IN THE FINANCIAL INDUSTRY REGULATORY AUTHORITY
JUAN FÉLIX TRINIDAD-GARCÍA; and JUAN FÉLIX TRINIDAD-RODRÍGUEZ Case No. 14-00487
Claimants SECURITIES ARBITRATION V.
POPULAR SECURITIES, LLC.; POPULAR SECURITIES, THREE MEMBER INC.; POPULAR, INC./BANCO POPULAR DE PUERTO PANEL RICO; JOSÉ ARTURO RAMOS; WELLS FARGO ADVISORS, LLC; UBS FINANCIAL SERVICES, INC. and UBS FINANCIAL SERVICES INCORPORATED OF PUERTO RICO
Respondents
INDEX
SECTION PAGE
I. INTRODUCTION 1-5 II. THE PARTIES 5-10 III. JURISDICTION AND VENUE 10-11 IV. CLAIMANTS’ HISTORY 11 A. Relevant Period 11 B. Juan Félix Trinidad García 11-12 C. Juan Félix Trinidad Rodríguez 12-13 V. JOSÉ “PEPE” ARTURO RAMOS 13-17 VI. THE TRINIDAD’S SUITABILITY NEEDS 17-21 VII. RESPONDENTS’ SUITABILITY DUTIES 21 A. Respondents’ General Suitability Duties 21-23 B. Respondent Broker Dealers’ Duties Under The Account 23-24 And Financial Advisor Agreements C. Respondents’ Duties As Tito’s Financial Planner And 24-25 Manager VIII. PAINE WEBBER/UBS-PR - 07/2000 to 03/2007 25 A. Tito’s Transactions 25-33 B. Félix’s Transactions 33-36 IX. WELLS FARGO/WACHOVIA - 03/2007 TO 11/2010 36 A. Tito’s Transactions 36-38 B. Félix’s Transactions 38-39 X. POPULAR SECURITIES/POPULAR INC./BANCO POPULAR 40 A. Tito’s Transactions 40-44 B. Félix’s Transactions 44-49 XI. THE CEFs AND PR BONDS 49 A. Respondents’ Role In The Underwriting And 49-50 Management Of The CEFs B. Respondents’ Market Dominance 50 C. The CEFs Structure 51-52 D. Lack of Federal Registration 53 E. The CEFs’ Costs 53 F. The Degrading Quality And Creditworthiness Of The PR 53 Bonds And CEFs’ Assets G. The CEFs’ High-Risk Leverage 54-55 H. The CEFs’ Illiquidity, Price And Market Manipulation 55-57 I. New CEFs Offerings 57-58 J. The SEC’s Cease and Desist Order 59 XII. RESPONDENTS’ JOINT AND SEVERAL BREACHES OF 59 THEIR SUITABILITY DUTIES A. Respondents’ Unsuitable Recommended Investment 60 Strategy B. Unsuitable Securities 60-61 C. Unauthorized Trading 61 D. Respondents’ Downplayed And Failed To Notify 62-63 Claimants About The Findings Of The Cease And Desist Order E. Lack Of Adequate Diversification 63-67 F. Unreasonably High Leverage 67-68 G. CEFs’ High Costs 68 H. Lack Of An “Exit Strategy” 68 I. Respondents’ Financial Gain At Claimants’ Unnecessary 69 Risk And Expense XIII. RESPONDENTS’ JOINT AND SEVERAL FRAUDULENT 69 SCHEMES A. Respondents’ False And Fraudulent CEFs 69-70 Representations B. Respondents’ Willful Failure To Disclose Material Facts 71 C. The Broker Dealers’ Exacerbated Conflicts Of Interest 71-72 D. Respondents’ Unreasonable And Fraudulent Transactions 72 E. Respondents’ Fraudulent Multiple Accounts Practice 72-74 F. Respondents’ Unfair And Unreasonable Commissions In 74-77 Excess Of 5% G. Respondents’ Joint and Several Fraudulent Loans Scheme 77 a) At all relevant times the Respondents acted as agents 77-78 and alter egos of each other. b) Respondents’ implementation of the Loan Scheme. 78-80 c) Respondents’ fraudulent inducement to prevent 80-80 Claimants from paying off the loans. d) Respondents’ fraudulent failure to disclose the high 80-83
ii risks created by the loans collateralized by the investments. e) Respondents’ fraudulent intended effect of the Loan 83 Scheme. f) Respondents’ violations of the banking laws. 83-85 H. Respondents’ Acted With Scienter 85-86 I. Injury Causation 86 J. Claimants’ Severe Economic Injury 86-89 K. Respondents’ Joint and Several Liability 89-90 XIV. FIRST CLAIM FOR RELIEF - SECURITIES EXCHANGE 90-92 ACT XV. SECOND CLAIM - PUERTO RICO SECURITIES ACT - 92 10 L.P.R.A. §890 XVI. THIRD CLAIM - FAULT, FRAUD, DECEIT, 92-94 RECKLESSNESS AND NEGLIGENCE XVII. FOURTH CLAIM - RESCISSION OF CONTRACT - 94 NULLITY OF PURCHASES AND LOANS A. Nullity of Purchases and Loans 94-95 B. Nullity of Waivers 95-96 XVIII. FIFTH CLAIM - PUNITIVE OR EXTENDED DAMAGES 96-97 XIX. SIXTH CLAIM - DEMAND FOR INTEREST, 97-98 ATTORNEY’S FEES & OTHER EXPENSES XX. SEVENTH CLAIM - DEMAND FOR DISGORGEMENT 98 OF COMMISSIONS, INTERESTS AND/OR SERVICE AND FOR LOAN FEES XXI. EIGHTH CLAIM - URGENT INJUNCTIVE RELIEF 98-99 XXII. STATUTES OF LIMITATIONS AND FRAUDULENT 99-100 CONCEALMENT TOLLING XXIII. PRAYER FOR RELIEF 100-101
iii IN THE FINANCIAL INDUSTRY REGULATORY AUTHORITY
JUAN FÉLIX TRINIDAD GARCÍA; and JUAN FÉLIX TRINIDAD-RODRÍGUEZ Case No. 14-
Claimants SECURITIES ARBITRATION
V.
