By Suzanne Barlyn
(Reuters) – UBS AG <UBS.N> must buy back an investor’s Puerto Rico bond fund portfolio for $1 million, securities arbitrators ruled on Tuesday in a rare, lengthy rebuke of the firm’s sales practices on the Caribbean island.
A Financial Industry Regulatory Authority (FINRA) arbitration panel in San Juan found two UBS units liable to the investor, Juan Burgos Rosado, whose losses in the now troubled closed-end funds sold by the firm’s Puerto Rico arm had reached $737,000 four years after he opened his account in 2011, according to the ruling, a copy of which was reviewed by Reuters.
Rosado, age 66 at the time, had invested years of savings from operating a bodega, the arbitrators wrote. The decision is unusual because it explains the reasons behind the ruling. The document will eventually become public on FINRA’s arbitration database.
Many of the Puerto Rico funds sold by UBS held concentrations of debt of the Caribbean island’s government and related entities. UBS is defending against hundreds of arbitration claims filed with FINRA, collectively seeking more than $900 million in damages.
Some of the funds lost half to nearly two-thirds of their value between March 2011 and October 2013, amid fears about the size of Puerto Rico’s debt burden and the weakness of its economy. They have failed to recover since.
“UBS is disappointed with the decision with which we respectfully disagree,” a spokeswoman said. She added the decision was not indicative of other cases, since it was based on the investor’s specific circumstances.
Over 20 years, the funds provided excellent returns, she said.
The ruling is among the first involving the risky securities. A FINRA arbitration panel, on May 14, ordered UBS AG to pay an investor $200,000 for losses in the funds..
FINRA, Wall Street’s industry-funded watchdog, runs the arbitration system in which investors and brokerages must resolve their legal disputes.
UBS “undertook an internal push” for its brokers to sell the funds in order to reduce its own inventory, the arbitrators wrote. UBS “solicited” Rosado to invest all of his money in the funds, which the firm said were appropriate for a well-balanced portfolio. The arbitrators wrote that Rosado was a “quintessential conservative investor, if ‘investor’ describes him at all”.
As the value of Rosado’s portfolio plunged, a UBS manager told him that “even a skinny cow could give milk,” the report said. Rosado “expressed concern that the cow would die,” but held on, arbitrators wrote.
“This is a well deserved award not only for this claimant but for many others similarly prejudiced by UBS’s actions,” Harold Vicente-Colon, a San Juan-based lawyer who represented Rosado, said in a statement.
(This story has been refiled to correct final paragraph to cite Rosado’s surname rather than middle name)
(Reporting by Suzanne Barlyn; Editing by Ken Wills)