UBS Wealth Management and its Puerto Rico unit
have been ordered to pay an investor $1 million in damages after an arbitration panel said brokers encouraged him to invest 100% of his portfolio in risky, proprietary closed-end bond funds.
Juan Burgos Rosado, a 66-year old “quintessential conservative investor,” according to the panel, lost $737,000 of his nearly $1 million portfolio when the value of UBS' Puerto Rico municipal bond funds collapsed in the fall of 2013. The loss took out most of what Mr. Rosado had saved from his career buying and repairing properties and running a bodega, the panel said.
“Claimant's lifetime pattern has been one of frugality, saving and employment of resulting capital and his own labor in business opportunities that he understands can earn a good return,” the panel wrote. “This account was extremely over-concentrated and clearly unsuitable for claimant.”
The award includes $600,000 in compensatory damages and an order that UBS must also pay roughly $400,000 to buy back Mr. Rosado's portfolio. It did not, however, grant the $1 million in punitive damages he requested.
'SKINNY COW'
But the panelists did include a lengthy justification for their award, indicting UBS' sales practices and noting how the firm's brokers were pressured to sell the funds and keep clients invested. When Mr. Rosado approached UBS in September 2013, concerned about the declines in the fund after the balance had fallen around $200,000 to $816,000, the branch manager told him, “even a skinny cow could give milk,” according to the award.
“Claimant expressed concern that the cow would die, but nevertheless held on and continues to hold on,” the panel said. “He did not know that brokers were under pressure to sell these closed-end funds and to encourage customers with them in their accounts to keep them.”
“So while we do generally ascribe to the concept of an investor assuming the risk of an account after sufficient notice of its risk, we do not think it applied to this investor,” the panel added.
UBS also provided Mr. Rosado with investment brochures and monthly statements in English despite the fact that Mr. Rosado had limited fluency and requested documents in Spanish, according to the award.
UBS spokesman Gregg Rosenberg said in an emailed statement that the firm was “disappointed” with the decision and disagrees with the award.
The decision comes as awards related to the Puerto Rico bond funds begin to trickle in. More than $1.1 billion in damages have been alleged so far, according to UBS' quarterly reports.
20 YEARS OF GOOD PERFORMANCE
The funds, which the firm said had performed well for two decades, rapidly lost value starting in August 2013 as investors became skeptical of Puerto Rico's ability to pay down its debts. UBS had sold more than $10 billion of the funds through 2012, according to marketing materials.
The firm did not expect that it would be “indicative of how other panels may rule,” according to the statement.
Arbitration awards do not set legal precedent, but Mr. Rosado's attorney, Harold Vicente-Gonzalez, who said he is representing around 150 investors in similar claims, explained that he felt the panel's logic behind why it granted damages would apply to many of the other claimants.
“Most of our clients are in this same position,” said Mr. Vicente-Gonzalez. “This does have an impact on the whole situation.”
Last week, another panel
ordered UBS to pay $200,000 to an investor who the firm claimed only had $8,000 in out of pocket losses, according to the attorney in the case, W. Scott Greco. The client had asked for between $400,000 and $700,000 in damages, according to the award.
Arbitrators in that case did not provide a detailed rationale behind their decision.
In a third case, an arbitrator
denied claims from an investor who represented herself and asked for around $10,000 related to damages from investments in the UBS Puerto Rico Fixed Income III Fund.
“Claimant had experience investing in a similar fund, and was provided with a full explanation of the nature and risks of the investment,” the arbitrator wrote. “Therefore, the arbitrator determined that the investment was suitable for claimant when made.”
