In another follow-on effect of Puerto Rico’s debt situation, on September 29, UBS’s Puerto Rico affiliate settled claims by the SEC and FINRA that a former UBS Puerto Rico representative engaged in a fraudulent scheme involving UBS closed-end mutual funds that invested in Puerto Rican debt. As the value of Puerto Rican debt declined, investors in these closed-end mutual funds faced tens of millions in maintenance calls, a risk that the SEC alleged was never disclosed to it. UBS is settling the SEC and FINRA actions for $34 million, with $11 million going to investors who lost money in the funds.

This settlement is simply the latest development in the debt crisis gripping Puerto Rico. Prior to the debt crisis, UBS and other banks marketed Puerto Rican debt as an attractive investment with steady returns and low risk. As the debt market soured, however, undisclosed risks of Puerto Rican debt materialized. Earlier this month, a FINRA arbitration panel awarded investors nearly $3 million after finding that UBS committed fraud in marketing closed-end mutual funds and bond funds that invested in Puerto Rican debt. In July 2015, UBS announced that its Puerto Rican business practices, including those related to selling funds investing in municipal debt, were subject to an investigation by U.S. authorities including the SEC and Department of Justice. On the private litigation front, a putative class action alleging that UBS led investors into risky mutual funds involving Puerto Rican debt securities is ongoing in New York. Banks have also faced suitability claims from investors who were led into Puerto Rican debt and now face significant losses as a result.

Against this backdrop, Puerto Rico’s debt crisis continues. The governor of Puerto Rico has claimed that the island’s existing debts are unsustainable and cannot be repaid at current levels. Pronouncements about Puerto Rico’s inability to pay have resulted in significant declines in the value of Puerto Rican bonds, which are owned by investors throughout the U.S. and the world. Lowenstein Sandler’s Global Capital Markets Group will be monitoring these developments as they continue to unfold.

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