UBS Financial Services Sued by Customer Group Alleging Fraud

David Jose Lugo, of San Juan, Puerto Rico, a stockbroker formerly registered with UBS Financial Services, has been named in one-hundred and twenty-four customer initiated investment related disputes between November 19, 2013, and January 29, 2017, based upon allegations against Lugo which include overconcentration of customer assets, misrepresentation, and unsuitability concerning the investments in Puerto Rico closed-end funds and municipal bonds funds which Lugo effected in customer accounts.
Financial Industry Regulatory Authority (FINRA) Public Disclosure reveals that Lugo has been identified in six additional customer initiated investment related disputes containing allegations of Lugo’s misconduct while employed with UBS Financial Services Incorporated of Puerto Rico, UBS Financial Services, Inc., and Doral Securities, Inc. Particularly, on May 13, 2015, a customer was awarded $200,000.00 in damages according to an investment related arbitration claim involving Lugo’s misconduct, based upon allegations including constructive fraud, common law fraud, unsuitability, manipulation, omission of facts, misrepresentation, breach of fiduciary duty, negligence, breach of contract, and violation of Puerto Rico Uniform Securities Act.
Subsequently, on December 18, 2015, a customer was awarded $1,000,000.00 in damages according to an investment related arbitration claim involving Lugo’s misconduct, based upon allegations that Lugo made misrepresentations and defrauded the customer in connection with sales of Puerto Rico closed-end mutual funds concentrated in Puerto Rico bonds.
Additionally, on February 28, 2016, another customer was awarded $1,142,000.00 in damages according to an investment related arbitration claim involving Lugo’s misconduct, based upon allegations including violations of FINRA’s Code of Conduct, violation of Puerto Rico Uniform Securiites Act, fraud, misrepresentation, breach of contract, breach of fiduciary duty, and fraudulent concealment.
FINRA Public Disclosure reveals that UBS Financial was censured, fined $7,500,000.00, and ordered to pay restitution to one-hundred and sixty-five customers totaling $10,978,402.00 based upon consenting to Financial Industry Regulatory Authority (FINRA) findings that the firm failed to establish and maintain a supervisory system and procedures that were reasonably designed to ensure suitability of transactions in closed end funds. Acceptance, Waiver, and Consent, No. 2013039142101 (Sept. 15, 2015).
According to the AWC, between January 1, 2009, and July 31, 2013, UBS did not monitor the leverage and concentration amounts in the firm’s customer accounts to ensure suitability of transactions based upon customers’ investment profiles. The AWC stated that UBS Puerto Rico customers’ investment accounts were ovconcentrated in closed end funds, exposing them to the risk of substantial of loss by the occurrence of merely one adverse market event. The AWC revealed that the closed end funds in question were internally leveraged, exposing the customers’ to even greater risk. Apparently, customers of conservative or moderate risk level contributed contributions of seventy-five percent or greater in the closed end fund shares.
The AWC stated that in 2013, the Puerto Rico bond market faced serious volatility, wherein several closed end funds and Puerto Rican Municipal Bonds lost twenty to fifty percent of their value. The AWC additionally revealed that customers who had been overconcentrated in the closed end funds incurred drastic losses in their accounts’ values and were faced with selling investment positions due to maintenance calls. Particularly, one-hundred and sixty-five customers who held seventy-five percent in the leveraged products received maintenance call, which resulted in customers incurring realized losses from the sale of assets to meet the maintenance calls.
The AWC further stated that the firm’s failure to monitor customer accounts was unreasonable based upon the firms’ knowledge of the economic conditions in Puerto Rico, the large percentage of the firms’ retail customer base having been overconcentrated in investments tied to the Puerto Rican economy, as well as the utilization of overconcentrated accounts as collateral for cash loans. FINRA found that the firm failed to monitor leverage and concentration levels in an adequate manner in order to determine when transactions were suitable based on elevated risks in the customers’ investment accounts. FINRA found the firm’s conduct to be violative of FINRA Rule 2010 and NASD Rule 3010.