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 Their misgivings became so great that when a group of brokers was
asked by the firm why they weren’t selling more of the funds’ shares
they came up with a list of 22 reasons, according to people familiar
with the matter. The concerns, which the brokers said were based on
their own views and feedback from clients, included allegations the
funds suffered from low liquidity, excessive leverage, oversupply
and instability. They were wary, in part, because many of the funds
were loaded up with debt of the Puerto Rican government and related
entities that was underwritten by UBS, the people said.
Their views were unacceptable to Miguel Ferrer, then the chairman of
UBS Financial Services Inc of Puerto Rico, a unit of UBS AG. On June
2 of that year he told a meeting of the firm’s brokers, held at its
offices in the Golden Mile banking district of San Juan, they had to
change their mindset or leave, according to an audio recording
reviewed by Reuters.
“You need to focus again on the attractive benefits of our funds and
stop this nonsense that there are no products available – because if
there are no products, go home, get a new job!” Ferrer can be heard
telling them in Spanish in the recording, which was made by one of
those attending.
Ferrer stressed that the brokers had almost $1 billion in cash in
their clients’ accounts that was not generating commissions. He said
the team’s production had dropped “40-something-percent” (a figure
now disputed by UBS that says it was closer to 10 percent), that
“overall we are doing quite badly” and it was “bullshit” for brokers
to claim there weren’t products to sell.
The recording could help to bolster arbitration claims filed with
the Financial Industry Regulatory Authority in the U.S. by hundreds
of investors seeking more than $900 million in damages from UBS,
said Andrew Stoltmann, a Chicago-based lawyer representing some of
the investors. The claims are based on allegations UBS Puerto Rico
pitched the funds’ high yields and tax benefits to clients, but did
not tell them about the risky nature of the investments, according
to Stoltmann. UBS also put its own financial interests ahead of its
clients by steering clients to funds containing bonds underwritten
by UBS, he said.
The bank said it does not comment on pending litigation.
A spokeswoman for UBS in New York, Karina Byrne, said the firm
believed the funds they were selling were a sound investment that
had provided investors strong returns in the past as well as tax
benefits.
UBS, which was provided with key parts of the recording, declined to
confirm their authenticity or say whether it reviewed them.
Ferrer, through his lawyer, provided Reuters with his own English
translation of his comments on the recording.
He said in a statement that UBS funds have provided attractive
investment opportunities for certain investors at various times over
the past 20 years. “However, as I reminded the financial advisors
both during and after the sales meeting, it was and is up to each
financial advisor to recommend only those financial products that
are suitable to their individual customers’ needs,” said Ferrer, who
left UBS last July in a restructuring.
Some of the funds lost half to nearly two-thirds of their value
between March 2011 and October 2013, and have failed to recover
since. To be sure, a few of the funds with AAA-rated debt, such as
Fannie Mae mortgage bonds, are higher now than they were in March
2011.
The investors in the arbitrations include 88-year-old widow Mabel
Ladicani and her daughter, Vanessa Hernandéz, who claim that in
October 2011, UBS broker Antonio Lopez switched money they had
invested in a fund of mostly AAA-rated Puerto Rican debt into one of
the riskier debt funds that UBS was selling.
Ladicani, who runs a fabric store in San Juan, said she does not
remember agreeing to the change. Her investment dropped by more than
half to $196,500 from an earlier $400,000 in a two-month period in
the middle of 2013, according to her Houston-based lawyer Samuel
Edwards. Ladicani, who also took a loan from UBS for a property
purchase with the fund shares as collateral, says the losses ended
her hopes of retirement. “I can’t sleep – it changes your life,” she
said. "I still work in the store every day.”
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UBS declined to discuss Ladicani’s case. Lopez did not return calls
seeking comment.
The recording of Ferrer’s comments could become evidence in two
whistleblower complaints involving the funds filed at the U.S.
Securities and Exchange Commission, a person familiar with the cases
said. An SEC spokeswoman declined to comment.
Reuters reported last June that the FBI was investigating
allegations that some UBS Puerto Rico clients were improperly
directed to borrow money from another UBS unit to buy the fund
shares. It is unclear if that probe is still continuing. An FBI
spokeswoman declined to comment.
Many of the funds were highly concentrated in the debt of the
Caribbean island’s government and related entities. But they were
being sold at a time when there were already fears about the size of
Puerto Rico’s debt burden and the weakness of its economy.
The debt picture has deteriorated further since. The island has more
public debt per capita than any U.S. state and its pension funds for
government employees are severely underfunded.
A senior broker who spoke at the 2011 meeting, Ramon Almonte, told
the brokers that Puerto Rico’s “fiscal and credit situation has
gotten miraculously better” and that the firm has to stop “being an
agent of fear, of panic,” according to the recording. At the time,
there had been some modest improvements in the island’s outlook,
including an upgrade of Puerto Rico’s credit rating by Standard &
Poor’s, though the pickup didn’t last.
Almonte, whose voice on the recording was identified by another
person who attended the meeting, can be heard on the tape saying it
was important that brokers try to dissuade those wanting to sell the
fund shares.
Almonte, who still works for UBS, said in a statement that the funds
had been very good products for the bank's clients.
At the time of the meeting, Ferrer and UBS Puerto Rico were the
subject of an earlier SEC probe into its sales tactics for the same
group of funds in 2008-2009. UBS paid a $26.6 million penalty in
2012 to settle allegations that it had offloaded shares in the funds
from its own balance sheet before filling its customers' sell
orders. The bank neither admitted nor denied the allegations.
Ferrer and another UBS executive, Carlos Ortiz, fought the case and
they were later cleared of wrongdoing by an SEC administrative judge
in 2013. The judge found that they had not misled customers or
engaged in fraud, and also said the SEC had not adequately proven
parts of its case. UBS did not seek to modify the prior settlement,
a spokesman said.
(Reporting By Suzanne Barlyn; Additional Reporting by Rodrigo Campos
and Edward Krudy; Editing by Charles Levinson and Martin Howell)
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