THREE MEMBER PANEL POPULAR SECURITIES, LLC.; POPULAR SECURITIES, INC.; POPULAR, INC./BANCO POPULAR DE PUERTO RICO; JOSÉ ARTURO RAMOS; WELLS FARGO ADVISORS, LLC; UBS FINANCIAL SERVICES, INC. and UBS FINANCIAL SERVICES INCORPORATED OF PUERTO RICO
Respondents
STATEMENT OF CLAIM
TO THE FINANCIAL INDUSTRY REGULATORY AUTHORITY:
COME NOW CLAIMANTS, through the undersigned attorneys, and very respectfully allege, state and pray:
I. INTRODUCTION
1.1 Claimants submit jointly this Statement of Claim for the purpose of procedural and monetary economy, as allowed by Financial Industry Regulatory Authority (“FINRA”)
Rule (“FR”) 12312, because the claims contain common questions of facts and law, arise of the same series of transactions or occurrences, and also have as a common link the participation of
Mr. José Arturo Ramos, also known as José (Pepe) Ramos, (“Ramos” or “Pepe Ramos”), as the Financial Advisor (“FA”) with Popular Securities, Inc. (“Popular Securities”), Wells Fargo
1 Advisors, LLC (“Wells Fargo”) and UBS Financial Services Incorporated Of Puerto Rico
(“UBS-PR”).
1.2 Ramos operates out of the Main San Juan Popular Securities Office in Hato
Rey’s Banco Popular Center Building, PR, under the supervision and management of Jaime
Antonio Toro-Lavergne (“Toro”) and Alberto Antonio Castañer-Barceló (“Castañer”). Ramos is registered with Respondent Popular Securities. Ramos has held an industry securities registration for over 3 years and is subject to FINRA oversight.
1.3 The Claimants plead against Respondents pervasive violations of FR 2090,
“know your Costumer Rule”, FR 2111, “suitability”, FINRA rules on concentration and fair dealings, violations of Puerto Rico laws by fraud, misrepresentation, breach of fiduciary duties, fault and negligence in contravention and in the fulfilling of contractual obligations, breach in the duty of care and candor that they should have with their costumers, anti-fraud provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and of the Puerto Rico Uniform
Securities Act (“PRUSA”).
1.4 Among other things, it is alleged that aiding and abetting each other, and acting in concert, Popular Securities and its affiliates, UBS Financial Services, Inc. (“UBS-Del”),
UBS-PR, its affiliates, and its acquired Broker Dealers, and Wells Fargo engaged in similar schemes to defraud with the intent to sell Puerto Rico Bonds (“PR Bonds”) and shares of PR
Closed End Funds (“CEFs”). The Respondents, their affiliates, and their acquired Broker
Dealers devised the schemes in two essential sub-schemes, the first the Fraudulent Sales
Scheme and the second the Fraudulent Loan Scheme. The implementation of these schemes were directed, managed and supervised by Popular Securities, Wells Fargo and UBS-PR, and carried out by the FA Ramos.
2 1.5 The Fraudulent Sales Scheme entailed: the underwriting by UBS-PR and
Popular Securities of the PR Bonds; the creation of CEFs for the purchase of the PR Bonds; a high percentage of leverage of the CEFs’ assets for the purchase and sale of more PR Bonds into the Funds and the repurchase of CEFs shares, to offer a return at a rate higher than the PR
Bonds’ return; the marketing and explicit recommendation of the investment strategy for the purchase and hold of the CEFs shares to the Claimants that wanted a secure fixed income investment under the false representation that the shares were PR Bonds guaranteed by the PR
Government; the manipulation of the shares’ prices and market to create a false appearance that the shares had stable high prices and demand that were established by the market’s supply and demand; and the failure to inform the Claimants about the high risks created by the CEFs’ high leverage, concentration in the PR Bonds, artificial market prices and demand, and illiquidity due to the excess of supply, market saturation and the market being limited to PR residents (“CEFs’ Concomitant Risks”).
1.6 The Fraudulent Loan Scheme entailed: the offering and granting of unsolicited lines of credits and “non-purpose loans” to the Claimants; the inducements for the Claimants to obtain line of credit loans against the CEFs or Bonds when in need of monies instead of the sale of the shares and/or Bonds; the inducement for the Claimants to use the lines of credit to purchase additional PR Bonds and shares of the CEFs; the false representation to the Claimants that the spread between the line of credit loans and the shares’ dividends entailed no risk of default because the shares were PR Bonds which return was guaranteed by the PR
Government; the failure to inform the Claimants about the even higher risks created when the
CEFs’ Concomitant Risks were combined with the clients obtaining loans using as collateral the non diversified portfolios composed of the PR Bonds and CEFs; and the failure to inform
3 the Claimants about the risks of default of the PR Bonds, the possibility that CEFs share prices came to be lower than the loan balances, and the additional artificial demand and price inflation created by the leverage and the creation of loan vehicles that allowed the Claimants to cover their monetary needs through loans instead of selling the PR Bonds and CEFs shares.
1.7 In furtherance of these Schemes, under the aforesaid false promises and pretenses, and through the omission of the aforestated material facts, at all relevant times the
Respondents explicitly recommended the Claimants to invest all their available liquid capital in the purchase of PR Bonds, and CEFs; to hold and continue to hold these securities; to obtain or continue to maintain margin and other loans to purchase more or to hold these securities.
1.8 Respondents thereby breached the suitability duties that they owed to the
Claimants and defrauded them when they had them incur and maintain said investment strategy while knowing and failing to inform them about: the PR securities’ lack of liquidity; the high costs charged by the CEFs for the purchase of its shares and for the management of its funds; the conflicts of interest that caused the Respondents to recommend said investment strategy that was against the Claimants’ best economic interests; the high risks that the excessive concentration in the PR securities entailed; the existence of an excessive surplus of those securities; the high risks entailed by the high leverage of the CEFs’ assets; that the share price on the CEFs was artificially maintained at a high price that could not be justified by the market’s demand and supply; that UBS-PR was heavily over-invested in CEFs; the degrading quality and loss of credit worthiness of the Municipal Bonds; and, the worrisome economic situation brewing for years in Puerto Rico that could impact very negatively the PR Bonds and the CEFs which were concentrated heavily and highly leveraged in these Bonds, potentially driving their prices down to zero. In their recommendation to the Claimants that they incur and
4 maintain said investment strategy the Respondents also disregarded the Claimants’ Liquidity needs, Time Horizon and Risk Tolerance in breach of their suitability obligations.
