The following story appeared in Caribbean Business on October 15, 2013:
By CB Online Staff
The pile on of UBS in Puerto Rico continues as lawmakers seek a legislative probe and unions push for legal action in the wake of multimillion-dollar losses for investors.
The Puerto Rico Workers Syndicate and other labor groups are calling on the island government to file suit against UBS for a bad bond deal dating back to 2007.
“They tricked the government into issuing products they knew would collapse,” union President Roberto Pagán said.
Meanwhile, minority New Progressive Party lawmakers are pushing for investigations of UBS’ practices in Puerto Rico that have been drawing increased scrutiny after a selloff of Puerto Rico debt in recent months hit its wealth clients very hard.
Rep. Ricardo Llerandi Cruz has filed legislation seeking a Capitol inquiry into UBS. Rep. Ángel Muñoz Suárez said he will file a complaint with the federal Securities Exchange Commission over “dubious transactions.”
UBS Puerto Rico CEO Carlos Ubiñas said the business isn’t responsible for “market events.”
“The loss in value of Puerto Rico bonds is tied to market forces and continued doubts over Puerto Rico’s credit,” Ubiñas said in a statement. “The financial industry, and much less UBS, can’t be blamed for market events.”
UBS is facing a potential flood of legal actions tied to its battered closed-end funds in Puerto Rico. Many suits are expected to be filed as a downturn in the value of Puerto Rico government bonds this year has resulted in big losses for local investors, many of whom hold closed-end mutual funds that invest heavily in Puerto Rico government bonds. The funds leverage their investment portfolios by financing about half of their total assets, which magnifies the risks for investors, many of whom also used additional loans to buy closed fund share assets.
The office of Massachusetts Secretary of the Commonwealth William Galvin has sent inquiry letters to heavyweight U.S. fund managers including Fidelity Investments, OppenheimerFunds, a unit of MassMutual Life Insurance Co. and UBS Financial Services. The probe aims to determine the extent of Massachusetts investors’ exposure to the risks; if Massachusetts investors were adequately made aware of the risks associated with their investments; to ascertain when the funds first became aware of financial situation in Puerto Rico. The division also intends to review whether the bonds were properly priced.
Unions: Take 2007 transaction to court
The union says the government faces a statute of limitations deadline to take legal action by Wednesday to recoup part of losses they peg at $80 million and offered the legal services of its stateside affiliate the Service Employees International Union.
“This is a legal tool that the Puerto Rico government has and should use,” General Workers Union official Eric Sevilla said.
The 2007 bond deal is different than a 2008 pension bonds transaction that has already reached the U.S. Supreme Court.
In August, the nation’s top court dismissed a case accusing a UBS unit of selling more than $750 million in bad bonds to Puerto Rico pension funds.
UBS, which had been financial adviser for Puerto Rico’s public pension agency for more than five years, underwrote $2.9 billion of Employee Retirement System-issued bonds during the administration of former Gov. Aníbal Acevedo Vilá in 2007. UBS Trust bought approximately $1.5 billion of the bonds and then sold them to funds.
The bonds value dropped 10 percent within two years of the sale, lowering the funds’ value. The lawsuit against UBS Trust, UBS Financial, and the director of the funds claimed that the defendants took part in a manipulative trading scam to make it look as if there was market interest when the point was to raise prices so that other investors would buy.
The bond sale, which was executed when the market was weak, caused a cash-flow deficit in the retirement system, going from $99 million to $380 million in 2009. As of 2013, the actuarial deficit in the pension fund was nearly $27 billion. Combined with judicial branch and teacher pension plans, the unfunded liability topped $37 billion.