UBS Financial Services Inc. has lost an $18.6 million arbitration claim, stemming from losses to clients who invested in Puerto Rico closed-end municipal bond funds.
The award, made by a
Financial Industry Regulatory Authority Inc. arbitration panel, was the "largest to date" having to do with Puerto Rico bond funds, according to Finra spokeswoman Michelle Ong.
The statement of claim was filed in 2014 by two
UBS clients, Mercedes Imbert De Jesus and Rafael Vizcarrondo, who initially sought $19 million in compensatory damages and $1.2 million in commissions and fees, according to the Finra arbitration award dated last Friday. The claimants alleged breach of fiduciary duty, breach of contract and other securities violations, according to the award.
The two
UBS investors will receive $12.7 million in compensatory damages and interest of $2.5 million. They will also receive $3.2 million in attorneys' fees and $163,000 in expert witness fees.
UBS and its affiliated firm,
UBS Financial Services Inc. of Puerto Rico, have been dogged by millions of dollars of client losses in Puerto Rico proprietary closed-end bond funds filled with Puerto Rico municipal securities issued by various authorities and agencies.
The market for Puerto Rico's $70 billion muni debt bottomed out over the summer of 2013 after Detroit filed for bankruptcy that July. Puerto Rico has been struggling to stave off a widespread default on its debt ever since.
“I think it's a very significant award given its magnitude,” said Timothy Dennin, one of the plaintiffs' attorneys in the claim. “Rafael Vizcarrondo is a distinguished attorney down there, with some regarding him as one of most prominent attorneys in Puerto Rico.”
It's difficult to convince arbitration panelists that sophisticated professionals are not always sophisticated investors, Mr. Dennin noted. “The defense was blaming the client and saying he should have known better, given who he is. It was gratifying to see the panel have the courage and conviction to do what was right.”
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UBS spokesman said that the firm is contemplating its options, which could signal an appeal of the award taking place outside of Finra arbitration and would be heard in federal court. It is extremely rare for the courts to overturn a Finra arbitration award.
“Although the arbitrators awarded less than the full damages claimants requested,
UBS is disappointed and strongly disagrees with the decision to award any damages,” said spokesman Peter Stack. “Mr. Vizcarrondo was an experienced investor who made a fully informed decision to concentrate his portfolio in
UBS Puerto Rico closed end funds because of their long history of providing excellent returns and substantial tax advantages.
The case was decided by a panel of three public arbitrators, meaning it contained no people who worked in the financial industry for any duration during their careers or people who represented investors or the financial industry as a significant part of their business but became public arbitrators after a cooling-off period.
(See: Merrill Lynch to pay $7.03 million in Finra case for inadequacies in leveraging customer brokerage accounts )
