Claim Filed Against UBS For Widow – More Than $1 Million in Losses Related to Puerto Rico Debt

Sonn Law Group and Aldarondo & Lopéz Bras recently filed a claim against UBS Financial Services, Inc. and UBS Financial Services Inc. of Puerto Rico on behalf of an elderly widow who has suffered more than $1 million in losses stemming from investments in Puerto Rico debt, including Closed End Funds (“CEFs”) that invested in Puerto Rico bonds as well as direct investments in Puerto Rico bonds. Aldarondo & Lopéz Bras is a separate law firm only licensed to practice law in Puerto Rico. The 68-year-old woman, a housewife who never held employment outside the home, was widowed in 2009 when her husband of 41 years died of cancer. The woman entrusted $1million from her deceased husband’s life insurance policy to UBS and its Financial Advisors. UBS recommended that the widow invest approximately $1 million in Puerto Rico debt, and compounded this risky, unsuitable concentration of securities by also recommending that she use her investments to obtain a credit line from UBS Bank.

UBS Puerto Rico was the primary underwriter of 23 CEFs with a total market capitalization of more than $5 billion. CEFs differ from traditional open-end mutual funds in that open-end funds offer and redeem shares at the fund’s net asset value (“NAV”). The NAY was determined by the managers of the fund. CEF prices can be at a discount or premium to the NAV. The majority of the UBS CEFs holdings are concentrated in Puerto Rico debt. These UBS CEFs are not traded on an exchange or quoted on any quotation service and are only available to Puerto Rico residents. UBS Puerto Rico has been the only or dominant secondary market dealer or liquidity provider for the UBS CEFs.

The Statement of Claim alleges that the widow had never had a brokerage account before and was a completely inexperienced and unsophisticated investor. She met with a UBS Financial Advisor in May 2009 to discuss investing the life insurance proceeds. The widow allegedly told the UBS Financial Advisor that she was primarily interested in generating a modest degree of income to meet her monthly financial needs, and that the life insurance proceeds represented virtually all of her liquid assets at the time. The widow could not afford to lose her capital, and had no interest in speculative or high risk investments or strategies. The UBS Financial Advisor allegedly assured the widow that he would only invest in low risk investments that would serve to protect her principal while generating a modest degree of income.

Yet, the UBS Financial Advisor recommended that the widow invest approximately $1 million in Puerto Rico debt including bonds and CEFS, according to the Statement of Claim. This dangerously concentrated the widow’s securities holdings in high risk Puerto Rico debt, which was compounded by UBS’ recommendation to borrow funds from UBS Bank secured by UBS Funds and Puerto Rico bonds.

According to the Statement of Claim, the UBS Financial Advisor initially recommended that the widow borrow funds from UBS Bank when she requested to withdraw funds from her account to assist her son. The UBS Financial Advisor rejected the widow’s request to sell securities and raise liquidity, and, instead, recommended that she establish a credit line with UBS Bank and borrow the money instead. He allegedly represented that it was more beneficial than withdrawing the funds she needed as she would pay a low rate of interest on the loan that would be covered by the interest generated by the UBS Funds and Puerto Rico bonds in her portfolio. Regrettably, the widow followed UBS Financial Advisor’s recommendation.

Another UBS Financial Advisor also allegedly recommended that the widow borrow funds from UBS Bank to pay a lump sum for taxes owed by her deceased husband, rather than making payments. This second UBS Financial Advisor allegedly represented to the widow that her investments were very secure and that the leveraged strategy did not expose her to risk of loss of her principal.

By recommending the UBS Bank credit line to invest in UBS Funds, UBS and its Financial Advisors recommended the use of leverage to buy Funds that already were leveraged and as such involved two layers of leverage which compounded the level of risk, according to the Statement of Claim. Using the UBS Bank credit line was a highly leveraged and concentrated strategy, which not only was very risky, but also left little room for error.

The alleged recommendation to use a UBS Bank credit line was illicit, because UBS Bank was not licensed to do conduct business in Puerto Rico and any recommendation by a UBS/UBS-PR broker to borrow money from UBS Bank was implicitly or explicitly illegal, according to the Statement of Claim. In fact UBS Bank and UBS/UBS-PR acknowledged the illicit nature of the loans by converting all UBS Bank loans to UBS-PR loans in late December 2013. UBS Bank and UBS-PR would not have engaged in this unprecedented action had the loans been legitimate and in accordance with Puerto Rico law.

In September 2013, the UBS Funds and Puerto Rico bonds in the widow’s accounts declined dramatically, and securities were sold in September and October 2013 to meet margin requirements. The UBS CEFs were illiquid beginning in or about September 2013, and the widow was unable to sell them at her discretion at the price published by UBS-PR. As result, the widow has lost no only income from the investments, but also access to her funds. She has been unable to make mortgage payments since September 2013, and is at risk of losing her home to foreclosure.

UBS and its brokers allegedly failed to adequately disclose the illiquid nature of the UBS CEFs, the risks associated with the leverage used by the UBS CEFs, the risk of a reduction in the dividend payments of the Funds, the risks of concentrating the widow’s retirement savings in speculative Puerto Rico debt, and the credit risks associated with the UBS CEFs due to Puerto Rico’s dismal financial and economic situation amongst other things, according to the Statement of Claim.

Dozens of other investors have retained Sonn Law Group and Aldarondo & Lopéz Bras to pursue claims against the firms who sold the investments to them. While UBS dominates the island’s market through its UBS Family of Funds, some of which are co-managed with Popular Securities, Banco Santander (Santander Securities), Merrill Lynch, Raymond James, Oriental Bank and others also sold investments linked to Puerto Rico’s municipal debt. 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.

If you invested in UBS CEFS, were a client of UBS, or obtained a loan from UBS Bank, and have experienced financial losses, please call us at 866-507-2640 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.