In March 2018, Erez Law obtained an award (view here) against UBS Financial Services Incorporated and UBS Financial Services Incorporated of Puerto Rico (“UBS”) in a FINRA arbitration for $1.88 million for losses sustained from investments in closed-end bond funds sold through UBS and in Puerto Rico municipal bonds. The investors were clients of financial advisor David Lugo (CRD# 3109426). Lugo was registered with UBS in San Juan, Puerto Rico from 2002 to 2015.
This is the third award against UBS that Erez Law founding partner Jeffrey Erez, Esq. has obtained. This trial lasted 8 days. “We are very pleased that the arbitrators rendered a strong award in favor of our clients. The evidence against UBS was overwhelming,” says Jeffrey Erez, Esq.
The Erez Law client, an elderly couple who were residents of Puerto Rico, entrusted their savings and retirement account with Lugo and UBS. The couple, who were long-time investors, informed Lugo that they were conservative investors.
Lugo and UBS recommended high-risk and unsuitable investments. Lugo recommended that the elderly couple invest the majority of their irreplaceable retirement savings in high risk and unsuitable proprietary closed-end funds (CEFs) that invested in Puerto Rico bonds, as well as direct investments in Puerto Rico bonds. The UBS Funds are only available to residents of Puerto RIco, and the illiquidity risk of the Funds was always inherently exceedingly high given the limited amount of qualified buyers.
The Puerto Rico CEFs are organized as Puerto Rico corporations and are not registered with the Securities and Exchange Commission and are not traded on an exchange. The Puerto Rico focused CEFs are only available to Puerto Rico residents, and given the very limited amount of qualified buyers, these CEFs’ liquidity risk was always inherently exceedingly high. Furthermore, the Puerto Rico focused CEFs are leveraged. The funds are generally permitted to borrow up to 100% of their equity, permitting the fund to hold $2 of securities for every $1 of capital invested in the funds. The funds pay to their shareholders the difference between their borrowing cost and the interest received on their holdings. The distributions paid by the Puerto Rico focused CEFs are mostly tax-free.
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.
UBS repeatedly assured the investors that the CEFs and the Puerto Rico bonds were safe and investments.
UBS recommended an extreme and dangerous level of concentration, which lacked any material diversification. This strategy of over concentrating the couple’s funds in levels and Puerto Rico focused UBS funds and direct investments in Puerto Rico bonds exposed the couple to a high degree of undisclosed risk and was unsuitable given their investment objectives.
As the couple’s investments declined in value, and the client voiced concerns, Lugo reassured the couple that there was nothing to worry about, that the price of the CEFs and Puerto Rico bonds will recover, and that they would continue to pay the same dividends. Lugo recommended to the couple that they hold and to refrain from selling. UBS caused the couple to lose a significant percentage of their funds, resulting in combined capital losses of $3 million.
Regrettably, the above case is not an isolated incident. Lugo has been the subject of 164 customer complaints between 2002 and 2018, according to his CRD report. There are 100 settled cases, most having to do with losses in connection with bonds, closed-end funds, and stocks and bonds tied to Puerto Rico municipal bonds ranging from $6,977.54 and up to $11,044,945, with some settlements in the middle including, $180,000, $250,000, $360,000, $450,000, $550,000, $895,000, $1,250,000, $1,400,000, $3,000,000, $3,500,000, $3,850,000 and $8,983,230, among many others. There have been three awards/judgements against Lugo in May 2014, May 2014 and October 2013 in the amounts of $4,029,731.11, $2 million and $702,003.
Six cases were denied and 54 cases are still pending, including:
- February 2018. “Time frame: December 2012-Present Claimants allege their investment in proprietary closed-end funds and Puerto Rico bonds were unsuitable and overconcentrated. They further allege that these investments were misrepresented to them. Finally, they allege that the recommendation to hold the investments was unsuitable.” The customer is seeking $713,434.83 in damages and the case is currently pending.
- February 2018. “Time frame: Unspecified Claimants allege misrepresentations, unsuitability, and over-concentration concerning their investments in closed-end funds and Puerto Rico municipal bonds.” The customer is seeking $415,000 in damages and the case is currently pending.
- February 2018. “Time frame: Unspecified Claimant alleges misrepresentations, unsuitability, and over concentration concerning her investments in closed-end bond funds.” The customer is seeking $300,000 in damages and the case is currently pending.
