By Matthias Rieker
UBS AG's U.S. wealth-management unit will have to pay a Puerto
Rican retiree $1 million in compensation for unrealized losses in
the island's municipal-bond funds.
A Financial Industry Regulatory Authority arbitration panel
ruled that the closed-end bond funds UBS brokers recommended for
Juan Burgos were unsuitable.
Mr. Burgos was 66 years old when he invested in the funds that
were popular on the island because of their favorable tax status.
He had no experience in buying securities.
"The account was grossly overconcentrated...any proper UBS
branch office or other review should have detected such obvious
unsuitability," the panel said in its award document posted on
Finra's website Wednesday.
Mr. Burgos opened his brokerage account at UBS in 2011, and over
the next two years UBS persuaded him to invest over $1 million--his
entire savings--in the municipal bond funds.
At that time, Puerto Rico had already been in a recession. But
two years later its government's troubled fiscal situation began to
worry bondholders, and the market for the funds dried up and their
value started to decline.
Mr. Burgos as well "was greatly concerned," but was reassured by
UBS. A UBS branch manager "explained that even a skinny cow could
give milk," according to the panel.
"While he knew that he did not have what he had thought, he
reasonably did no know or understand what he in fact had," the
panel said.
The value of Mr. Burgos's fund holdings ultimately fell by
$737,000, and he held on to the investments because selling them
would have generated even more losses, the panel said.
Mr. Burgos had demanded more than $2 million in compensation and
punitive damages from UBS. His lawyer, Harold Vicente, said the
award "gives justice" to Mr. Burgos. "We consider it to be a
triumph for all the investors on the island."
Mr. Vicente also said he has filed municipal bond arbitration
cases for more than 150 clients, mainly against UBS.
A spokesman for UBS said the firm "is disappointed with the
decision, with which we respectfully disagree."
Mr. Burgos's case is the second win by a UBS client within a
week. Last week, a Finra arbitration panel ordered UBS to pay
Yolanda Bauza $200,000 in compensation for her poorly performing
closed-end bond fund investments. She had demanded between $357,000
and $625,000 in damages.
Unlike court rulings, arbitration decisions aren't
precedent-setting for other panels. However, UBS and other
brokerage firms in Puerto Rico face hundreds of arbitration claims
from clients who invested in such closed-end funds that are largely
stacked with bonds issued by the Puerto Rican government and its
agencies.
Some executives in the Puerto Rican brokerage industry have said
it was difficult to persuade clients to diversify because the tax
advantage, and in many cases the tax-exemption, of such funds had
long made their returns difficult to replicate with other
investments.
In its ruling Monday, the panel acknowledged that UBS brokers
were under pressure to sell the funds, as the firm underwrote many
of the funds.
The UBS spokesman said that investors in Puerto Rico municipal
bonds and closed-end funds "received excellent returns that
frequently exceeded the returns available through investments in
other bonds or bond funds" over the last 20 years.
"The funds have continued to pay a monthly dividend," he
added.
Write to Matthias Rieker at matthias.rieker@wsj.com
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