SEC, Finra fine UBS $34 million over Puerto Rico funds

Fine related to two actions from the SEC and Finra over sales of closed-end bond funds and a former broker's fraud

Sep 29, 2015 @ 1:29 pm

By Mason Braswell

UBS Wealth Management Americas, which is facing a raft of customer complaints tied to its sales of Puerto Rico municipal bond funds, has agreed to pay a combined $34 million to settle allegations from U.S. regulators tied to its supervision of sales of the funds and a former broker's alleged fraud.

The payment is tied to charges from the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc., which announced the settlements concurrently Tuesday afternoon.

In both cases, the firm did not admit or deny charges. A UBS spokeswoman, Karina Byrne, said in an emailed statement the firm was pleased to have resolved the inquiries, which began in early 2014.

"We remain dedicated to serving our customers during this difficult economic time for the commonwealth," she wrote.

In one action, the Financial Industry Regulatory Authority Inc. fined UBS $18.5 million for supervisory failures related to the funds. The fine includes $11 million in restitution to 165 customers who took losses from the funds, which posted a dramatic drop in value in late summer 2013. Finra said that customers were sold too many shares in the funds, creating an over-concentration that was exacerbated because when they then used the accounts for collateral for loans.

"UBS of Puerto Rico operated in a unique economy and ultimately failed to tailor its supervisory systems to its specific business needs,” said the Finra chief of enforcement, Brad Bennett. Despite the fact that the firm was very familiar with the unusual characteristics of its retail accounts, it did not supervise these transactions properly to prevent customers' heightened exposure to risk."

The SEC settlement, which includes $15 million in disgorgement, interest and penalties, which will go to a fund for harmed investors, is tied to the firm's supervision of a former broker in Puerto Rico who fraudulently had customers take out tens of millions of dollars in loans against their accounts to purchase additional shares of Puerto Rico closed-end mutual funds, according to the SEC.

The broker, Jose Ramirez Jr., who was known as “the whopper,” according to plaintiff's attorneys, increased his own compensation by $2.8 million by having customers take out the securities-backed loans against firm policy. Mr. Ramirez also lied to his branch manager about suspicious transactions, according to the SEC. He was terminated by the firm in January 2014 and has been barred by Finra. His BrokerCheck record shows 68 customer complaints.

“Broker-dealers like UBS Puerto Rico must have effective procedures in place designed to detect misconduct by employees under their supervision,” said Andrew Ceresney, director of the SEC's Division of Enforcement. “UBSPR lacked reasonable systems for ensuring compliance with the firm's prohibition on loan recycling and to ensure that brokers adequately conveyed the risks involved in lines of credit.”

Mr. Ramirez could not immediately be reached for comment. The SEC has filed a separate complaint against Mr. Ramirez in district court in Puerto Rico.

An earlier version of this story incorrectly identified Brad Bennett as chief of enforcement for the SEC. He is chief of enforcement for Finra.


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