The Securities and Exchange Commission has charged UBS Financial Services of Puerto Rico and a former branch manager for failing to supervise a former broker who had customers invest in UBSPR affiliated mutual funds using money borrowed from a UBSPR affiliated bank.
UBSPR and the bank prohibited using such loans to purchase securities and the practice exposed investors to losses while producing profits for the former UBSPR broker, the SEC alleged.
UBSPR agreed to settle the SEC’s charges by paying $15m in disgorgement, interest, and penalties, which will be placed into a fund for harmed investors. The former branch officer, Ramiro L. Colon III, agreed to a settlement in which he will pay a $25,000 penalty and be suspended from a supervisory role for one year.
Separately, the SEC filed a complaint in federal court in Puerto Rico against Jose Ramirez, Jr., a former registered representative in UBSPR’s Guaynabo branch office. The SEC alleges that Ramirez increased his compensation by at least $2.8m by having certain customers use proceeds from lines of credit with UBS Bank USA to purchase additional shares in UBSPR closed-end mutual funds. To evade detection, Ramirez allegedly instructed the customers to transfer money from their line of credit to an outside bank account before depositing the funds into their UBSPR brokerage account and purchasing the closed-end funds.
The funds invested heavily in Puerto Rico municipal bonds and lost value as the Puerto Rico bond market declined, requiring the customers to pay down a portion of the loans or risk having their investments liquidated.
According to the SEC’s complaint, Ramirez misled customers about the safety of the closed-end funds and the risks of investing in them with borrowed money. He also is alleged to have lied to his branch manager when questioned about suspicious transactions in the closed-end mutual funds. Ramirez was terminated by UBSPR in January 2014.
According to the SEC’s order instituting a settled administrative proceeding against UBSPR, the broker-dealer lacked procedures and systems to prevent and detect Ramirez’s misconduct. UBSPR allegedly was made aware on at least two occasions that Ramirez customers may have been violating internal policy but UBSPR’s policies failed to address reasonable follow up, the order found. It also found that although UBSPR prohibited using line of credit proceeds to purchase securities, it had no system to monitor for this when proceeds were transferred outside of UBSPR accounts.
“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.”
Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “We allege that Ramirez sold tens of millions of dollars of closed-end funds to certain customers while lying to them about the safety of his risky leverage strategy and as a result, those UBSPR customers suffered significant losses.”
According to the SEC’s order instituting settled administrative proceedings against Colon, he was alerted to the possibility that a Ramirez customer was using a line of credit to purchase closed-end funds. Instead of investigating, Colon allegedly accepted Ramirez’s explanation and did not follow up with the customer. The order alleges that Colon ignored other information, including the fact that line of credit originations by Ramirez and the Guaynabo branch were far higher than those of other registered representatives and branches.
The SEC appreciates and recognizes the assistance of the Financial Industry Regulatory Authority (FINRA), which also announced an action against UBSPR for the firm’s violation of its rules on supervision and principles of trade. UBSPR agreed to settle FINRA’s charges by paying a $7.5m fine and interest on up to $11m in restitution to more than 150 investors in the closed-end funds.