have realized losses in their investments.

If you invested in Puerto Rico debt and have experienced investment losses, please call us at 844-689-5754 or complete our “contact form.” Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies.