There have been over 2,000 FINRA arbitrations filed in Puerto Rico in regards to unsuitable leveraged investments in Puerto Rican bond funds, and over $226 million in awards so far. However, many of these cases settle. Some analysts have noted that while banks such as UBS have faced a large number of arbitration claims for investing clients’ funds in unsuitable high-risk leveraged Puerto Rican bond funds, bank of Santander was spared from most of these claims and is subject to only 200 filings. This lower number of claims stands in contrast to the fact that the Santander funds had higher leverage than UBS, and may have been marketed more aggressively to unsuitable clients.
Santander sold over 12 closed end funds and six open end funds in Puerto Rico; designated “First Puerto Rico Funds.” Santander marketed 11 of these funds to clients with conservative investment goals of “capital preservation,” yet these funds declined by 56% on average. In 2013, there were $3.4 billion in assets in these 11 closed end funds. By 2015, there were only $1.6 billion, with $1.8 billion in valuation vanishing as default rates rose on the bonds.
Most municipal bond funds are leveraged at a maximum of 20%, whereas Santander sold Puerto Rican municipal bond funds to conservative investors leveraged at 50% – 100%, doubling potential gains, but also doubling possible losses. Given that Puerto Rican municipal bonds were already paying coupons of between 5% to 6%, leveraging an already-risky bond in which the inflated yield is supposed to compensate for increased risk is unwise at best, according to some investment professionals.
During the time period in which Santander marketed and sold these leveraged bond funds to conservative investors, there were numerous macroeconomic indicators of the risk of default in the Puerto Rican bond market, demonstrating the inherent risks in these bonds. From the early 2000s through 2015, Puerto Rico borrowed over $70 billion in the municipal bond market at high interest rates. Additionally, Puerto Rico was running other enormous deficits, and was borrowing across the board to meet pension obligations, while at the same time raising sales taxes in an attempt to close these budget deficits. All of this information was available to Santander, and these risks were priced into the bonds, hence the higher yield rates of 5% to 6% for bonds with 20-year maturation dates.
Rather than informing investors of the potential risks of these bond funds and making them a small part of an aggressive or high growth investment strategy, Santander piled conservative and low risk investors, including retirement accounts, into these leveraged Puerto Rican bond funds. As these funds collapsed in value, many investors faced margin calls, financial strain, and the fear of losing all of their retirement savings, due to overconcentration in these highly-leveraged bond funds.
The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. Specifically, attorneys at Lax & Neville have achieved significant settlements in regards to improper sale of Puerto Rican bonds and bond funds. If you are a victim of unsuitable investment losses, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.