Panel Slaps UBS with $9 Million Judgment in Puerto Rico Case
A Financial Industry Regulatory Authority arbitration panel ordered UBS AG’s U.S. brokerage unit and its Puerto Rican subsidiary to pay nearly $9 million in damages to an investor who claimed the firm over-concentrated him in closed-end Puerto Rican bond funds, according to a decision issued Friday.
The three-person panel of public arbitrators granted the client, Luis R. Romero Lopez $7,983,230 million of the $10 million he requested in compensatory damages. It also ordered UBS to pay $1 million in punitive damages over an $8 million ‘non-purpose’ loan that UBS provided to Lopez, which was used to buy more closed-end bond funds in violation of Federal Reserve Board regulations on margin loans and suitability standards.
UBS either “knowingly encouraged” Lopez to take out loan or acted with “extreme recklessness and indifference,” according to the award. The arbitrators cited unidentified UBS managers in New York who “were informed and denied that loans were being recycled in Puerto Rico and used to buy securities.”
Over six weeks in August and September 2013, Lopez, a doctor now in his mid-50’s, watched his $14 million account drop to negative $1 million, according to his lawyer, Sam Edwards, of Shepherd Smith Edwards & Kantas LTD, who filed the complaint in November 2013.
“It was a total wipe out,” Edwards said.
A spokeswoman for UBS and the firm’s outside attorney did not respond to requests for comment.
UBS counter-sued Lopez for $2.9 million for his failure to repay the loans, according to the award. The panel granted the firm over $1 million in damages, which it used to offset the total $9 million in compensatory damages it had had initially granted Lopez. The arbitrators did not provide a reason for their decision on the counter-claim.
UBS’s retail brokers aggressively sold the closed-end bond funds, loans and securities amid a prolonged recession in the island territory economy that began in 2006. Most of the losses were incurred in 2013 when Puerto Rico’s bond market imploded.
The Lopez judgment is the third-largest decision of roughly 25 issued so far against UBS in cases tied to sales of Puerto Rico bond funds, municipal securities and loans collateralized by the securities, according to Craig McCann, who has worked as an expert witness for plaintiffs in the Puerto Rico cases.
Arbitrators ordered UBS to pay $18.5 million ruling in December and another $18.2 million in January.
UBS, which has filed a complaint in federal court seeking to overturn the December ruling, said in its most recent earnings report that it faces a total of $2 billion in damage claims tied to the collapse of the Puerto Rico bond funds. It has resolved almost half, or $861 million, of those claims through settlements, arbitration or withdrawal of the claim, it said.
In another case that was resolved last week, arbitrators imposed a $475,000 judgment against UBS over similar claims of unsuitable recommendations to invest in the island’s debt.
UBS has won five disputes and over 700 other cases have been settled for undisclosed sums, McCann said.