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Puerto Rico pension fund joins suit against UBS over muni bonds

(Bloomberg) — Puerto Rico’s retirement system, on the brink of insolvency, is joining a lawsuit against UBS, faulting the company for poor investment returns on $3 billion it borrowed in an effort to bolster the pension.

UBS underwrote bonds sold by the employees and judiciary retirement systems in 2008 and served as the investment consultant. The income from reinvesting the proceeds was supposed to far exceed the borrowing, delivering a profit. Puerto Rico said in a statement that much of the proceeds went instead into low-yielding accounts that produced “negative investment income since day one."

UBS Real Estate

UBS served as a major banker for the U.S. territory, which has been defaulting on a growing share of its debt and has been placed under federal financial oversight. The bank was able to legally serve as an adviser, underwriter and bond-fund manager even though such multiple roles are barred on the mainland because of the conflicts of interest.

The bank has already paid millions to settle with investors who purchased Puerto Rico bonds, though it hasn’t admitted or denied wrongdoing. Peter Stack, a UBS spokesman, declined to comment.

The Puerto Rico retirement fund said Tuesday that it has decided to join the lawsuit filed in 2011 against UBS and two smaller brokerage firms by six beneficiaries.

Puerto Rico’s pension funds are nearly exhausted, holding just 4 percent of the assets they need to fulfill promises to workers, according to audited figures for the year ended in June 2014, the most recent available. The largest one could go broke as soon as 2018.

"Rather than await our funds’ insolvency, our board is addressing the system’s past ills and aims to obtain a significant recovery on behalf of our participants and pensioners,” Pedro R. Ortiz, administrator of the system, said in the statement.

Bloomberg News