UBS: Keep The Champagne On Ice

The big boys at UBS are probably popping bottles of bubbly today to celebrate what appears to be a big legal victory for the firm. An administrative law judge for the Securities and Exchange Commission ruled on Tuesday that the SEC failed to prove that two high-ranking UBS Puerto Rico executives committed fraud by promoting a series of closed-end, municipal bond funds as good investments to clients.

The judge’s decision is based on sales of the same proprietary, Puerto Rico muni bond funds this blog has been closely following for the past several weeks. There’s a key difference between that complaint and what we are currently learning and hearing each day from investors burned by the UBS Puerto Rico Muni Bond funds.

What investors who have seen their life savings obliterated by the funds need to keep in mind is that this week’s decision stems from an SEC case focused on what UBS Puerto Rico revealed to investors about the Muni Bond funds back in 2008 and 2009. It has nothing to do with the crisis the UBS Puerto Rico Muni Bond holders currently face.

Indeed, UBS Puerto Rico is undoubtedly elated, but this blog is recommending that the UBS boys keep the champagne on ice. It will still face a rash of complaints from investors, who have suffered a jaw dropping $4.5 billion in losses so far this year, according to a report in Reuters from an unnamed reporter in San Juan.

As we see it, there are several significant facts that UBS Puerto Rico Muni Bond Fund investors must focus on.

For the most part, the administrative law judge’s decision has little, if any relevance to the current issues plaguing the Puerto Rico bond market.

The SEC complaint, filed in 2012, focused on whether disclosures of specific trading strategies at UBS were adequate. That is not the issue in our cases. Unlike 2008 and 2009, the Muni Bond market in Puerto Rico right now is collapsing. We believe UBS didn’t disclose that the funds it was selling and managing held bonds that were approaching “junk” status.

Furthermore, many of UBS PR’s clients were improperly encouraged by its brokers to borrow against their UBS Puerto Rico Muni Bond holdings.

Most importantly, our cases are about suitability. The question is, should retirees and ultra-conservative investors have been invested in volatile, quasi-junk instruments like this? Absolutely not.

Some in the investment profession have been pointing to a potential collapse in the municipal bond market for years. In 2010, Meredith Whitney famously called for the potential of a wave of municipal defaults. Was anyone at UBS listening?

Part of the defense by the two executives in the case they won this week was that the Puerto Rico Municipal Bond funds, with their high yields and tax-exempt status, were terrific, highly suitable investments for “certain investors,” according to the decision.

What they meant was investors with an extraordinary appetite for risk.

Unfortunately, the Mom and Pop investors of Puerto Rico and elsewhere who bought these funds were anything but high-risk investors. Considering how many investors who do not fit that description and ended up in these bond funds anyway – let’s just say that UBS has a great deal of explaining to do.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions, including UBS.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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