I generally have stayed off of topics dealing with the financial industry because, let’s face it, it’s an easy target. We’ve witnessed one round after another of improprieties bordering on blatant theft from banks, investment firms, and financial advisors. Everyone seemingly has been touched in one-way or another by the extraordinary greed, deception and flawed financial products that have been the financial industry of late.
Yet, as has been noted across the media landscape, very little has changed. In fact, just today the New York Times reported that Goldman Sachs might not make quite as much profit this year. We can all weep silently.
However, the claim against UBS bond funds filed recently by Peter Mougey at the Levin, Papantonio law firm is such an astonishing example of sheer greed, diversion and manipulation that certainly deserves to be written about.
Created To Provide Financial Gain – For UBS alone.
To the investors in the 23 closed-end funds marketed by UBS as bond funds, their funds were characterized as safe and secure. They offered consistent income, without high risk. This is generally considered the nature of bond investment.
UBS-PR (Puerto Rico) was an underwriter and dealer for the UBS funds, and received financial compensation for taking this on – a sizable sum overall. In the case of UBS-PR, the commissions that investors paid through the banks’ retail brokerage units actually paid twice the commissions of other securities.
Behind all this – and what investors did not realize – is that these funds were the largest single source of income for UBS—PR. Their investments generated over 50% of the annual total revenues for UBS-PR and UBS Trust combined.
With numbers like that to make, it was clearly in UBS interest to maximize its own financial gain in as many ways possible. So they did.
Why Investors Bought In
To investors in Puerto Rico, the funds were attractive because the income earned on their investments was tax-free – with the caveat that at least 67% of the funds’ holdings were Puerto Rican securities. As a closed-end fund with only a finite number of shares that could be distributed, the value of these assets depended on supply and demand. That would, in theory, optimize the potential gains of the funds presuming that they attracted their fill of other investors. Given that Puerto Rico is a small island, with limited numbers of investors, in an economy that was dubious at best, this was risky business from the beginning.
The Set Up
The UBS-PR Funds were, in fact, far riskier than the average closed-ends municipal funds. They were neither traded on an exchange nor quoted on any quotation service. They weren’t even registered with the Securities and Exchange Commission (“SEC”). To maintain this exemption, the funds could only be sold to residents of Puerto Rico. Once outside the island, the shares would lose their market. And investors were encouraged to buy securities on lines of credit, which worked to provide UBS-PR the benefit of added commissions while investors put money they did not even have on the line.
Further, while most closed-end funds have a limited leverage ratio – 33% – not so for the UBS-PR funds. Instead, these funds have a 50% leverage ratio that ends up doubling the impact that security losses have on investors.
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The funds claimed to be diversified – they were not. Instead the funds were invested in only two Puerto Rican Issuers. Investors invested in Puerto Rico, a government gripped by a fiscal crisis that magnified the effect of such a limited portfolio. And UBS had substantial conflicts of interest. All in all, at every level and every opportunity UBS managed to find a way to make more money on the backs of this very tenuous bond fund.
As UBS Profited, Life Savings Are Lost
In a recent piece on the UBS-PR story, Investment News let us hear from just one of the hundreds of people who have lost nearly everything as a result of UBS greed and deceptions. It’s the story of a 70-year-old retiree; a woman who invested her entire $500,000 portfolio in these proprietary closed-end funds, along with the individual municipal securities that were contained inside the funds she already owned.
She was encouraged, she says, to open a line of credit with UBS in order to buy her home. She is now selling the portfolio to cover the equity line she took out. The woman relied on the income from the municipal holdings to pay for her retirement. UBS has been liquidating the holdings to pay interest on margin loans.
Criminal Fraud And The Lawsuit That Will Help Those Whose Savings Were Lost
Reuters reported earlier this year of the criminal investigation that was opened in relation to the UBS-PR funds. Regardless of the outcome of this federal investigation, there are hundreds of people suffering at the hands of yet another financial entity taking advantage of the investors at every possible turn.
There will be more to the story, no doubt. I will write more as additional facts become available.
Ellen Barnett is a frequent contributor to Ring of Fire Radio