1.9 In furtherance of the Fraudulent Loan Scheme, the Claimants were also induced by the Respondents to incur and maintain the investment strategy of borrowing monies from
Respondent affiliate’s Bank to acquire more PR Bonds and CEFs, and to borrow monies to cover their needs and to hold and carry them instead of selling their PR Bonds and CEFs shares, which resulted ultimately in exponential economic losses to the Claimants.
1.10 Respondents’ fraudulent and wrongful conduct alleged herein caused huge economic losses to the Claimants.
II. THE PARTIES
2.1 The Claimants are: Juan Félix Trinidad-Garcia (“Tito Trinidad” or “Tito”); and
Juan Félix Trinidad-Rodriguez (“Félix Trinidad”, “Félix” or “Don Félix).
2.2 Tito Trinidad is of legal age, married to Sharon Santiago-Nieves, a resident of
San Juan, Puerto Rico, and a retired professional boxer. Tito Trinidad’s address is: 258 Reina
Mora St., Montehiedra, San Juan, PR 00926-7108.
2.3 At the times relevant herein, Tito has had the following Accounts with Popular
Securities that are the object of this Claim: General Investment Accounts PSL-005865 and
PSL-005673; Individual Investment Accounts: PSL-005690, PSL-005665, PSL-005681, PSP-
067008, PSP-067016, and PSP-085250; and Loan Accounts PSP065250 and
10100121939400101. As per the November 1 to November 30, 2013, Accounts Statement,
Tito had open the General Investment Accounts PSL-005665 and PSL-005673 and a Joint account with his father: PSP-066990.
5 2.4 At the times relevant herein, Tito had the following Accounts with UBS-PR that are the object of this Claim: 1G 03481; JX 41959; 1G 46354; 1G 46356; 1G 00062; 5V 02340;
JX 00011; and Accounts JX 42011; JX 46115 and JX 46354.
2.5 At the times relevant herein, Tito had the following Accounts with Wells
Fargo/Wachovia that are the object of this Claim: 4111-5428; 4932-2500; 8762-8811; 3273-
4529; and 7663-0902.
2.6 Félix Trinidad (“Félix”) is the father of Tito Trinidad, married to Blanca Nelly
Lira-Rodríguez (“Blanca Nelly”), a resident of Guaynabo, Puerto Rico and retired from his career as manager of Tito Trinidad’s boxing career as well as other protégés professional boxers’ careers. Félix Trinidad’s address is: Raphis St. #35, Palma Real, Guaynabo, PR 00969.
2.7 At the times relevant herein, Félix has had the following Accounts with Popular
Securities that are the object of this Claim: Individual Investment Accounts PSL·005622, PSL-
005614, PSL-005630, PSL·005649, PSL·005657, PSL·006966, and Retirement Plan PSK-
008737.
2.8 At the times relevant herein, Félix had the following Accounts with UBS-PR that are the object of this Claim: 1G and 1X 46121 RMA; 1G 46122; 1G 03909 RMA Juan F and Juan C. Trinidad Tenants in Common; 1G and JX 03531 “Special Account”; 1G and JX
46133; JX 47660; 5V 02339 - Premier Variable Credit Line; 1G 02973 Tenants in Common;
1G 03481; and 1G 46356.
2.9 At the times relevant herein, Félix had the following Accounts with Wells
Fargo/Wachovia that are the object of this Claim: 3727-8573; 5080-4663 Collateral Account;
5329-2570 Collateral Account; 2383-0197 Retirement Plan; 3731-7988; 5734-6945 Juan F and
Juan C. Trinidad Tenants in Common; and 3680-1432.
6 2.10 Respondents are: Popular Securities, Inc.; Popular Securities, LLC; Popular,
Inc./Banco Popular De Puerto Rico; José Arturo Ramos Rios; Wells Fargo Advisors, LLC; and
UBS Financial Services, Inc. and UBS Financial Services Incorporated of Puerto Rico.
2.11 Popular Securities, Inc. (“Popular Securities”) is a corporation organized pursuant to the laws of the Commonwealth of Puerto Rico and/or authorized to conduct business in the Commonwealth of Puerto Rico.
2.12 Popular Securities, LLC CRD# 8096, SEC# 8-24216, is a Broker Dealer and investment advisor firm with main offices at 208 Ponce de León Ave., Popular Center, Suite
1200, San Juan, P.R. 00918.
2.13 Popular Securities is a member of the Financial Industry Regulatory Authority
(FINRA).
2.14 Popular Securities is a wholly owned subsidiary of Popular, Inc. [Nasdaq:
BPOP] and an affiliate of Banco Popular de Puerto Rico (“Banco Popular”). Popular Securities offers a range of security products, and the financial advisory services to its clients through more than 50 Financial Consultants. Its business includes the sale of municipal and corporate bond issues, private placements, and underwriting of equity and debt securities. It has underwritten $35 billion in capital market transactions since 2006, and acted as senior or co- senior manager in over $11 billion of them.
2.15 Banco Popular, also a subsidiary of Popular, Inc., is the leading financial institution in Puerto Rico with $28 billion in assets. Banco Popular provides financial services to more than 1.5 million individual and business clients. Banco Popular also offers the most extensive and complete distribution network in Puerto Rico and the Virgin Islands, with 192 branches.
7 2.16 At all relevant times, Popular Securities, Inc. and Popular, Inc./Banco Popular
De Puerto Rico acted as alter egos of each other and for their joint economic benefit and may be hereinafter jointly referred to by “Popular”.
2.17 In or around July 2011, Popular Inc. entered into an agreement with Wells
Fargo Advisors LLC Puerto Rico, a Broker Dealer and investment advisor firm owned by
Wells Fargo Advisors, LLC (CRD# 19616) (“Wells Fargo”) for the acquisition of the latter company’s assets. This agreement allowed Popular to acquire 1,750 accounts and assets under
Wells Fargo’s management for approximately $500 million, which came to be handled by
Popular Securities.
