Erez Law recently filed a $600,000 FINRA arbitration against Morgan Stanley and Kestra Investment Services, LLC regarding Puerto Rico bond losses. The former customer alleges that Tom Puentes (CRD #1713812), who was a registered representative of Morgan Stanley and then Kestra Investment Services, LLC over concentrated the customer’s accounts, and an investment trust that he was a beneficiary of in high risk and unsuitable Puerto Rico bonds, causing devastating losses.
Puerto Rico suffers from long-term financial and economic deficiencies that rendered its credit increasingly more speculative. The deterioration of Puerto Rico’s financial condition culminated in its debt being downgraded to junk status or speculative (below investment grade). For the past several years, Puerto Rico has been struggling with compounding debt and economic decline. As a result, the value of Puerto Rico’s municipal tax-free bonds has considerably fallen. Since September 2013, when the steep decline in Puerto Rico bond values began, investors holding these bonds have suffered massive losses. In May 2017, Puerto Rico filed for bankruptcy protection from creditors in what is being described as the largest municipal bankruptcy filing in history.
To make matters worse, after Hurricane Maria devastated the island in September 2017, Puerto Rico debt fell by 4%, the biggest weekly drop since July 2015. This sharp fall came after Governor Alejandro García Padilla announced that Puerto Rico would ask bondholders to take less than what they were owed.
According to the statement of claim filed by Erez Law, it is alleged that Puentes presented himself as a financial advisor that had a conservative investment philosophy and strategy that emphasized insured municipal bonds of the highest credit quality.
The customer, a conservative municipal bond investor, entrusted Puentes and Morgan Stanley with the vast majority of his irreplaceable retirement savings. The customer repeatedly informed Puentes that he was a conservative investor interested in generating tax-free income from high quality fixed investments while preserving his principal for his account and that of the insurance Regrettably, Erez Law alleges that Puentes ignored the client’s and the insurance trust’s low risk tolerance and unnecessarily caused them significant, avoidable and unacceptable losses.
The customer was a client of Puentes for more than 25 years, and when Puentes changed employment from Morgan Stanley to Kestra Investment Services, LLC, the customer transferred his accounts to remain with Puentes. The client only recently found out that Puentes was fired from Morgan Stanley for unauthorized trades.
It is alleged that Puentes, Morgan Stanley and Kestra Investment Services, LLC recommended that the customers invest in high risk, uninsured and unsuitable Puerto Rico bonds. It is alleged that Puentes failed to obtain the required authorization prior to each of the numerous Puerto Rico bond purchases. Puentes did not have written discretionary authority to make trades in the customer’s accounts. As such, it is alleged that most or all of these trades were unauthorized and illicit.
It is alleged that Puentes failed to adequately explain the significant credit risks associated with the Puerto Rico bonds he recommended and/or purchased. Puentes also failed to adequately disclose the rapid credit degradation of the COFINA bonds including the multiple downgrades by the rating agencies. Instead, Puentes led the client to believe that the Puerto Rico bonds he recommended were secure and low risk investments. Puentes also disregarded his longtime understanding with the client of selling any bonds that presented with increased risk of future losses. By excessively concentrating the customer’s accounts and retirement savings in a single high risk bond issuer, Puentes further increased the level of risk to which the customer was unknowingly exposed.
It is alleged that Puentes repeatedly reassured the client that the Puerto Rico bonds were safe investments and that the client and the insurance trust should continue holding their Puerto Rico bonds and refrain from selling. When the client raised the mounting losses in the bonds in his accounts as reflected in his monthly statements, Puentes repeatedly reassured the client that he would not lose his principal, that it would be “OK” and that the government would resolve the credit issues to investors’ and his favor.
Puentes caused the customer more than $600,000 in losses in high risk, uninsured and unsuitable Puerto Rico bonds, and the client is no longer receiving interest on the investment. In addition to admittedly unauthorized purchases of Puerto Rico bonds, the bonds that Puentes purchased were unsuitable as Puerto Rico bonds were high risk, uninsured and unsuitable for the customer.
Puentes was registered with Morgan Stanley in Langley Washington from 2009 to 2014 when he was terminated due to concerns relating to his use of discretion without written authorization in connection with municipal bond transactions. Puentes has been registered with Kestra Investment Services, LLC in Woodland Hills, California since 2014.