- February 2018. “Time frame: 2011 through present Claimant alleges misrepresentations, unsuitability, and over concentration concerning its investments in Puerto Rico municipal bonds.” The customer is seeking $1,500,000 in damages and the case is currently pending.
- February 2018. “Time frame: Unspecified Claimants allege misrepresentations, unsuitability, and over-concentration concerning their investments in closed-end funds and Puerto Rico municipal bonds.” The customer is seeking $1,300,000 in damages and the case is currently pending.
- December 2017. “Time frame: 2006 through present Allegations: Claimants allege misrepresentations, unsuitability, and over-concentration concerning their investments in closed-end funds and Puerto Rico municipal bonds.” The case is currently pending.
- December 2017. “Time frame: Unspecified Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in Puerto Rico municipal bonds and common and preferred stock issued by Puerto Rico banks.” The customer is seeking $290,000 in damages and the case is currently pending.
- December 2017. “Time frame: 2005 through present Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in closed-end funds.” The customer is seeking $225,000 in damages and the case is currently pending.
- December 2017. “Time frame: unspecified Allegations: Claimants allege their investments in Puerto Rico closed-end funds and municipal bonds were unsuitable, over concentrated, and misrepresented as safe investments.” The customer is seeking $115,000 in damages and the case is currently pending.
- December 2017. “Time frame: Unspecified Allegations: Claimant alleges his investments in Puerto Rico closed-end funds and government bonds were unsuitable, over-concentrated, and misrepresented as safe investments.” The customer is seeking $500,000 in damages and the case is currently pending.
- December 2017. “Time frame: Unknown — Present Claimants allege their investments in Puerto Rico closed-end funds were unsuitable, over concentrated, and misrepresented as safe investments.” The customer is seeking $700,000 in damages and the case is currently pending.
- November 2017. “Time frame: 2012-2015 Claimant’s Counsel alleges unsuitability, misrepresentation and over concentration in Puerto Rico municipal bonds and also alleges recommendation to hold.” The customer is seeking $20,000,000 in damages and the case is currently pending.
- November 2017. “Time frame: Unspecified Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in closed-end funds and other Puerto Rico securities.” The customer is seeking $5,700,000 in damages and the case is currently pending.
- November 2017. “Time frame: unspecified Allegations: Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in closed-end funds and Puerto Rico municipal bonds.” The customer is seeking $6,000,000 in damages and the case is currently pending.
- September 2017. “Time frame: 2013-present Claimants allege their investments in Puerto Rico closed-end funds and municipal bonds were unsuitable, over concentrated, and misrepresented as safe investments.” The customer is seeking $969,626 in damages and the case is currently pending.
- August 2017. “Time frame: 2012-2015 Claimants allege unsuitability, misrepresentations, and over-concentration concerning their investments in Puerto Rican municipal bonds.” The customer is seeking $90,000,000 in damages and the case is currently pending.
- June 2017. “Time frame: unspecified Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in Puerto Rico municipal bonds.” The customer is seeking $1,500,000 in damages and the case is currently pending.
- June 2017. “Time frame: unspecified Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in closed-end funds and Puerto Rico municipal bonds.” The customer is seeking $1,700,000 in damages and the case is currently pending.
- May 2017. “Time frame? Not stated Claimant’s Counsel alleges misrepresentations and unsuitable recommendations resulting in the overconcentration of the clients accounts in CEFs.” The customer is seeking $15,000,000 in damages and the case is currently pending.
- January 2017. “Time frame: unspecified Claimant alleges misrepresentations, unsuitability, and over concentration concerning his investments in closed-end funds and Puerto Rico municipal bonds.” The customer is seeking $8,500,000 in damages and the case is currently pending.
- February 2016. “Claimant alleges misrepresentations, unsuitability, and over concentration concerning his investments in closed-end funds and Puerto Rico municipal bonds. Time frame: unspecified.” The customer is seeking $3,038,418.82 in damages and the case is currently pending.
- September 2015. “Time frame: unspecified Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in closed-end funds.” The customer is seeking $2,257,543.55 in damages and the case is currently pending.
- September 2015. “Time frame: 2006-2015. Claimants allege misrepresentations, unsuitability, and over concentration concerning their investments in Puerto Rico municipal bonds and closed-end bond funds.” The customer is seeking $3,265,000 in damages and the case is currently pending.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, UBS may be liable for investment or other losses suffered by Lugo’s customers.
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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