UBS Financial Services of Puerto Rico Named in FINRA Arbitration Seeking Damages For Losses in Puerto Rico Municipal Bonds Bought on Margin

A prominent Puerto Rico family has filed a FINRA arbitration claim against UBS Financial Services of Puerto Rico for approximately $22 million in losses sustained in Puerto Rico municipal bonds purchased on margin through the UBS Puerto Rico Family of Funds.

Victor Gomez Garcia, his wife Socorro Horta Mendez, his daughter Madeline Gomez Horta, and his son Victor Gomez Horta also named UBS Financial Services, Inc., Jose M. Ramirez, Carlos Freire-Borges, UBS Bank USA, Carlos Ubinas, and Doel Garcia as respondents in their FINRA arbitration claim seeking damages related to losses in closed-end bond funds known as the UBS Puerto Rico Family of Funds.

The FINRA claim alleges that the Garcia family sought a safe, diversified, fixed income portfolio, but instead UBS Financial Services of Puerto Rico implemented a risky and highly-leveraged strategy focused on the UBS Puerto Rico Family of Funds. The claim also alleges that UBS and its brokers compounded the risk of the Puerto Rico municipal bond investments by using the proceeds of loans obtained from UBS Bank USA to purchase additional shares of the UBS Puerto Rico municipal bond funds.

According to the FINRA claim, initially, the interest due on the loans was lower than the dividends paid on the UBS Puerto Rico Family of Funds investments resulting in a positive return to the investors. However, according to the Garcia family, that all changed when the value of the investments holding Puerto Rico municipal bonds dropped in 2013.

When the Puerto Rico municipal bond market suffered a huge downturn in 2013, the value of the UBS Puerto Rico Family of Funds fell accordingly. According to Caribbean Business, some of the funds have lost half of their value. According to marketing materials for the UBS Puerto Rico Family of Funds, the funds can have up to 50% leverage, meaning for every two dollars of assets in the fund, one dollar comes from investor funds, the other dollar is borrowed. According to the FINRA Statement of Claim, this resulted in double-leverage on the investments: the leverage used by UBS in formulating the Puerto Rico municipal bond fund holdings and the leverage used by the investors in purchasing the Puerto Rico municipal bond funds.

Victor Garcia, a retired automotive dealer executive, and his family are seeking actual damages of approximately $22 million, plus $5 million in punitive damages in the FINRA arbitration.

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