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Status of Claims against UBS and other Brokerage Houses for Investments in Closed En Funds




by:
Luis E. Minana Associates Abogados-Notarios - San Juan Office

 
December 5, 2013

Previously published on December 3, 2013

Dear Friend:

We want to inform you of what is going on with the Claims against UBS and other Brokerage Houses that have recommended and invested their clients in the Closed End Funds (“CEF”s) without regard to their illiquidity and the risks involved in the leverage utilized in them, a deceitful investment scheme that has cost millions of dollars and financially crippled thousands of investors in Puerto Rico.  This week we worked on the claims to be submitted shortly to the Financial Industry Regulatory Authority, (“FINRA”). We also interviewed with a myriad of other affected investors, seeking advice on how they should proceed.

We have seen that the losses caused by the unsuitable recommendations, the lack of orientation and the concentration in PR paper, has not only resulted in monetary damages, but also in psychological ones. It is to be expected that losses like these cause people grief enough to cry, not sleep, be worried about their future and be affected. This grief turns into an affliction, much like the Post Traumatic Stress Disorder suffered by soldiers; the events that have transpired in PR have been traumatic because of their magnitude and speed. We recommend always consulting a health professional even if it is for a routine checkup.

We have heard that UBS had available up to $100 million to " repurchase" shares of UBS CEFs at a price well below net asset value, only from clients who have margin loans with UBS Bank, and that the proceeds of the sales would be credited to the margin loans. Some clients were consulted and others are just receiving confirmation slips of sales pursuant to a so-called repurchase program. By the way, although $100 million is indeed a lot of money, it is less than 5% of the aggregate outstanding balance of UBS Bank margin loans receivable secured by closed end UBS Funds.[1]

Now, to make a decision on whether to sell the CEFs at this juncture, the client has to consider if the Puerto Rico Economy will get better with the measures the government is taking or whether there is a risk that the PR Bonds might default. In second place, the holder of CEFs has to consider the proposal as long as it does not entail any release of UBS, et al or the waiver of any claim, defense or cause of action by the client, and provided the client accepts the price before execution. In essence, if there is a risk that the PR Bonds might default, then the client should sell in order to comply with their stated conservative objective for this money of safety of principal and to mitigate their damages.  These shares might become less liquid with the passage of time and UBS will only purchase a fraction of them, possibly only to the extent required to pay some loans to UBS Bank, therefore, the clients should grab whatever liquidity they can.

This week’s Caribbean Business has an article on solutions to PR problems, but see none of them in PR’s horizon. “Mary Miller, the U.S. Treasury Department undersecretary for domestic finance, said during the Bloomberg Link State & Municipal Finance Conference in New York that there is ‘no deep federal assistance right around the corner’ for Puerto Rico.” This should be taken into account.

Meanwhile, the class action, although still no class certified, remains alive. The suit has survived numerous Motions to Dismiss, and now is the subject of a motion for reconsideration from the defendants and a motion to compel discovery (R-26) by the plaintiffs. Remember that if and when a class is certified, that class should be composed of the buyers and sellers from January, 2008 to May, 2012.

The injunctive action to stop UBS from withholding the dividend and interest payments in the accounts with the illegal loans is still in US District Court waiting for a decision from Judge Jay García Gregory to remand (or not) the action to the Puerto Rico Court of First Instance. Meanwhile, UBS Bank has initiated a Declaratory Judgment action in the District Court of Utah, as a tactic of forum shopping. One of the attorneys in the consolidated action, made an appearance in Utah and is dealing for our group with trying to dismiss that action. We will try to keep all of you informed regularly of anything and everything that happens in relation with the CEFs.

[1] See Statement of Financial Conditions UBSFSI 2013 Note 10: “[¿]Receivables and payables with brokers and dealers, agreements to resell and repurchase securities, and securities borrowed and loaned are generally collateralized by cash, U.S. Government and Commonwealth of Puerto Rico Government, and agency securities. Additional collateral is requested when considered necessary. The Company may pledge clients’ margin securities as collateral in support of securities loaned and bank loans, as well as to satisfy margin requirements at clearing organizations. For margin loans, the amounts loaned or pledged are limited to the extent permitted by applicable margin regulations. Should the counterparty fail to return the clients’ securities, the Company may be required to replace them at prevailing market prices. At June 30, 2013, the market value of client securities loaned to other brokers approximated the amounts due or collateral obtained. The Company extends margin to its clients as part of its day to day retail brokerage activities. The Company reviews the value and adequacy of collateral pledged by its clients supporting margin loans and performs additional stress scenarios to monitor the overall concentration risk. As of June 30, 2013, the Company has $882,748 in client margin loans that are collateralized primarily by bonds from the Commonwealth of Puerto Rico. Management believes the risk of credit loss from either the clients’ failure to perform in connection with the margin loan agreements or from the overall concentration in the collateral supporting the client margin loans is minimal.” (Amounts in Thousands of Dollars)

http://www.ubs.com/content/dam/static/wmamericas/statement&under;of&under;financial&under;condition.pdf

 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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