As prices for Puerto Rican bonds have spiraled down, UBS' legal bills stemming from client complaints about the firm's sales practices have piled up.

In the latest in a series of cases, an arbitration panel has sided with a client against UBS, ordering the wirehouse to pay nearly $1.5 million in damages related to UBS' sale of Puerto Rican bonds and closed-end funds.

The firm's legal troubles have their origins in the summer of 2013, when market prices of Puerto Rican municipal bonds and closed-end funds plummeted. That collapse left many clients – who have claimed that their advisors over-concentrated their portfolios in such assets, and misrepresented the nature of the investments – exposed. It has since led to many ongoing arbitration cases.

UBS has beaten back some claims and had some awards reduced – such one involving two clients who won $250,000 from UBS instead of the original $2.5 million they sought. But the wirehouse has lost or settled a number of cases.

So far clients seeking $284 million in claimed damages have had their cases resolved either through settlements or arbitration awards, according to UBS' latest earnings report. The total amount awarded to clients is less than the total damages originally sought, but the figure is not public because the settlements are confidential.

"It's sort of death by a thousand cuts for UBS," says Andrew Stoltmann, a Chicago-based attorney who is not affiliated with this case but who has represented other clients against UBS.

INHERITANCE LOST

In this latest case, Christel Barie Bengoa Lopez, 45, sought $2 million in damages from UBS for misrepresentation, breach of fiduciary duty, negligent supervision and fraudulent concealment of misconduct among other charges.

Bengoa was already a client of UBS when her father sold his business in 2006and gifted $5 million to each of his children, according to her attorney, Robert Pearce, and arbitration documents. She wanted to invest in safe assets that would produce some income and protect her principal.

Following the advice of her UBS advisor, Bengoa invested about $4 million in UBS' closed-end funds of Puerto Rican bonds, according to arbitration documents. She ended owning shares in eight funds created and managed by UBS.

In the following years, when Bengoa needed money for large purchases, such as a new home and later an apartment, UBS furnished her with lines of credit. Her advisor neglected to discuss the risks associated with these moves, according to arbitration documents.

Her advisor also neglected on several occasions to discuss with Bengoa the illiquidity of her investment as well as the risk of being over-concentrated in a single, geographically-limited asset, according to Bengoa.

In 2013, Bengoa's accountant notified her that the value of her investments at UBS had declined $800,000 from the prior year – leading to a meeting in August in which her advisor assured her of the strength of her investments.

Then in September of that year, her advisor called to tell her that the value of her investments plummeted 50% in a single month and that she would have to immediately pay back UBS for the loans. And, according to arbitration documents, Bengoa soon received a letter from UBS telling her that she had to repay $1.3 million by October 15, 2013. With help from her parents, she was able to do so and avoid the forced liquidation of all the assets in her account.

'HIT FROM BOTH ENDS'

A UBS spokesman noted the funds' long history of strong performance, and the advantages for clients to invest in them.

"In addition, because they are exempt from Puerto Rico estate and gift taxes and may have provided tax-exempt or tax-advantaged income, Puerto Rico municipal bonds and closed-end funds provided additional benefits to investors," the spokesman said.

However, attorneys representing clients in arbitration against UBS say that there was an aggressive sales culture within the firm's brokerage offices on the island. Executives encouraged advisors to sell the firm's closed-end funds, according to the claims filed by Bengoa.

One email from a senior executive exhorted: "So; do not be a Lemming, be a Lion! Start accumulating our funds now. Now; because the prices will probably be higher soon."

UBS actions on the island have drawn the scrutiny of regulators. Last September, the firm agreed to pay $34 million to the SEC and FINRA in order to settle charges that it failed to properly supervise the suitability of transactions in Puerto Rican closed-end fund shares. Of that sum, $11 million was to be paid in the form of restitution to clients who suffered losses in closed-end fund positions.

Meanwhile, claims by clients have piled up. UBS reported in its latest earnings report that the claims, included those already paid out, have added up to an aggregate $1.5 billion.

"They're getting hit from both ends, from customer claims and from regulators. The firm has a big old kick me sign on its back," says Stoltmann, the Chicago-based attorney.

'DISAPPOINTED'

Last week, a panel of three arbitrators awarded Bengoa $1.5 million for damages and interest, attorney's fees, arbitration costs and expert witness fees. While the amount was less than the $2 million originally sought, Bengoa's attorney hailed the decision.

"I think the arbitrators covered the bases and made the proper award in this case," Pearce, Bengoa's attorney, says.

UBS felt otherwise.

"Although the arbitrators awarded less than the full damages the claimant requested, UBS is disappointed with the decision to award any damages, with which we respectfully disagree," a spokesman said via email. "UBS notes that the decision in this case was based on the facts and circumstances particular to this claimant, and is not indicative of how other panels may rule with regard to other customers who invested in similar products."

Stoltmann sees an uphill battle for UBS. He says the firm should aim for a global settlement with all claimants in order to safeguard its reputation.

"The results of the tried cases that have gone to hearing have been horrific for the firm. The question is: How much longer can they continue this?" he asks. "The cases get harder for UBS the longer claimants lawyers keep digging."

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