2.18 Wells Fargo was the second largest brokerage firm in the United States as of
October 1, 2007 with $1.17 trillion retail client assets under management. In turn, on or around, effective December 31, 2008, Wells Fargo had completed its merger with Wachovia
Corporation/Wachovia Securities, Inc. (“Wachovia”) (CRD# 431) also a stock brokerage and asset management firm.
2.19 Wells Fargo is a member of FINRA. Founded in Winston-Salem, N.C. as
Wachovia National Bank. In June 16, 1879, Wachovia grew to be one of the largest diversified financial services companies in the United States and provided a broad range of retail banking and brokerage, asset and wealth management, and corporate and investment banking products and services to customers through 3,300 retail financial centers in 21 states, along with nationwide retail brokerage, mortgage lending, and auto finance businesses. Globally,
Wachovia served clients in corporate and institutional sectors and through more than 40 international offices. In 2008, Wells Fargo & Company acquired Wachovia Corporation to
8 create North America’s most extensive distribution system for financial services. Wells Fargo provided banking, insurance, investments, mortgage, and consumer and commercial finance.
2.20 UBS Financial Services, Inc. (hereinafter “UBS-Del”) is a Delaware corporation with principal places of business in New York, New York, and Weehawken, New
Jersey (Weehawken), that is a wholly owned subsidiary of UBS, AG, a private issuer based in
Switzerland, and the controlling stockholder of UBS-PR.
2.21 UBS-Del, BD # 8174, is a Broker Dealer and investment advisor firm with over
12,300 registered representatives nationwide. UBS-Del is a FINRA member.
2.22 At all relevant times, UBS-Del exercised de facto control over, and acted as an alter ego of UBS-PR. UBS-PR and UBS-Del may be hereinafter jointly referred to by “UBS”.
2.23 UBS Financial Services Incorporated of Puerto Rico (“UBS-PR”) is a registered
Broker Dealer and investment advisor firm (CRD #13042), and the largest in the
Commonwealth of Puerto Rico, with around 47% to 51% of the market in assets under management. UBS-PR is a FINRA member.
2.24 UBS-PR is a corporation organized pursuant to the laws of the Commonwealth of Puerto Rico and/or authorized to conduct business in the Commonwealth of Puerto Rico, and has several offices or branches in Puerto Rico. UBS-PR and its affiliates are by far the largest asset managers in Puerto Rico, with over one hundred thirty (130) advisors or registered representatives and tens of thousands of retail accounts. UBS-PR holds around half of the brokerage licenses in all of Puerto Rico.
2.25 UBS-PR acquired the Paine Webber Puerto Rico Brokerage Firm (“Paine
Webber”).
9 2.26 Ramos CRD# 4159163, has been employed as a Financial Advisor (“FA”) with:
Paine Webber/UBS-PR, from on or around 07/2000 to 03/2007; Wells Fargo/Wachovia, from on or around 03/2007 to 11/2010; and with Popular Securities, since on or around 11/29/10, and up to the present.
2.27 At all relevant times, Pepe Ramos’ conduct was in his capacity as a FA, and/or
Financial Planner (“FP”), within the scope of his employment, and furthered a desire to, and did serve and benefit the interests, and resulted in the economic benefit of Paine Webber/UBS-
PR, Wells Fargo/Wachovia and Popular Securities/Popular, Inc./Banco Popular.
III. JURISDICTION AND VENUE
3.1 Pursuant to FR 12200 the parties to this action must also arbitrate this Claim because it is required by the Client Investment Account written agreements executed between the Claimants and the Respondent Broker Dealers Paine Webber/UBS-PR, Wells
Fargo/Wachovia and Popular Securities/Popular, Inc./Banco Popular (“Broker Dealers”). The
Client Investment Account written agreements require the arbitration of any claims made herein against the Respondent Broker Dealers, and their Respondent corporate affiliates and employees.
3.2 The parties to this action must also arbitrate this Claim against all other
Respondents because: it is requested by the customer Claimants; the disputes are between the customer Claimants and the Respondent Broker Dealers’ FINRA members and their associated persons; and the dispute arises in connection with the business activities of the Respondents’
FINRA members and their associated persons.
3.3 Venue is proper in this District pursuant to §27 of the Exchange Act and 28
U.S.C. §1391(b). Respondents UBS-PR and Popular have their principal place of business in
10 San Juan, Puerto Rico and a substantial part of the transactions and wrongs complained of herein, including the Respondents’ primary participation in the wrongful acts detailed herein, occurred in this District, and Respondents have received substantial compensation in this
District by doing business here and engaging in numerous activities that had an effect in this
District. Moreover, the Puerto Rico District is also the proper venue pursuant to FINRA R
12213 because it is the closest location to the Claimant customer’s residence at the time of the events giving rise to the dispute.
IV. CLAIMANTS’ HISTORY
A. Relevant Period
4.1 This Statement of Claim is related to transactions in the Claimants’ Accounts since they were opened and up to the date of the filing of this Statement, and/or up to the date of the hearing (hereinafter the “Relevant Period”).
B. Juan Félix Trinidad García
4.2 Tito was born in Fajardo, Puerto Rico. Tito is 41 years old and a retired professional boxer. Tito began boxing at age ten (10) and turned professional in 1990 at age seventeen (17).
4.3 In June 1993, in his 20th professional boxing bout, Tito captured the
International Boxing Federation welterweight crown from Maurice Blocker in two (2) rounds.
Tito had Fifteen successful defense fights, 12 by knockout, including: on January 29, 1994, over Héctor “Macho” Camacho (W 12); on September 17,1994, over Yory Boy Campas (TKO
4); on December 10, 1994, over Oba Carr (TKO 8); on February 10, 1996, over Rodney Moore
(TKO 4); on May 18, 1996, over Freddie Pendleton (KO 5); on February 20, 1999, over
Pernell Whitaker (W 12); and on September 18, 1999, over Oscar de la Hoya (W 12). Trinidad
11 then moved up in weight to win the World Boxing Association light-middleweight title from
David Reid (W 12) on March 3, 2000. On July 22, 2000, Tito won by TKO in the 3rd round against Mamadou Thiam. Later that year Tito unified titles on December 2, 2000, with a 12th round TKO over IBF champion Fernando Vargas. On May 12, 2001, Tito became a three- division champion with a 5th round TKO over William Joppy for the WBA middleweight title.
