The Swiss-based financial services and wealth management giant has agreed to settle the charges brought by the U.S. Securities and Exchange Commission. As part of the settlement, UBS will pay $26.6 million towards a fund that will go to investors affected by the scheme. That includes $11.5 million in disgorgement; a $14 million penalty and $1.1 million in pre-judgment interest.
UBS Puerto Rico, which also allegedly misrepresented those funds’ risks to its own financial advisors, has neither admitted nor denied the findings in the case.
The SEC’s administrative proceedings against UBS Puerto Rico also include its vice chairman and former chief executive Miguel A. Ferrer, age 73, and head of capital markets Carlos J. Ortiz, age 51.
The SEC alleges that UBS Puerto Rico failed to properly disclose the risks associated with the closed-end mutual funds (or CEFs), which the firm began selling in 2008. UBS Puerto Rico marketed those investments as having consistent demand in the secondary market, resulting in what it portrayed as regularly high premiums to net asset value of up to 45%.
But UBS Puerto Rico did not disclose that the prices of the funds were set exclusively by a trading desk, and instead portrayed the prices as set by market forces, the SEC said.
As market demand for the funds declined, UBS Puerto Rico did not disclose those changing conditions to the funds’ investors, the SEC alleged. The firm marketed the CEFs to its Puerto Rican retail customer base, which included some senior citizens and retirees. Some of those investors depended on the monthly dividend income from the CEFs to supplement their Social Security payments.
Instead of making the disclosures, UBS Puerto Rico bought shares from investors who wanted to exit the investments to create the impression of a more liquid market. At the same time, UBS Puerto Rico continued to sell new investments in the closed-end funds and did not accurately portray the conditions associated with those investments.
In 2009, UBS Puerto Rico received orders from its parent firm to reduce its closed-end mutual fund inventory, resulting in a 75% or $35 million sale of its inventory. The parent firm also ordered UBS Puerto Rico to improve the methods and transparency of its pricing to investors, but the firm failed to meet those objectives, according to the SEC.
Instead, UBS Puerto Rico made it a priority to sell UBS Puerto Rico’s shares in those funds before customer shares; did not tell those customers that it was reducing the size of the firm’s investments; and encouraged investors to sell their shares directly to the fund companies.
In its order against Ferrer, the SEC alleges that the former chief executive knowingly participated in the misrepresentation of the closed-end funds. Ferrer made positive public statements regarding the investments, even as UBS Puerto Rico was selling its own stake in the investments, the SEC stated. Ferrer also ordered new primary offerings for the funds, while also telling the firm’s financial advisors to tout the investments’ low volatility and high returns to clients.
The SEC alleged: “Ferrer repeatedly misled UBS PR’s financial advisors throughout the fall of 2008 into continuing to promote CEF sales. In email after email, he repeatedly misstated the strength, stability and liquidity of the CEF market. Ferrer also directed Ortiz to create investor demand for the CEFs.”
According to the SEC, on Sept.18, 2008, Ferrer told the firm’s financial advisors, “I note the superior performance of our local funds” and “you should look at these for clients searching for low volatility and respectable returns.” In another email dated Oct. 9, 2008, Ferrer wrote to the advisors: “keep in mind that local investors have sidestepped the wrath of the marketplace and have been enjoying superior returns from our funds.”
And about one month later, Ferrer sent another email to the advisors that, according to the SEC, was intended to address their concerns about the impact of two upcoming CEF issues on share prices and the liquidity in the secondary market. Ferrer’s email allegedly stated: “Not to worry!!! No one should feel discomfort for our opening new Fund opportunities; because the local marketplace [is] in a very rapid consolidation. . . We have put in place a growth strategy in a consolidating market! It is bold, but it is right. This move should have little direct effect on secondary market activity, and if any, a positive one.”
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