UBS Ordered to Pay Client $693,000 in Another Puerto Rico Arbitration
(Updated with comment from UBS in eighth paragraph.)
In a relatively rare decision, a Finra arbitration panel has ordered UBS Financial Services to repurchase illiquid closed-end bond funds in a customer’s Puerto Rico account, in addition to paying him almost $436,000 for principal losses on the funds plus costs and attorneys’ fees.
The award published on Monday totals over $693,000, and followed another decision two weeks ago in which a Finra panel ordered units of the Swiss bank to pay just over $19 million in damages, costs and attorneys’ fees to another customer as a result of the 2013 crash in Puerto Rico municipal bond prices.
UBS customers have claimed an aggregate $2.8 billion of damages over losses in the bonds and related closed-end funds, with $1.7 billion resolved to date through settlements, arbitrations or withdrawals, the Swiss bank said in its third-quarter earnings report. It did not report the aggregate payments it has made.
In the latest case, three “public” arbitrators ordered UBS Financial Services and its Puerto Rico affiliate to repurchase (or in legal terms, rescind) from customer Jose Pastrana all non-cash assets except for a Nuveen muni fund and a AAA UBS target fund. The rescission, which Pastrana’s lawyer said will total about $128,000, will supplement an award of $435,623 of compensatory damages for losses, $102,000 in attorneys’ fees and almost $27,000 in costs.
“The closed-end funds are illiquid and my guy was stuck with the shares,” said Stefan Apotheker, the lawyer at Sonn & Erez, PLC, in Miami, who represented Pastrana over 16 hearing sessions in San Juan.
The arbitrators denied the customer’s request for punitive damages. But it also denied UBS’s request to expunge statements of the claim from records of advisors or other personnel, and the bank’s motion to exclude from the panel’s hearings evidence of earlier regulatory settlements and arbitration awards.
The compensatory damage award was short of the bottom end of the $500,000-$1 million claim that Pastrana made in his December 2015 filing, Apotheker said. Finra rules require damage claims to be made in price ranges, and Pastrana’s encompassed the $526,000 capital loss alleged in his bond investments, according to the lawyer.
“While we respectfully disagree with this decision, it is important to note that the claimants were awarded less than they sought,” a UBS spokesman wrote in an email. “It should also be pointed out that for over twenty years Puerto Rico bonds provided steady and substantial returns, also coupled with extraordinary tax advantages available only to Puerto Rico residents.”
Apotheker, despite being turned down for punitive damages and higher attorneys’ fees his firm had requested, expressed satisfaction with the award.
“Punitive damages and rescission are rare,” he said, “and the rescission acknowledges that [Pastrana] was suffering more than a capital loss” because of the fund’s illiquidity.
The arbitrators, to be sure, ordered UBS to repurchase the bond funds at the market value shown on Pastrana’s July 31, 2018, financial statement rather than at the higher purchase price.
The earlier $19 million arbitration award published on October 19 went to a UBS client who claimed he not only was sold Puerto Rican bonds and bond funds that crashed but also was encouraged to use lines of credit to buy some of the securities. Pastrana had not borrowed against his portfolio to make more purchases, his lawyer said.
In discussing its Puerto Rico bond issues in its third-quarter earnings report, UBS said last week that the U.S. Department of Justice “is conducting a criminal inquiry into the impermissible reinvestment of non-purpose loan proceeds.”
The firm in 2014 and 2015 made multi-million dollar settlements with Finra, the Securities and Exchange Commission and Puerto Rico’s Office of the Commissioner of Financial Institutions over supervisory and other operational procedures related to the Puerto Rico bond collapse.