In late September 29, 2001, Tito had his first loss against Bernard Hopkins in the
Middleweight World Championship Series (L 12). Tito then came back in May 11, 2002, to win over Hacine Cherifi (TKO 4). After that fight Tito announced his retirement. In March
2004, Tito announced his comeback. On October 2, 2004, Tito fought and won against Ricardo
Mayorga (TKO 8). Thereafter, following consecutive losses, on May 12, 2005 to Winky
Wright (L 12), and on January 19, 2008 to Roy Jones Jr. (L 12), Tito definitely retired with a professional record of 42-3 (35 KOs).
4.4 Tito won five World Welterweight Championships in three different weight divisions and holds the longest record as undefeated Welterweight Champion. Tito was a dynamic puncher, particularly with an explosive left hook. Tito is one of the world-recognized boxing’s brightest superstars that fought during the 1990s and 2000s. Boxing was Tito’s sole source of work income. Tito is the best-paid Puerto Rican boxer (whose gross purse amounted to around $86,000,000). On December 4, 2013, Tito was elected to the International Boxing
Hall of Fame in the first year of eligibility. The Puerto Rico people revere Tito as a hero.
C. Juan Félix Trinidad Rodríguez
4.5 Félix Trinidad, Sr., (“Félix”) is 61 years old and retired from his professional boxing trainer career. Tito Trinidad was trained and advised by his father Félix. The Boxing
Writers’ Association of America (“BWAA”) chose Félix as “Trainer of the Year” in 1995 &
12 2000. In the year 2000, Félix was also named “Manager of the Year” by the same organization.
Félix Trinidad has acted all his life in the most forthright and loyal manner towards his protégées, including his son Tito, in the handling of their boxing careers as recognized and stated by a great number of boxing professionals.
4.6 In one of the most characteristic instance of his managing career, Don Félix as he is cordially known had to litigate with Don King in Court to protect his son from an oppressive contract that did not value his position as a champ. At that time, with barely any knowledge of the English language, and while Hurricane Georges was pounding the Puerto
Rico Island, Don Félix was in the Southern District Court of New York, battling legally for two weeks until he obtained a settlement that guaranteed Tito a $42 million contract for four
(4) years.
4.7 In another instance, Don Félix incurred the wrath of the Boxing Institution and
HBO, one of the biggest boxing promoters in that industry, and survived a boycott geared to find a combat for Oscar de la Hoya against Tito, and had Tito fight in another higher weight against David Reid that was much more beneficial to his son’s health. Don Félix also fully backed his son’s retirement.
4.8 Don Félix was a great contributor to Tito’s successful professional boxing career because he was Tito’s trainer and manager throughout his career. Félix’ sole source of work income came from his boxing manager career.
V. JOSÉ “PEPE” ARTURO RAMOS
5.1 Tito and Félix met Respondent Pepe Ramos in or around the year 1991. Pepe
Ramos approached Félix because he wanted to be introduced into the boxing business to play his chances as an amateur. At that time Pepe Ramos worked as a full time salesman at Rovira
13 Biscuits. Thereafter, Pepe Ramos came to be Tito’s personal friend. The relationship got to be so close that Pepe became Tito’s godfather (best-man) at his wedding in 1994. While from time to time Pepe Ramos also assisted on a part time basis Tito’s father, Félix, in his boxing meetings, and as translator in his telephone conferences. Pepe Ramos also got to travel along with Don Félix in his trips to the continental United States. This relationship continued to increase and in the year 1998 Pepe Ramos left Rovira Biscuits and commenced to work for
Tito and Félix (jointly referred to as the “Trinidad”) under contract with Trinidad Boxing, Inc.
(“Trinidad Boxing”). From then on, although Pepe Ramos continued assisting both of the
Trinidad under the contract executed with Trinidad Boxing, Pepe Ramos also acted as Tito’s personal translator throughout his professional boxing career until he exclusively remained acting as Tito’s administrative manager. Under the contract, Pepe Ramos received a $1,500 bi- weekly compensation and a $6,000 compensation per fight. Later, Pepe Ramos’ bonuses successively increased throughout the years and he got to receive up to $150,000 bonus for his participation in one of Tito’s bouts.
5.2 From inception, Pepe Ramos (who by that time had no brokerage license) participated in meetings about the Trinidad’s investment and financial planning and over accounts maintained at different banks and Broker Dealers. Initially, Ramos advised the
Trinidad and had them invest in Certificates of Deposits.
5.3 Pepe Ramos worked full time for the Trinidad during the years 1998 to 1999.
During 1998, Tito held meetings with various Broker Dealers that by that time contacted him in their interest for his account. To these meetings Tito assisted with this father, Don Félix and
Pepe Ramos as his administrative assistant. Sometime in 1998, and motivated by these meetings, Don Félix opened an account at UBS with Mr. Irizarry. On the other hand, Tito also
14 opened an account of approximately $2,000,000 at Doral Securities with Rafael Quixano, as his Financial Consultant. All these meetings were held in the presence of Pepe Ramos who by that time was becoming familiar with the investment industry and with investment concepts since he was acquainted and knowledgeable with numbers and assisted the Trinidad in making their investment decisions. Ramos, in his role as full time employee at Trinidad Boxing, coordinated and scheduled all these meetings.
5.4 As a result of those meetings and sometime in 1999, in its interest to bring over
Tito’s accounts, Doral Securities approached Pepe Ramos and offered him employment and an opportunity to train him in the brokerage industry. Immediately, Pepe Ramos expressed to the
Trinidad his intent of obtaining a security brokerage license. As a result, Pepe Ramos left
Trinidad Boxing to work for Doral Securities, an affiliate of Doral Bank of Puerto Rico that maintained a relationship with UBS-PR as their Broker Dealer and clearinghouse. Pepe-Ramos started working with Doral Securities in a partnership with Angel Aquino who acted as his mentor and associate at that time. When Pepe Ramos expressed to Tito his intent of obtaining a securities-brokerage license, Tito was amenable and was looking forward for Pepe Ramos to be in charge of his investments due to the close personal, trust, and employment relationship that had grown among them throughout the years. Pepe Ramos never explained to the Trinidad that having him act as their broker and Financial Advisor could entail any sort of conflict of interest. Pepe Ramos told the Trinidad that their trust in him would never be misplaced and that if they allowed him to run their accounts, as their financial advisor and broker, he would make their moneys grow and he would always protect them.
