UBS Puerto Rico, Others Tied to SEC Fraud Action
When the bond market collapsed in Puerto Rico many clients at UBS Financial Services Incorporated of Puerto Rico had significant losses. Many had purchased shares of UBS PR closed-end funds or CEFs. UBSPR had been selling shares of these funds for years. Indeed, the firm offered customers a number of CEFs and had served as the primary underwriter for 23 CEFs. The often highly leveraged securities are not eligible for margin and are not registered with the SEC. A number of the customers had purchased the CEFs with funds acquired from lines of credit obtained from BUSA, an FDIC insured Utah based bank affiliated with UBS. Those transactions violated UBSPR policies. The firm failed to supervise the broker who was charged with fraud. In the Matter of UBS Financial Services Incorporated of Puerto Rico, Adm. Proc. File No. 3-16846 (September 29, 2015).
Over a period of two year beginning in 2011 UBSPR, UBSPR registered representative Jose Ramirez, sold millions of dollars of CEFs to customers. At the same time he advised them to use LOC’s from BUSA to acquire the securities. The registered representative told customers that use of the LOC would permit them to make additional money. The rate for the LOCs was as low as 1.5%. In contrast, the CEFs were generating tax advantaged returns of over 6%. This represented a significant arbitrage opportunity. It would also increase his production and add to commissions.
Mr. Ramirez knew that the use of LOC funds to acquire securities was prohibited by UBSPR policy and the customer agreement with BUSA. To circumvent these restrictions Mr. Ramirez told customers to draw down the funds and transfer them to a different bank account. Then after a few days the money could be transferred to their brokerage account at UBSPR. Customers who questioned the procedure were told that since the funds were coming from another bank, they were not the same funds as those from BUSA. Therefore the transaction was not prohibited. By late 2013 Mr. Ramirez had executed over 200 customer trades using this strategy.
UBSPR failed to reasonable supervise, according to the Order. Although BUSA monitored transfer activity between UBSPR brokerage accounts for potential misuse of LOCs, UBSPR’s policy “did not implement any procedures concerning monitoring the proscribed and prohibited conduct when proceeds were transferred outside of UBSPR accounts,” the Order found.
UBSPR also failed to establish reasonable policies and procedures for follow-up on indications of misuse of LOCs. In August 2011 an operations manager questioned a series of transactions in the accounts of a Ramirez customer. She believed they may have resulted from the improper use of LOC proceeds to purchase securities. Her supervisor took the information to manager Ramiro Colon who presented the issue to Mr. Ramirez. He denied any impropriety. The inquiry was dropped. Weeks later the same operations manager noted a series of similar transactions with the same client. Although the issue was again presented to the supervisor it was not discussed with either Mr. Colon or Mr. Ramirez. These are significant lapses, according to the Order.
In 2013 the Puerto Rico bond market collapsed. Investors had significant losses – particularly the CEF holders since they were leveraged up to 50%. Following a customer meeting UBSPR conducted an internal investigation and uncovered the Ramirez scheme. The Order alleges violations of Exchange Act Section 15(b).
To resolve the matter the firm consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. The firm will also pay disgorgement of $1,188,149.41, prejudgment interest and a penalty of $13,637,653.62. See also In the Matter of Ramiro L. Colon, III, Adm. Proc. File No. 3-16847 (September 29, 2015)(action against branch manager for failure to supervise resolved with an order suspending him from any supervisory position or from participating in a penny stock offering for 12 months and imposing a penalty of $25,000); SEC v. Ramirez, Civil Action No. 3:15-cv-02365 (D. P.R. Filed September 29, 2015)(action alleging violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b) against the broker; it is in litigation). See Lit. Rel. No. 23369 (Sept. 29, 2015). In addition, see FINRA Press Release (Sept. 29, 2015)(regulator fined UBSPR $7.5 million for supervisory failures).