UBS loses Ocean Capital lawsuit 

A high-profile proxy dispute between Puerto Rico mutual funds and a group of activist investors has ended decisively, with the U.S. Court of Appeals for the First Circuit affirming the dismissal of all claims brought by the funds.  

On May 12, the First Circuit upheld a lower court ruling that rejected allegations from nine closed-end mutual funds, each investing primarily in Puerto Rico municipal securities. The funds claimed that Ocean Capital LLC and affiliated investors violated federal securities law by acting as an undisclosed group during proxy contests and by making misleading statements in their filings.  

The dispute emerged in 2021, when Ocean Capital and several individuals launched campaigns to nominate new directors across the nine funds. Organized under the banner “Coalition of Concerned UBS Closed-End Bond Fund Investors,” they advocated for improved governance and, in some cases, potential liquidation as a path to shareholder value.  

In response, the funds sued, asserting violations of Sections 13(d), 14(a), and 20(a) of the Securities Exchange Act of 1934. They argued that Ocean Capital had formed a de facto group—triggering additional SEC disclosure obligations—and that proxy materials were misleading for failing to name all coordinated parties and overstating shareholder alignment.  

But the appellate court found the funds’ arguments lacking. For eight of the nine funds, the plaintiffs could not demonstrate that the investors had acted as a group under SEC rules. While one fund, PRRTFF IV, received a letter from a “Stockholder Group” proposing liquidation by a specific date, the court found no evidence that this letter tied the broader campaigns together.  

Even where possible coordination was alleged, the court said the funds failed to show irreparable harm—a necessary element for injunctive relief. Furthermore, supplemental SEC filings submitted by Ocean Capital in March 2022 acknowledged the litigation and clarified several points in dispute, which the court found sufficient to inform shareholders.  

The court also dismissed the notion that the use of terms like “coalition” or statements about shareholder alignment were materially misleading. It emphasized that ambiguity in phrasing does not, by itself, establish securities fraud—particularly when disclaimers and additional disclosures are provided.  

Because the underlying claims failed, the court affirmed dismissal of the Section 20(a) claims that sought to hold certain individuals liable as “controlling persons.”  

The decision also upholds a district court order requiring the funds to seat Ocean Capital’s nominated directors on the boards of PRRTFF I, PRRTFF VI, and TFF I—an outcome resulting from successful shareholder votes during the contested campaigns.  

For mutual fund boards, compliance officers, and governance professionals, the ruling underscores the need for clear factual support when alleging group activity or misinformation in proxy disputes. It also reinforces the SEC’s expectation that supplemental disclosures can effectively cure deficiencies—as long as shareholders receive enough information to make informed decisions.  

With activist campaigns growing more sophisticated, particularly in the closed-end and municipal fund space, this case sets a clear precedent for how courts are likely to assess disclosure-related claims and internal proxy fights going forward.