Investors who purchased these bonds, either directly or via closed-end bond funds created by financial firms like UBS, have felt the sting of the losses. The losses have been particularly frustrating in these funds as investors typically look to municipal bonds as relatively safe, stable investments.
To date, Puerto Rico has defaulted on over $200 million in bond payments and rating agencies have downgraded Puerto Rican municipal bonds to below investment grade, or “junk,” bond status. Obviously, therefore, the value of Puerto Rico’s municipal bonds (and any corresponding closed-end bond funds) has fallen dramatically. Making matters worse, many investors were overly-concentrated in the bonds based on their brokers’ promise that these were stable and safe investments.
Various regulatory bodies, like FINRA, have brought allegations against UBS related to its sales of Puerto Rico bond funds. These bodies have found that UBS failed to adequately supervise its clients’ accounts, leading to an over-concentration of municipal bond purchases. This lack of supervision, coupled with the unsuitability of the purchases, has led to significant losses for investors.
How Major Brokerage Firms Failed Their Clients
The Sales Pitch vs. Reality
Major financial institutions marketed Puerto Rico municipal bonds and related closed-end funds as conservative, income-generating investments suitable for retirees and risk-averse investors. The reality was starkly different:
What brokers promised:
- “Safe, stable municipal bonds”
- “Government-backed security”
- “Tax-free income”
- “Conservative investment suitable for retirement portfolios”
What investors actually got:
- Highly speculative debt from a financially unstable government
- Concentrated exposure to a single, distressed issuer
- Illiquid investments that couldn’t be easily sold
- Devastating losses in supposedly “safe” portfolios
The Supervision Failures
Financial Industry Regulatory Authority (FINRA) investigations revealed systematic failures across major firms:
UBS: The most heavily sanctioned firm, with regulators finding the company failed to adequately supervise representatives who concentrated client portfolios in risky Puerto Rico paper. Some clients had 50% or more of their portfolios in Puerto Rico-related investments.
Industry-wide problems included:
- Inadequate risk assessment procedures
- Failure to monitor portfolio concentration levels
- Insufficient due diligence on Puerto Rico’s deteriorating finances
- Misleading marketing materials that downplayed risks
Your Legal Rights: Understanding the Claims Framework
The Legal Foundation for Investor Claims
If you suffered losses from Puerto Rico municipal bond investments, you may have valid claims based on several legal theories:
1. Negligence and Breach of Fiduciary Duty
- Brokers have a legal obligation to recommend suitable investments
- Failure to adequately research Puerto Rico’s financial condition
- Recommending unsuitable investments for conservative investors
2. Failure to Supervise
- Firms must monitor their representatives’ recommendations
- Inadequate oversight of portfolio concentration levels
- Lack of proper risk management protocols
3. Misrepresentation and Omission of Material Facts
- Failing to disclose known risks about Puerto Rico’s finances
- Overstating the safety and stability of the investments
- Omitting material information about liquidity risks
4. Unsuitability
- Recommending high-risk investments to conservative investors
- Creating excessive concentration in a single issuer
- Ignoring client investment objectives and risk tolerance
The Arbitration Process
Most brokerage accounts require disputes to be resolved through FINRA arbitration rather than court litigation. This process:
- Typically takes 12-18 months from filing to resolution
- Uses industry experts as arbitrators who understand securities law
- Has proven successful for many Puerto Rico bond investors
- Allows recovery of losses plus interest and sometimes attorneys’ fees
Which Firms Are Facing Claims?
Major brokerage firms that sold Puerto Rico municipal bonds and related products include:
Primary Targets for Claims:
- UBS: Faced the largest regulatory fines and has paid significant settlements
- Merrill Lynch: Heavily marketed Puerto Rico closed-end funds
- Morgan Stanley: Significant exposure through bond sales and fund offerings
- RBC Securities: Promoted Puerto Rico investments to clients
- Wells Fargo: Sold bonds and funds through various platforms
The Settlement Landscape
Many firms have already paid substantial settlements:
- UBS has paid hundreds of millions in settlements and fines
- Other major firms have resolved thousands of claims
- Recovery rates vary but many investors have recovered significant portions of their losses
Taking Action: What You Need to Know
Time Is Critical
FINRA arbitration claims must generally be filed within six years of the investment or three years of discovery of the problem. Given that Puerto Rico’s crisis peaked in 2017, the window for filing claims is narrowing.
Gathering Your Documentation
Essential documents include:
- Account statements showing Puerto Rico bond purchases
- Marketing materials and research reports provided by your broker
- Communications with your financial advisor
- Records of investment objectives and risk tolerance discussions
The Path Forward
If you invested in Puerto Rico municipal bonds or related closed-end funds and suffered significant losses, you may be entitled to compensation. The combination of regulatory findings, successful arbitration awards, and ongoing settlement negotiations suggests that many investors have viable claims against their brokerage firms.
The Puerto Rico municipal bond crisis serves as a stark reminder that even investments marketed as “safe” can carry hidden risks—and that when financial firms fail in their duties to clients, there are legal remedies available.
Get in Touch With the Frankowski Firm
The Frankowski Firm provides comprehensive representation on behalf of investors who have lost money because of the collapse of Puerto Rico’s municipal bonds. If you or someone you know has lost money or was misled into the purchase of a Puerto Rico municipal bond or related bond fund, while a UBS customer or otherwise, please call The Frankowski Firm at 888.741.7503 or fill out this contact form.
Read related article: Puerto Rico Municipal Bonds Have Led to Serious Investor Losses