5.5 Subsequently, Pepe Ramos had Tito transfer the five million dollars
($5,000,000) deposited at Banco Popular under Zaida Montalvo to Doral (Tito’s purse surplus
15 from his De la Hoya match). Thereafter, Ramos took full control of Tito’s financial affairs, to such a point that he requested Tito not to move his moneys to any securities firm until he had passed the Securities Representative Examination. However, Pepe Ramos also convinced Tito to refinance with Doral Mortgage the mortgages of Tito’s residence and other real estate properties. Pepe Ramos earned significant commissions at Tito’s expense for these transactions in addition to costing Tito an inordinate sum in closing costs, because of the substantial size of the mortgages.
5.6 After Ramos started working in Doral he distanced himself from Don Félix but remained very close to Tito. In the meantime, Don Félix maintained an account with Morgan
Stanley Dean Witter. At all times, Don Félix felt confident and trusted that Pepe Ramos and the Broker Dealers that he came to work for were responsibly managing Tito’s finances and investment accounts, therefore, he did not ever intervene with Tito’s finances.
5.7 On April 4, 2000, shortly prior to obtaining his broker’s license, Pepe Ramos requested and obtained a personal loan from Tito for the principal amount of $225,000 to be paid in a term of fifteen years. That loan was paid off with a payment of $148,500 on August 9,
2007. Pepe Ramos never informed any of the BDs during that seven year period that he had borrowed money from a client and that the loan was still outstanding.
5.8 In or around August 2000, Pepe Ramos passed the General Securities
Representative Examination, and shortly thereafter he began to work as a FA for Doral
Financial Group. After his registration as FA, Pepe Ramos immediately commenced to act as
Tito’s broker and FA. As a start, Pepe Ramos had Tito deposit around $4,000,000 into his account at Doral for a total of invested assets of around $9,000,000. Sometime thereafter, out
16 of his desire to lend a hand to Pepe and collaborate with him, Don Félix also started to give his savings to Pepe for him to invest.
5.9 Since then and until recently, Pepe Ramos came to be an integral part of the
Trinidad’s group, escalating from an administrative assistant on a part time basis all the way to becoming Tito’s personal marketing agent, Financial Planner, Advisor, Manager and Securities
Broker, and as Félix’s Financial Advisor and Securities’ Broker, while Ramos acted as an authorized agent and for the economic benefit of Paine Webber/UBS-PR, Wells
Fargo/Wachovia and Popular Securities/Popular, Inc./Banco Popular.
5.10 In the year 2002, after Félix’s retirement from his professional boxing manager career he handed over to Pepe Ramos the management contracts of promising professional boxer Fres Oquendo and others to start Ramos’ professional boxing manager career, at Ramos’ request.
5.11 Throughout the relationship between the parties, trust grew and was deposited by the Claimants with Ramos to the extent that Ramos handled Tito’s business, financial and investment affairs, as well as Don Félix’s investment affairs as if he had discretionary power.
Yet, in all of the different Broker Dealers that Ramos was employed at and where Ramos serviced the Claimants’ accounts, not a single paper, document or signature gave Ramos such discretionary power or any discretion whatsoever.
VI. THE TRINIDAD’S SUITABILITY NEEDS
6.1 Tito completed three semesters at college but did not obtain a university degree while Don Félix completed elementary studies and was not able to complete eighth grade. Tito and Félix do not read, write, speak or understand the English language. Tito and Félix had no knowledge about, or experience with investments, securities, or financial matters.
17 6.2 When the accounts were opened with the Respondent Broker Dealers the
Claimants’ investment profile was conservative. When Claimants opened their investment accounts they had the following investment profile characteristics as they expressed:
a) they had no knowledge of or experience with securities;
b) the monies they were investing constituted all their available liquid assets;
c) they were interested only in secure, tax free fixed income producing securities;
d) they needed and were counting with the income produced by the securities to fund their living expenses, especially after their retirement, when they had no other source of income, except for social security;
e) the funds deposited in the respective investment accounts had been set aside to finance their future living and/or business expenses;
f) they needed the funds to have liquidity to be available when needed;
g) they could not afford to sustain losses to their capital, and the preservation of the capital was of much greater importance than the rate of return; very risk averse;
h) they wanted to avoid any risk to the capital or their investments;
i) their investment portfolios had to be diversified, precisely to avoid excessive risk, not concentrated as they ultimately were in Puerto Rico Bonds and CEFs;
j) they did not know what the CEFs were, or their lack of liquidity; and
k) they did not have any knowledge about margin loans, were not aware of the possibility of obtaining loans collateralized by securities or of using the proceeds of such loans to buy additional securities, or the possibility of increasing the return on investments through leverage, or of the advantages, disadvantages and risks that such leverage would entail.
6.3 Although Claimants’ accounts were not marked as discretionary, and the investment transactions were not marked as solicited, the Respondent FAs, under the
18 supervision of, and with the knowledge, consent and encouragement of their direct supervisors and the Respondent Broker Dealers, exercised de facto practical and functional discretionary control over all transactions in their accounts. This was so because the Claimants did not have sufficient financial knowledge to understand and independently determine the suitability of any given investment. Moreover, most pertinent financial documents and data related to the recommended securities are in the English language that the Claimants do not clearly understand or dominate. At all times, the Claimants trusted and relied upon Respondents’ professional reputation and expertise although they were not informed of the transactions made in their accounts for the purchase or sale of securities or of any other instruments. FA Ramos always told to the Claimants that he would explain the monthly statements but never did.
However, they did believe that their investments were safe and that the principal would be preserved.
6.4 Therefore, the Respondents owed fiduciary duties to the Claimants with regard to the investment strategies that they recommended to them and that they followed. The extent of Respondents control over the Claimants’ Accounts is shown, among other things, when
Respondents requested and attained the Claimants to sign material account documents in blank, and when they carried out transactions in the Claimants’ Accounts without obtaining their consent or authorization.
