US authorities are probing UBS AG for criminal fraud after a former broker in Puerto Rico allegedly directed clients to improperly borrow money to buy mutual funds that later plunged, according to lawyers representing some of the investors.
At issue is whether UBS executives in Puerto Rico and in the US knew proceeds from loans made by a Utah unit of the Swiss bank were used in a way that violated its own lending rules. If they knew about the practice and did not stop it, they could be criminally responsible if fraud allegations are proven.
The investigations are the latest headache for UBS, which has faced myriad lawsuits and probes since the financial crisis.
Puerto Rico-based lawyers Harold Vicente-Gonzalez and his son, Harold Vicente-Colon, said they were representing several dozen people who were clients of UBS Financial Services Inc.
They said the investors lost large portions of their savings through investments in closed-end funds whose sales by UBS have been the subject of several investor lawsuits and regulatory probes. Packed with Puerto Rican government bonds that UBS had underwritten, the funds plunged in value at the end of last summer as concerns grew about the weak state of the US territory’s economy and its ability to repay its debt.
Karina Byrne, a New York-based spokeswoman for UBS, said the bank had fired the broker, Jose Ramirez, last year and conducted an internal investigation.
The inquiry targets non-purpose loans from UBS Bank USA of Utah that were arranged by Ramirez for his clients. Because these loans are backed by a borrower’s investment portfolio, their proceeds cannot, according to their terms and conditions, ever be used to buy securities since changes to the portfolio could devalue the collateral.
However, attorneys for the investors say that Ramirez was using the non-purpose loans he got for his clients to buy more shares for them in the bond funds.
Ramirez’s lawyer in San Juan said his client would not comment.
According to the Vicentes and Jeffrey Erez, who is representing another 130 UBS clients, Ramirez gave clients paperwork that made them think they were borrowing from the bank in Puerto Rico rather than the one in Utah.
The lawyer said that Ramirez told his clients to put the proceeds of their loans into accounts at an unrelated local bank and then to write him checks for the loan amounts, which he then used to buy more bond fund shares for them.
There was another problem with the loans: Puerto Rico’s Office of the Financial Institutions Commissioner had never issued UBS Bank a license to lend on the island. After the regulator learned of the situation, UBS agreed to sell the loans to its Puerto Rico brokerage without admitting or denying any wrongdoing.
Hundreds of wealthy Puerto Rican investors, including clients of UBS and other brokerages, have lost much of their life savings by investing in local closed-end funds that owned the island’s debt. The funds typically invested at least 67 percent of their money in Puerto Rico assets.
The net worth of these funds fell nearly 40 percent over the course of last year, according to a report by Puerto Rico’s Office of the Financial Institutions Commissioner.
So far, about 200 people on the island have filed cases with the Financial Industry Regulatory Authority against UBS and other brokers to try to recover their money, data from the Wall Street self-regulator shows.
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