UBS Could Be Guilty of Possible Fraud: Reasons why Claims Against the Bank Have High Chances of Success

For a while, UBS had a good thing going in Puerto Rico. The bank acted as the adviser to the commonwealth’s Employees Retirement System when it proposed and underwrote a $2.9 billion bond issue for the pension agency in 2008. However, UBS did something else. They pushed half of those bonds into a package of closed-end mutual funds which they later sold exclusively to its customers in Puerto Rico. And like every good bank, it collected fees in every stage of the bonds issue.

The Risk

After a considerably profitable period for UBS, things are starting to fall away from the seam. The U.S territory is on a swan dive as a result of government debt crisis, and UBS is practically helping the government fall even further into debt. Its customers on the island of course bought themselves a ticket for the ride when they bought into UBS mutual fund seven years ago. Now the customers face potential liabilities as they have to cover the risk from the Puerto Rico saga.

Desperate customers have filed arbitration claims with the Finance Industry Regulatory Authority seeking over a billion dollars in damages from UBS. The customers claim misrepresentation on UBS part as the company sold the package claiming it was a high-income investment that would safeguard their investment.

Since the saga, UBS has closed down five offices, and nearly 60 of its 140 financial advisers have left the bank. Also, the banks brokerage holdings in the island have plummeted by an alarming 15% since 2010. What does this mean for customers who bought into UBS Puerto Rico package? Right now, most investors are licking their wounds. Customers cannot even sell the mutual fund because it has lost a significant portion of its value.

Going to the arbitrators has proven to be the most successful solution for the affected customers. In several cases, especially claims brought by senior citizens, the judges ruled that UBS grossly over-concentrated customers’ investment in the bond funds, which were unsuitable for senior citizens with no investing experience.

With as many as six arbitration claims ruled in the same way, UBS is facing a total payment liability of more than seven million dollars. However, this is not an indication of the direction other arbitration claims might take. But chances are high customers will recover their investments from the bank. Had UBS packaged the bonds into the mutual funds on the mainland, they would have had to contend with the Investment Company Act, which forbids such practices. So essentially, one can construe that UBS knew the kind of risk it was exposing its customers to, but still opted to sell the mutual bonds.

Why Claims Against UBS Might Succeed

In fact, it can be argued that UBS was solely after making money at the risk of its clients. This presents an enormous conflict of interest, and the matter should be investigated for possible fraud on the bank’s side. While selling the fixed-income mutual funds to customers, the bank had no regard for diversification or the appropriateness of the risk customers were exposed to, according to securities litigation experts.