6.5 At all times thereafter, Pepe Ramos acted as the Tito’s Financial Planner,
Manager and Advisor, and Securities’ Broker (hereinafter collectively referred to as “Financial
Planner” or “FP”), and as Félix’s Financial Advisor and Securities’ Broker (hereinafter collectively referred to as “Financial Advisor” or “FA”), with the actual or implied knowledge,
19 consent and authorization, of all the Broker Dealers that Pepe Ramos came to work for, to which he brought the Trinidad’s Accounts with him.
6.6 Tito placed his trust and confidence in Pepe Ramos as his personal Financial
Manager, Planner and Advisor and in the Broker Dealers (Paine Webber/UBS-PR, Wells
Fargo/Wachovia and Popular Securities/Popular, Inc./Banco Popular) that Ramos came to work for and relied upon them to design and implement a secure Financial Plan. Tito also entrusted the total purse of his future bouts into the hands of Pepe Ramos and these Broker
Dealers for them to responsibly manage all his finances. That is since then, Tito will handle all the moneys that he was able to earn throughout his professional boxing career to Pepe Ramos and the Broker Dealers that Ramos came to work for with the understanding and agreement that they were to use those monies to pay his boxing debts and income taxes from the monies earned, and invest the remnants in secured securities through instruments that would increase, guarantee or secure the invested money amount and that would produce a fixed income or return, for Tito to use the return to pay for his and his family living expenses throughout the rest of his career and eventual early retirement.
6.7 Shortly after Pepe Ramos came to be a FA, Don Félix also placed his trust on
Pepe Ramos and the Broker Dealers that he worked for. Since then, Don Félix handed to Pepe
Ramos and the Broker Dealers that he worked for all his future income from his boxing manager career with the understanding and agreement that they were to invest those monies in secured securities through instruments that would guarantee or secure the invested money amount and that would produce a fixed income or return, for Félix to use the return to pay for his and his family living expenses throughout the rest of his career and eventual early retirement.
20 6.8 It was well known to Ramos and these Broker Dealers that due to the nature of their boxing profession, the Trinidad were to retire at a young age. Ramos also knew that thereafter they would never be able to generate similar income, and that they needed to ensure that these monies they had earned throughout their professional careers were invested wisely and conservatively to allow the Trinidad and their immediate families the income that they needed and would need after their retirement to continue to live comfortably throughout the rest of their lives.
6.9 Moreover, at all times, the Trinidad specifically requested Pepe Ramos and the different Broker Dealers that he worked for, and it was well known by them, that their main objective was the preservation of the capital of their investments. The Trinidad’s personal circumstances, their financial condition, and objectives required their capital investments to be in secured fixed income producing instruments, where the preservation of the capital was to be of much greater importance than the rate of return.
VII. RESPONDENTS’ SUITABILITY DUTIES
A. Respondents’ General Suitability Duties
7.1 The new FR Rule 2111 about suitability requires that Respondents “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the [Claimants], based on the information obtained through the reasonable diligence of the member or associated person to ascertain the [Claimants’] investment profile.” The phrase “investment strategy involving a security or securities” used in this Rule is to be interpreted broadly and would include, among other things, an explicit recommendation to hold a security or securities, to use and maintain margin or loans for the
21 purchase of securities. This duty applies when Respondents explicitly recommended to the
Claimants to continue with the investment strategy that had been initially recommended with a prior Broker Dealer.
7.2 To comply with FR Rule 2111 Respondents have the duty to make customer- specific determinations of suitability when preparing the investment strategy and portfolios that they recommended to the Claimants, and to tailor their recommendations to the Claimants’ investment needs and profiles.
7.3 Respondents’ investment recommendations had to be responsibly made on the basis of actual knowledge and careful consideration of the securities involved and the
Claimants’ investment profile. To possess the required knowledge to advise and decide upon the securities, Respondents’ had a duty to study and research any available market data and information, any pending legal actions, SEC investigations, risks of default, and market analysts’ consensus regarding the purchase, hold or sale of the securities that formed part of the investment strategy that they explicitly recommended to the Claimants.
7.4 Respondents’ suitability and fiduciary duties to the Claimants are heightened as a direct result of the practical discretionary control that they had over Claimants’ investment decisions and account transactions.
7.5 Moreover, under the suitability Rule, Respondents have an ongoing duty to monitor Claimants’ accounts after the initial investment decision was made to assure that the investments continued to be appropriate in light of changes in the securities market of the
Claimants’ profile. Recognition of such an ongoing obligation is a natural consequence of the fiduciary and suitability duties that Respondents have with respect to the securities that they recommended that the Claimants purchase, hold or sell. This duty requires that the
22 Respondents to advise the Claimants about the need to change the prior recommended investment strategy and the foreseeable risks if no change is taken. See, Vucinich v. Paine,
Webber, Jackson & Curtis, 803 F. 2d 454, 460 (9th Cir. 1986).
7.6 Lastly, Respondents had the duty to have in place a safe “exit strategy”. That is, a plan in place to monitor Claimants’ investments and to have a structured plan to divest the account of the securities when economic factors affected the investment negatively. Such a plan would have entailed “stop loss” thresholds put in place that would trigger a sell order when the securities’ loss in value turn them unsuitable for Claimants’ investment objectives and profile.
B. Respondent Broker Dealers’ Duties Under The Account And Financial Advisor Agreements
7.7 At all times, pursuant to the Account Agreements, Pepe Ramos and the
Respondent Broker Dealers that he worked for acted as the Claimants’ FA and securities’ broker. Under the Account and Financial Advisor Agreement it was the Respondents’ professional responsibility to put together a portfolio of investments that was suitable to the
Claimants’ manifest objective of investing their monies in secure fixed income securities, where the preservation of the capital investment was the principal and main objective.
7.8 The Respondents had the duty to provide security for Claimants’ investment capital by working to mitigate the harm that could be caused by expected or unexpected and unmanageable financial loss, and to produce a financial gain.
7.9 Although none of the Claimants’ accounts were discretionary, nevertheless Pepe
Ramos with Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular’s knowledge, consent and encouragement, exercised de facto practical and functional discretionary control over the accounts.
