October 30, 2013 / 12:57 PM / 6 years ago

U.S. SEC judge throws out complaint against UBS Puerto Rico executives

SAN JUAN, Puerto Rico (Reuters) - A Securities and Exchange Commission judge dismissed a complaint against two top executives of UBS Puerto Rico as it prepares to fight off a flood of legal complaints prompted by local investor losses adding up to $4.5 billion so far this year.

Chief Administrative Law Judge Brenda P. Murray ruled on Tuesday that the SEC failed to prove its complaint against the executives, Miguel A. Ferrer, formerly chairman and chief executive of UBS Puerto Rico, a unit of Swiss bank UBS AG, and Carlos J. Ortiz, managing director of Capital Markets at UBS Puerto Rico, which is the U.S. territory’s largest securities dealer .

The two were accused of misleading investors to conceal a liquidity crisis and mask UBS’ control of the secondary market for 23 proprietary closed-end funds.

“I do not find that the preponderance of the evidence supports the division’s allegation that UBS PR, Ferrer, and Ortiz engaged in a fraudulent course of conduct or a scheme to mislead customers ... when they represented the funds as profitable, safe, and stable investments and that supply and demand were responsible for Fund prices,” Murray wrote.

“The record shows that the closed-end fund market in Puerto Rico was unique, but that it was based on the peculiarities of that sui generis market. The fund situation was odd compared to other securities in other markets, but the preponderance of the evidence is that in 2008-2009, there was a solid factual basis which showed the pricing of fund shares to be proper and legitimate.”

The SEC had alleged the UBS officials committed fraud by promoting the funds as good investments to clients, while the firm was selling its own shares because of concerns that its exposure posed too large a financial risk, undercutting clients’ sell orders in the process.

Murray found that “given the disclosures contained in the prospectus, brochures, and other literature, and its own trading practices, it was lawful for UBS PR to post firm bids that were below an open marketable customer order.”

Therefore, the judge said, UBS PR, Ferrer, and Ortiz did not engage in fraud, mislead customers and financial advisers or violate their fiduciary duties.

“Because I found no primary violations, all the aiding and abetting and causing charges do not stand,” she wrote.


“As the firm has maintained since first disclosing this investigation in 2010, the allegations against Mr. Ferrer and Mr. Ortiz were meritless, and the judge’s decision today confirms our position,” the company said in a statement.

The complaint, covering 2008-2009, was “a period of significant turmoil in the global financial markets,” UBS said in the statement.

UBS Puerto Rico is in the midst of another closed-end fund headache, facing a flood of lawsuits and regulatory inquiries after a sharp downturn in the value of Puerto Rico government bonds. It resulted in big losses for investors in closed-end funds, whose holdings consisted largely of Puerto Rico government bonds.

In May 2012, UBS Puerto Rico agreed to pay $26.6 million to settle SEC charges related to misrepresenting and omitting material facts about its Puerto Rico closed-end bond funds, but Ferrer and Ortiz contested the charges.

Investors lost $2.25 billion in September 2013 alone through funds invested in Puerto Rico government bonds and other island-based securities, as their overall value fell to $7.31 billion from $9.56 billion, according to the Puerto Rico Financial Institutions Commissioner’s Office.

The losses on Puerto Rico bond and securities investments add up to $3.7 billion so far this year, according to the commissioner’s office. The figure balloons to $4.52 billion when non-local fund investments are added in.

Local losses may not have stopped. There is little or no liquidity in the closed-end fund market, Financial Institutions Commissioner Rafael Blanco said. The lack of liquidity is exacerbated by rules requiring the tax-exempt funds only be sold to Puerto Rico residents.

In all there are 48 funds, known as investment companies, in Puerto Rico, with combined assets of $15 billion, according to local press reports.

Reporting by a Reuters correspondent in San Juan; Editing by Jane Sutton and Jeffrey Benkoe

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