FINRA ordered UBS to hand over $18.2 million for misleading a family of investors in Puerto Rico closed-ended funds, the second highest fine for individual investors in a series of cases against the bank’s U.S. unit.
The award came just a month after FINRA ordered UBS to pay $18.4 million to two investors who made similar claims about their investments in closed-ended funds.
In the case announced this week the claimants had sought $27.9 million, plus interest and costs.
In response UBS had sought the repayment of a $7 million loan.
The FINRA arbitration panel denied the UBS’s counterclaim and awarded $18.2 million to three of the four claimants, Victor Gomez Jr., Socorro Horta and Madeline Gomez-Horta. It denied any damages to the fourth, a limited liability company known as Inversiones VM Gomez.
The case, filed in 2013, is one in a slew of Puerto Rico bond cases filed against UBS and other entities over their improper marketing of closed-ended funds. According to one of the claimants’ attorneys, Harold Vicente, there are thousands of Puerto Rico bond arbitration cases filed with FINRA.
In a September 2015 enforcement action FINRA found that between Jan. 1, 2009 through July 31, 2013, UBS failed to monitor the combination of leverage and concentration levels in customer accounts to ensure transactions were suitable for customers’ risk objectives and profiles. The firm failed to implement a reasonably designed system to identify and prevent unsuitable transactions, given Puerto Rico’s economy and the fact that retail customers typically maintained high levels of concentration in the territory’s assets and often used the accounts as collateral for cash loans.
In September 2015, FINRA found 165 customers with conservative investment objectives and $2 million or less in assets had accounts more than 75% concentrated in highly-leveraged closed ended funds’ shares.
The claimants in the case resolved this week alleged that UBS misled them about the nature of the investments and that the firm failed to properly oversee its professionals who were engaged in securities fraud.
“Although the arbitrators awarded less than the full damages claimants requested, UBS is disappointed and strongly disagrees with the decision to award any damages," a UBS spokesman said when asked for comment on Friday. "Mr. Gomez was an experienced investor who made a fully informed decision to leverage his investments and concentrate his portfolio in UBS Puerto Rico closed end funds because of their long history of providing excellent returns and substantial tax advantages. UBS is considering its options to overturn the award.”
Of the award, $9.63 million was to compensate the three claimants, $4 million was punitive damages against UBS to the claimants, and $4.6 million was for attorney’s fees and other costs of the case. In addition, FINRA ordered UBS to pay $33,000 in hearing fees to FINRA.
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