by T. GormanPosted on Posted in SECActions

The Commission instituted proceedings against UBS Puerto Rico and two of its former senior executives alleging that misrepresentations were made in connection with the sale of shares in non-exchange traded closed end funds about the pricing and the market. The action involving UBS Puerto Rico or UBS PR settled. In the Matter of UBS Financial Services Inc. of Puerto Rico, Adm. Proc. File No. 3-14863 (Filed May 1, 2012). The proceeding against Respondents Miguel A. Ferrer, former CEO of UBS PR, and Carlos J. Ortiz, former Managing Director of Capital Markets of the subsidiary, did not. In the Matter of Miguel A. Ferrer, Adm. Proc. File No. 3-14862 (Filed May 1, 2012).

Since 1995 UBS PR, a subsidiary of UBS Financial Services, Inc., has been the primary underwriter of fourteen separately organized closed-end companies’ shares. Those companies had a market capitalization of about $4 billion. The firm was also co-managed nine offerings of similar fund shares. Those had a market capitalization of about $1 billion. The shares in the funds are not listed on an exchange or quoted by any quotation service. They are only available to residents of Puerto Rico. The majority of the funds held Puerto Rico municipal bonds. The firm is the only secondary dealer for the funds it underwrote. It is the dominant dealer for the others.

Fund share prices were effectively set by the UBS PR head trader. The firm priced the fund shares to maintain a high premium to net asset value or NAV throughout 2008 and early 2009. Nevertheless, customers were told that the prices were set through supply and demand. Those prices were also listed on the client account statements as “market values.” In fact that statement was false, according to the Order.

The reinvestment program for the funds was an important sales tool. Under this program investors could elect to receive dividend reinvestment shares at net asset value or NAV. Those shares could immediately be resold to UBS PR at the then existing market price which could earn a premium of up to 45% because of the manner in which the firm priced the fund shares.

By the spring of 2009 the parent firm concluded that the inventory of fund shares held by UBS PR was too large. The subsidiary was directed to reduce the inventory because it represented a potential risk to the firm. Subsequently, UBS PR regularly sold fund shares at prices which were below those reflected in pending customer sell order. The firm was undercutting customer orders, effectively preventing them from selling their shares.

From March to September 2009 UBS PR sold about 75% of its inventory to investors. Throughout the period the firm continued to misrepresent the manner in which it set secondary market prices and the liquidity of the market. The firm also did not disclose that it was withdrawing support from the market. By fall, when the inventory reduction was completed, market prices of certain funds declined by 10 – 15%. The Order as to the firm alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c).

The firm settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. In addition, to complying with its undertakings, the firm agreed to pay disgorgement of $11.5 million along with prejudgment interest and a civil penalty of $14 million.

The Order as to the two executives, alleges violations of Securities Act Section 17(a)(1), (2) and (3) and Exchange Act Section 10(b). It also claims that Messrs. Ferrer and Oritz substantially assisted UBS PR’s principal violations and willfully aided and abetted those violations. That action is proceeding to hearing.

Tagged with: , ,

by T. GormanPosted on Posted in SECActions

The Tenth Circuit Court of Appeals sustained the refusal of the district court to permit a defendant faced with a summary judgment motion in a Commission enforcement action to withdraw his invocation of the Fifth Amendment privilege not to testify. The Court declined, however, to rule on the question of whether the district court properly drew an adverse inference against the defendant, citing two conflicting cases on the point. SEC v. Smart, No. 11-4134 (10th Cir. Decided April 27, 2012).

The Commission’s action was brought against Brian Smart and his company, Smart Assets, LLC. It alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b), claiming essentially that Mr. Smart operated a Ponzi scheme.

During the investigation Mr. Smart was issued a subpoena to testify. He appeared with his counsel and declined to testify, citing his Fifth Amendment rights. The next day the SEC filed an action against him and his company.

During discovery the SEC scheduled his deposition. Mr. Smart failed to appear. He did however appear the next day when the testimony of his company was scheduled. He appeared confused about the reason for two depositions. After consulting with company counsel he invoked his Fifth Amendment right and declined to answer questions.

Approximately two months later the Commission moved for summary judgment. In its motion the SEC requested that an adverse inference be drawn against Mr. Smart based on his invocation of the Fifth Amendment. A request for a continuance by Mr. Smart was denied.

Subsequently, Mr. Smart retained counsel and, approximately five months later, filed a motion for summary judgment and a request to withdraw his assertion of the Fifth Amendment. Mr. Smart offered his affidavit in support of his motion. The SEC opposed the withdrawal of the Fifth Amendment, arguing that Mr. Smart had been dilatory and that it would be prejudiced because of a lack of opportunity to rebut the newly presented evidence.

The district court denied Mr. Smart’s motions. The court granted summary judgment in favor of the SEC. In making its ruling the court “inferred from his Fifth Amendment invocation that ‘he knowingly and purposely defrauded investors.’”

The Circuit Court affirmed, concluding that the withdrawal of the privilege is based on the facts and circumstances of the case. An example of an impermissible withdrawal is when the party invokes the privilege throughout discovery and then seeks to change position to support or defend a motion for summary judgment. This is because the opposing party is often placed at a significant disadvantage because of increased costs, delays and the need for further inquiry. On the other hand, where the party is pro se, unaware of the consequences of taking the Fifth and the opposing party has sufficient substitute evidence, withdrawal may be appropriate.

Here the Court concluded that Mr. Smart was “using the privilege to manipulate the litigation process.” Mr. Smart failed to appear for his deposition without explanation, did not respond to a suggestion that the proceeding be continued and consulted with company counsel before invoking the privilege. If there is a question about whether he understood the consequences of his action, it is dispelled by the fact that earlier Mr. Smart had taken the Fifth Amendment based on the advice of his counsel. Accordingly, it is clear that he understood the consequences.

Finally, the Court affirmed the grant of summary judgment in favor of the Commission. The SEC offered proof to support its claim. Since the agency presented a properly supported motion Mr. Smart had an obligation to respond. He failed. In view of that failure the Court concluded that it need not determine if the district court properly drew an adverse inference against him. In reaching this conclusion the Court cited Stichting Ter Behartiging van de Belangen v. Schreiber, 407 F. 3d 34, 55 (2nd Cir 2005) for the proposition that “’Even assuming that a jury might draw [an adverse inference from asserting the privilege against self-incrimination], however, we are required at summary judgment to draw all reasonable inference in favor of the non-moving party[.]’” (emphasis original). The Court followed that citation with one to SEC v. Colello, 139 F. 3d 674, 677-78 (9th Cir. 1998) for the proposition that “the district court did not error in drawing an adverse inference against defendant based on his Fifth Amendment invocation in a summary judgment proceeding because there was ‘additional evidence’ to support the SEC’s case.”

Tagged with: , ,