UBS Fights Back Against Landmark $18.5 Million Puerto Rico Award
After a persistent series of arbitration losses related to its sale of Puerto Rico municipal securities, UBS Financial Services is fighting back.
The U.S. brokerage unit of Swiss banking giant UBS AG and its Puerto Rican subsidiary on Friday filed a federal court claim seeking to overturn an $18.5 million award that a Financial Industry Regulatory Authority arbitration panel made to investors last month.
The award was the largest of about 20 that arbitrators have issued against UBS over charges that it aggressively sold bonds, closed-end bond funds and loans collateralized by the securities of Puerto Rico.
The sales occurred amid a six-year recession in the U.S. territory’s economy that crippled operations of the local government.
In its December 30 court filing in Puerto RIco, UBS asserts that the arbitration panel decision should be vacated because two of the three arbitrators on the panel should have been disqualified for failing to disclose potential biases in documents that parties use to select arbitrators.
“Finra rules, and basic notions of fairness, bar securities arbitrations before arbitrators who have committed fraud, or failed to disclose that they themselves have acted as plaintiffs in securities fraud claims, or who have made material misrepresentations on important disclosure documents,” the lawsuit says.
Frances Johnson Wright, one of the three public arbitrators, failed to disclose that she had been the lead plaintiff in a 2001 securities class-action lawsuit against Teradyne, the semiconductor equipment manufacturer, according to the complaint.
A second public arbitrator, Susan Meek, failed to disclose that she had once filed for personal bankruptcy and was convicted of making a fraudulent claim related to the filing, according to the lawsuit.
Wright and Meek, lawyers who are based in Texas, did not respond to requests for comment. Meek is the author of a book on arbitration and other alternative dispute resolutions.
UBS, which markets itself as UBS Wealth Management Americas, has not challenged previous arbitration decisions that resulted in its paying some $400 million to investors.
“[T]he unique and egregious circumstances of this arbitration compel UBS to make its first motion to vacate arising out of these arbitrations,” the complaint says. “Based on information that has come to light after the award, it is evident that UBS did not receive a hearing before a panel of three qualified, impartial arbitrators under Finra’s rules and regulations.”
In its December 5 award decision, the arbitration panel awarded claimants Rafael Vizcarrondo and Mercedes Imbert de Jesús $12.7 million in compensatory damages, $2.5 million in interest, $3.2 million in attorneys’ fees and expert witness fees of $163,000 after 25 days of hearings. The pair alleged that they were misled about the suitability and riskiness of closed-end funds they were sold, and and were over-concentrated in the positions.
UBS argued that Vizcarrondo is a sophisticated investor who was educated at Harvard and was managing partner at one of Puerto Rico’s most prestigious law firms. It also argued that Vizcarrondo rejected a recommendation from a broker that he diversify his portfolio beyond Puerto Rican bonds.
Timothy Dennin, the lawyer who represents the investors, declined to comment.