The Securities and Exchange Commission (SEC) announced on May 1, 2012, that they charged UBS Financial Services Inc. of Puerto Rico and two executives with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.
UBS Puerto Rico will settle the SEC’s charges by paying $26.6 million that will be placed into a fund for the “harmed investors.”
According to the SEC, UBS Puerto Rico misled its investors and failed to disclose that it controlled the secondary market, where investors could sell their shares in the funds. UBS Puerto Rico significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market. However, UBS Puerto Rico later withdrew its market price and liquidity support in order to sell 75 percent of its closed-end fund inventory to unsuspecting investors.
UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz, have SEC proceedings against them which they are contesting.
“UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law – accurate price and liquidity information, and a trading desk that did not advantage UBS’s trades over those of its customers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “We will aggressively prosecute firms that use conflicts of interest for their own financial gain.”
The SEC’s order states that beginning in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance and continuously high premiums to net asset value (up to 45 percent) as the result of supply and demand in a competitive and liquid secondary market. However, when investor demand began to decline, UBS Puerto Rico sought to maintain the illusion of a liquid market by buying shares into its own inventory from customers who wished to exit the market. Throughout a falling market, UBS Puerto Rico continued to sell shares by conducting primary offerings in order to grow its closed-end fund business. UBS Puerto Rico failed to disclose the true state of the market to investors.
According to the SEC’s order, they state on their website that UBS Puerto Rico’s parent firm determined in the spring of 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk, and directed the firm to reduce its inventory by 75 percent to reduce that risk and “promote more rational pricing and more clarity to clients . . .