According to the Acceptance, Waiver & Consent (AWC), Morgan Stanley prohibited registered representatives from exercising discretion, including time and price discretion, in commission-based accounts unless given prior written authorization from the customer and the firm. Discretion, or discretionary trading, occurs when a broker makes trades in customer accounts without the customer’s consent. It is also alleged that Puentes did not disclose his use of time and price discretion to Morgan Stanley when he responded to annual compliance questionnaires between 2010 and 2013. During this period, it is alleged that Puentes used time and price discretion in at least 14 customer accounts on approximately 220 occasions, violating Municipal Securities Rulemaking Board Rule G-17 that pertains to fair dealing. He was sanctioned to a 30-day suspension from November to December 2016 and $15,000 in civil and administrative penalty fines.
In addition to the case above, Puentes recently has been the subject of 22 additional customer complaints, four of which were denied and one was closed without action, between 2000 and 2017, according to his CRD report:
- July 2017. “Claimant alleged, inter alia, unsuitability with respect to municipal bond investments-2011-2014.” The case is currently pending.
- January 2017. “Complaint involving the suitability of a municipal bond investment sold in 2012 and 2013 through Morgan Stanley.” The complaint was closed without action.
- February 2016. “Client alleges purchases of pr bonds were unauthorized. June 2012 – March 2013.” The customer sought $101,501 in damages and the case was settled for $19,200.
- January 2016. “Client verbally alleged, inter alia, that the purchase of Puerto Rico bonds in account were unauthorized – December 2009- January 2015.” The case was settled for $57,500.
- January 2016. “Client verbally alleged that the purchase of Puerto Rico bonds in account were unauthorized – December 2009 to July 2013.” The case was settled for $20,000.
- October 2015. “Claimant alleged, inter alia, unauthorized trading and unsuitability with respect to purchases of municipal bonds in accounts – 2012 to 2013.” The customer sought $200,000 in damages and the case was settled for $52,500.
- September 2015. “Client Alleges unauthorized trading, inter alia, with respect to municipal (SP) bonds- August 2011 – September 2014.” The customer sought $85,000 in damages and the case was settled for $30,000.
- September 2015. “Client alleged, inter alia, that the purchases of Puerto Rico bonds in his account were unauthorized. Alleged damages (SP) unspecified 2010-2013.” The case was settled for $15,000.
- August 2015. “Client alleges, inter alia, that from October 2011 to July 2013 the FA purchased unsuitable Puerto Rico municipal bonds in the clients account without his authorization.” The customer sought $300,000 in damages and the case was settled for $125,000.
- July 2015. “Claimants allege, inter alia, that from 2012 through 2013 the FA made unsuitable purchases in the clients’ account.” The customer sought $160,000 in damages and the case was settled for $20,000.
- June 2015. “Claimants allege, inter alia, that from 2012 through 2013 the FA made unsuitable purchases in the clients’ account.” The customer sought $450,000 in damages and the case was settled for $100,000.
- June 2015. “Claimants allege, inter alia, that from December 2011 through April 2013 the FA made unsuitable purchases in the clients’ account.” The customer sought $216,084 in damages and the case was settled for $64,500.
- April 2015. “Client’s attorney alleged, inter alia, that investments purchased in the client’s account were unsuitable. 2013 damages unspecified.” The customer sought $236,547.36 in damages and the case was settled for $60,000.
- April 2015. “Client’s attorney alleged, inter alia, that investments purchased in the client’s account were unsuitable. 2013 damages unspecified.” The customer sought $236,547.36 in damages and the case was settled for $60,000.
- March 2015. “Clients’ allege, inter alia, that from December 2011 to November 2014 the Puerto Rico bonds purchased in the clients’ account were unsuitable.” The customer sought $111,138 in damages and the case was settled for $35,000.
- January 2015. “Claimant alleged, inter alia, that purchases of bonds in account were unauthorized and unsuitable – 2009 – 2013.” The customer sought $373,000 in damages and the case was settled for $99,000.
- March 2014. “Client alleges, inter alia, that there were unauthorized purchases of bonds in their account in 2013. Damages unspecified.” The case was settled for $35,000.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.
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