Yesterday, regulators hit a Union Bank of Switzerland (UBS) affiliate in Puerto Rico with an orders to pay $33.5 million to settle claims the bank failed to supervise a representative who allegedly misled investors into using borrowed money to purchase the bank's proprietary closed-end bond funds.
The claims were brought jointly by the Securities and Exchange Commission (SEC) as well as the Financial Industry Regulatory Authority (FINRA). The SEC separately sued Jose G. Ramirez Jr., accusing him of misleading investors on the Caribbean island into using lines of credit to purchase roughly $50 million of the proprietary closed-end mutual funds that plummeted in value when the island’s bond market deteriorated in 2013.
To settle the SEC’s claims, UBS Financial Services Inc. of Puerto Rico agreed to pay $15 million in disgorgement, interest and penalties. FINRA separately fined the UBS unit $7.5 million over its alleged supervisory failures and ordered it to pay roughly $11 million to 165 customers hit with losses on the funds that Ramirez recommended and sold to them.
FINRA separately said UBS of Puerto Rico failed to have systems in place to spot and prevent unsuitable securities transactions and that it failed to adequately monitor whether certain customers’ fund purchases were suitable in light of increased risks in their existing portfolio.
According to the SEC’s lawsuit against Ramirez, which was filed in federal court in Puerto Rico, he made at least $2.8 million in illicit profits off a multiyear scheme, in which he allegedly persuaded investors to take out lines of credit to purchase the closed-end funds. The SEC said Ramirez, who was terminated from UBS last year, knew the firm’s policies and customer agreements prohibited brokerage customers from using non-purpose lines of credit extended, by a UBS bank affiliate, to purchase the closed-end municipal bond funds. Yet, Ramirez concocted a scheme whereby he persuaded customers to draw down their UBS lines of credit and then transfer the funds to a non-affiliated bank and subsequently use those deposits to purchase the UBS closed-end bond funds.
To make matter worse for the customers, the lines of credit Ramirez encouraged clients to open were collateralized by their securities accounts. When the value of the securities in the accounts fell below the required collateral level, the customer received a margin maintenance call and were required to deposit additional assets or liquidate securities effectively wiping out many of the accounts.
The Swiss bank in July disclosed it was under investigation over the Puerto Rico securities business. In a statement Tuesday, a UBS spokeswoman said the firm is “pleased” to have resolved the matters with the SEC and FINRA. “We remain dedicated to serving our customers during this difficult economic time for the Commonwealth,” she said.
The SEC also sanctioned a former UBS branch manager who supervised Ramirez for allegedly failing to follow up on red flags about his conduct. Ramiro Colon agreed to pay a $25,000 fine and be suspended from the securities industry for a year.
The experienced securities litigation attorneys at Colling Gilbert Wright & Carter, along with local Puerto Rico counsel are aggressively investigating and filing claims on behalf of Puerto Rican residents who purchased and lost money in UBS, as well as other (Santander Securities, Banco Popular Securities) closed-end municipal bond funds. If you have lost money investing in Puerto Rican bonds and closed-end bond funds, please contact our office today for a free consultation.