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UBS Loses a $3 Million FINRA Arbitration Award

A FINRA arbitration panel ordered UBS Financial Services Incorporated of Puerto Rico and UBS Financial Services Inc. (collectively “UBS”) to pay a group of former investor clients approximately $3 million related to the sale of closed-end funds consisting of Puerto Rico municipal bonds.  Specifically, the claimants asserted the following causes of action against UBS: fraud; breach of fiduciary duty (including violation of Regulation 6078 issued under the Uniform Securities Act of Puerto Rico); negligence; breach of contract; negligent misrepresentation and omission; unsuitability; overconcentration; control person liability; alter ego liability; and failure to supervise under federal securities laws, the Uniform Securities Act of Puerto Rico, Puerto Rican law and FINRA rules. The causes of action related to the claimants’ investments in UBS Puerto Rico proprietary closed-end funds and other Puerto Rican municipal bonds, and the use of these investments as collateral to borrow funds through lines of credit.

Several members of the group of claimants who filed the FINRA arbitration settled their claims prior to the FINRA panel’s decision, according to the FINRA award.  To those investors who did not settle, the FINRA arbitrators specifically ordered UBS to pay compensatory damages in the amount of approximately $2.4 million, plus $55,000 in costs and $479,000 in attorneys’ fees.  The FINRA arbitration panel also assessed the total hearing session fees of $21,600 to UBS.

According to media reports and the various lawsuits filed against UBS by investors in Puerto Rico, UBS recommended that its clients invest in 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. 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.  To compound the riskiness of these investments, UBS brokers encouraged its clients to borrow money on margin or through the use of credit lines to invest in the funds, which in effect doubled the leverage and increased the riskiness of the investments. 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 substantial losses to investors.   Many lawsuits have already been filed against UBS, and according to UBS’s most recent earnings report and media outlets, the firm is facing investor/customer claims totaling more than $1.1 billion.

Lax & Neville LLP is investigating claims on behalf of investors regarding possible sales practice abuses in connection with UBS’s sale and marketing of various highly leveraged closed-end bond funds to customers in Puerto Rico. Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers and investors who have suffered losses, including experience in prosecuting claims involving leveraged funds. Additionally, Lax & Neville LLP has nationally represented small broker-dealers, investment advisers, financial services professionals and securities industry companies in regulatory matters and securities and investment related litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.

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