Erez Law Files Claim for $675,000 by Morgan Stanley Financial Advisor Tom Puentes for Puerto Rico Bond Losses

Erez Law recently filed a $675,000 FINRA arbitration against Morgan Stanley Smith Barney LLC (Morgan Stanley).

Their customer alleges that Tom Puentes (CRD #1713812) caused them massive losses in high risk, uninsured and unsuitable Puerto Rico bonds.

The Erez Law client is a couple who are described as conservative municipal bond investors. The couple was interested in generating tax-free income from high quality fixed-income investments while preserving his principal. They were clients of Puentes for more than 25 years.

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 couple entrusted Puentes and Morgan Stanley with the vast majority of their irreplaceable retirement savings.

According to the statement of claim filed by Erez Law, it is alleged that Puentes ignored the couple’s low risk tolerance and unnecessarily caused them significant, avoidable and unacceptable losses. Puentes recommended high risk and uninsured Puerto Rico bonds, presenting the bonds as special dedicated revenue bonds that were high quality investments. Puentes did not disclose any risk of loss.

In 2012 to 2013, Puentes purchased without authorization $675,000 of high risk, uninsured and unsuitable Puerto Rico bonds in the couple’s account. Specifically, he recommended uninsured and subordinated bonds issued by the Puerto Rico Sales Tax and Financing Corp (COFINA). Today, these bonds are worth a mere 20% of their purchase cost and have since defaulted. The couple is also no longer receiving interest from the near worthless COFINA bonds. Puentes did not discuss purchases with the couple in advance of each trade, and it is alleged that Puentes failed to obtain authorization prior to each of the numerous Puerto Rico bond purchases and trades, as such these trades were unauthorized and illicit.

Erez Law alleges that Puentes recommended and/or purchased without authorization approximately $675,000 in high risk, uninsured and unsuitable Puerto Rico bonds. It is alleged that Puentes failed to explain the significant credit risks associated with the Puerto Rico bonds he recommended and purchased. Instead, Puentes led the couple to believe that the Puerto Rico bonds he recommended were secure and low risk investments. It is also alleged that Puentes disregarded the longtime understanding with the couple of not investing in excess of 5% of the account with a single issuer. In this case, Puentes recommended and implemented an unsuitable strategy of investing in excess of 30% of the account in a single troubled issuer. It is alleged that Puentes’ strategy of over-concentrating the couple’s retirement savings in a single high-risk bond issuer was grossly unsuitable.

Even when the customer raised the mounting losses in the COFINA bonds account, Puentes repeated reassured the couple that they would not lose principal, it would work out, and that the government would resolve the credit issues to investors in their favor. In order to induce the couple to hold, Puentes represented to the couple that the COFINA bonds were safe because the bonds were tied to sales tax revenue which was sufficient to meet its obligations.

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.

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 24 additional customer complaints, four of which were denied and two were closed without action, between 2000 and 2017, according to his CRD report:

• February 2018. “Claimant alleges, unauthorized trading with respect to bond transactions between 2012 and 2014.” The customer is seeking $600,000 in damages and the case is currently pending.
• February 2018. “Claimant alleging, Inter alia, unsuitability with respect to investments 2011 to 2012.” The case is currently pending.
• July 2017. “Claimant alleged, inter alia, unsuitability with respect to municipal bond investments-2011-2014.” The case is currently pending.
• 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.