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UBS Seeks to Overturn Puerto Rico Bond Finra Award

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  • Posted on: Jan 23 2017

In December 2016, UBS lost an $18.5 million arbitration brought by two former clients, a husband and wife, in connection with the sale of close-end funds that were collateralized by Puerto Rican bonds.

The controversy arose in the wake of the collapse of the island nation’s bond market in 2013 during which time UBS allegedly increased the local demand for the bonds artificially and misled the clients about the potential risks associated with the investments. In 2014, the couple filed a complaint in arbitration, claiming breach of fiduciary duty, unsuitability, and other misconduct.

During the arbitration proceeding, UBS claimed the clients maintained investments in the bonds with rival firms and rejected the recommendations of UBS financial advisors to diversify. While the arbitration transcript showed that this recommendation was in fact rejected, the couple argued that UBS profited from the sale of artificially  inflated bonds. After numerous hearing sessions, the couple was awarded damages, plus attorney’s fees.

Finra Arbitrator Disclosure Requirements

Now, UBS is seeking to overturn the award in federal court, claiming that two of the three arbitrators were not impartial judges of the merits of the case because they failed to disclose key material facts before the proceeding began. One arbitrator did not disclose her involvement as a plaintiff in a securities fraud class action seeking to recover personal investment losses. The second arbitrator failed to disclose that she had committed fraud, and denied she had previously filed for bankruptcy.

In sum, UBS claims that those who have committed fraud or who have made material misrepresentations, are barred from acting as arbitrators by FINRA rules. In addition, UBS argues that the claims should have been dismissed because one of the clients is a Harvard educated attorney and a savvy investor who made his own investment decisions and rejected UBS financial advisors’ recommendation to sell his bond positions.

Some observers believe that UBS will prevail in overturning the award since potential arbitrators are required to disclose certain information about their professional and personal histories. Nonetheless, there are reportedly hundreds of other claims against UBS related to its sale of the Puerto Rican bonds.

The Takeaway

While it is unclear what the outcome of this case will be, it does illustrate the importance of financial advisors fulfilling their fiduciary obligations to their clients. The case also shows the importance of selecting the right arbitrators for a case and the arbitrators’ obligation to comply with the rules and regulations that govern them. These issues, among others, are important for investors who have a dispute with their broker or financial advisor to understand. Accordingly, if they find themselves in such a dispute, they should engage the services of an experienced arbitration attorney.

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