NEW YORK, July 29 UBS AG is facing
claims of more than $600 million from clients who say the bank
is responsible for losses they incurred on investments in risky
Puerto Rico debt, UBS said in its quarterly report on Tuesday.
The predominantly older investors sued UBS in May, claiming
a former broker in Puerto Rico directed clients to borrow money
to buy mutual funds whose value plunged because of the
commonwealth's fiscal woes.
U.S. authorities are also probing UBS for criminal fraud
over the matter, lawyers representing some of the investors said
in June. At issue is whether UBS executives knew proceeds from
loans made by a Utah unit of the Swiss bank were used in a way
that violated its own lending rules.
"Declines in the market prices of Puerto Rico municipal
bonds and of UBS Puerto Rico sole-managed and co-managed
closed-end funds since August 2013 have led to multiple
regulatory inquiries, as well as customer complaints and
arbitrations with aggregate claimed damages exceeding USD $600
million," the quarterly report said.
The complaint filed in Manhattan federal court said UBS
exacerbated the problem by using leverage in the funds. It said
the bank encouraged clients to take out $500 million of costly
loans to invest in the funds, when they were at an age when they
should have opted to preserve capital ahead of retirement.
The quarterly report said an internal review showed some
clients, acting on the recommendation of one financial advisor,
invested proceeds of loans in closed-end funds which was in
contravention of their loan agreements.
Puerto Rico's economy has been in or near recession for
eight years, and its debt was cut to junk status this year by
the three major U.S. credit rating agencies. The commonwealth is
expected to start restructuring some of its debt this year with
concurrent losses for bond holders.
Separately, UBS said its U.S. brokerage business has $24
million of loans to investors that it considers "impaired"
because they are collateralized by Puerto Rican municipal bonds
and related funds.
The U.S. brokerage unit, which has been encouraging its
7,000 financial advisers to sell mortgages and other loans
backed by securities portfolios to wealthy clients, ended the
second quarter with $660 million of loans collateralized by
Puerto Rico securities and closed-end funds. That is down from
$814 million three months earlier, primarily because of share
buybacks by some of the closed-end funds.
(Reporting by Edward Krudy; additional reporting by Jed
Horowitz; Editing by David Gregorio)