23 7.10 The Claimants did not have sufficient financial knowledge to understand or determine the suitability of any given investment. Moreover, most pertinent financial documents and data are in the English language that they cannot read or understand. At all times, Claimants trusted and relied upon Respondents’ expertise when they made transactions in their accounts for the purchase or sale of securities, to hold the securities, or in obtaining loans against them. As a result of this trust relationship the Claimants invariably followed the
Respondents’ explicit recommendations in the purchase or sale of securities, in holding the securities, or in obtaining loans against them. Respondents thus owed fiduciary duties to the
Claimants with regard to the management and handling of their accounts.
C. Respondents’ Duties As Tito’s Financial Planner And Manager
7.11 Pepe Ramos acted not only as Tito’s Financial Advisor and securities’ broker, but he also acted with Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular’s knowledge, consent and encouragement, as Tito’s personal Financial Planner and Manager
(“FP”). Thereby, Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular had the duty of, and came to be responsible and liable for, the secure planning and management of Tito’s finances.
7.12 Tito focused his time and energy in his boxing career and delegated to Pepe
Ramos, Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular the secure management of the monies that he earned and the use of those monies in a responsible professional manner to plan for Tito’s immediate and long term personal and family financial needs in accordance with the money amounts that he earned throughout his boxing career.
7.13 In the capacity as Financial Planner and Manager of Tito’s finances, Pepe
Ramos, Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular, had complete and
24 absolute control over Tito’s monies, investments and finances, and were all responsible for the management of Tito’s monies and investments before and after his retirement, in a responsible professional manner to plan for his immediate and long-term financial needs, using his monies to make investments in guaranteed fixed income securities that would protect the principal of the investment, and produce a rate of return sufficient to pay for his personal and family living expenses, and periodic debt, including loan payments, if any, according to a reasonable lifestyle that corresponded to the amount of his earned capital, to timely pay all local and federal income taxes and property taxes to avoid unnecessary fines and penalties, and to payoff or plan to payoff all debt.
7.14 Respondents owed fiduciary duties to Tito with regard to the Financial
Planning, Management and handling of his accounts.
VIII. PAINE WEBBER/UBS-PR - 07/2000 to 03/2007
A. Tito’s Transactions
8.1 In or around June 2000, Tito’s Accounts at Doral Securities, with worth of
$9,122,634.13, were transferred by Ramos to be managed by or through him at Paine Webber
(now “UBS-PR” and hereinafter referred to as “Paine Webber/UBS-PR”). At that time, Tito’s
Accounts had not liens or debts tied to the account.
8.2 Ramos used the Tito’s Accounts as a negotiation chip to obtain employment at
Paine Webber/UBS-PR, and he received substantial monetary incentives for transferring these
Accounts to Paine Webber/UBS-PR.
8.3 At all times thereafter, when Tito met with Respondents FA Pepe Ramos and
Paine Webber/UBS-PR to discuss his investments and performance of his investments, the
Respondents explicitly recommended or had Tito to invest or continue to invest his available
25 liquid capital in the purchase of Puerto Rico (“PR”) Bonds, and Closed End Funds (“CEFs”); to hold and continue to hold these securities; to obtain or continue to maintain margin and other loans to purchase more or to hold these securities (hereinafter, “investment strategy”).
This investment strategy was ordered, approved and/or allowed to be implemented by the
Respondent Paine Webber/UBS-PR.
8.4 During the management of Tito’s account by Ramos and Paine Webber/UBS-
PR, Tito deposited $16,474,400.00 in cash into his Accounts. After Tito’s May 11, 2002, fight with Hacine Cherifi, the Trinidad evaluated with FP Pepe Ramos and Paine Webber/UBS-PR
Tito’s retirement. Ramos, acting as Paine Webber/UBS-PR’s FA and agent, assured the
Trinidad that Tito’s income taxes of his previous fights were up-to-date, and that he was personally in charge of overseeing and assuring that Tito’s tax matters were complied with and timely paid. Ramos also represented that the Trinidad had enough saved monies and assets for them to retire. Relying upon those representations, shortly thereafter Tito publicly announced his professional boxing retirement.
8.5 Nevertheless, contrary to Ramos’ representations, Tito’s income taxes of his previous fights were not up-to-date. These income taxes had not been timely paid because
Ramos and Paine Webber/UBS-PR’s did not set aside enough cash and/or cash equivalent in
Tito’s accounts to timely pay the tax debt and because of their failure to produce and provide on time the information about the cost basis of the investments sold and requested by Tito’s accountant to file the returns. Instead Ramos used the cash and cash equivalent to buy additional securities, as explained in more detail below. Notwithstanding the insistence of the
Tax Attorney Jaime Benitez for Paine Webber/UBS-PR to timely produce the required information, the costs for the majority of the securities transferred from Doral, was not timely
26 made available by them. Presumably, the lack of diligence with the production of this information was caused by Ramos’ unwillingness to inform Tito of the losses that he had sustained with his investments. Moreover, both Pepe Ramos and Paine Webber/UBS-PR continued to earn commissions over the securities not sold to pay the tax debt at the expense of causing great economic harm to Tito due to the fines, interest and late charges that he later was forced to pay on his income tax debt.
8.6 In August 2002 and after Tito’s first retirement, Pepe Ramos and UBS provided him with an unsolicited line of credit in the amount of $5,000,000. Immediately thereafter,
Ramos and Paine Webber/UBS-PR recommended and had Tito payoff the mortgages of his principal residence and other real estate properties, as well as certain other expenses, withdrawing from the line of credit around $1,362,278.22.
8.7 Tito never requested any line of credit. FP Pepe Ramos explained to Tito that the loan interest rate on the line of credit would always be lower than the guaranteed investment dividends, that he would always earn a positive spread that would increase his net return at no risk. Tito delegated on FP Pepe Ramos and Paine Webber/UBS-PR this decision as long as his monthly expenses (that were much less than the monthly dividends) were covered.
Tito did not know and it was never fully explained to him by Ramos or any of the Respondent
Broker Dealers that he came to work for, that his investments served as collateral to this line of credit, about the margin percentages that had to be maintained, that if the investments value descended by a given percentage there would be a margin call, and that he could be held personally liable for any outstanding loan amounts if the value of the investments came to be insufficient to payoff the loan. Had Tito been properly informed about these risks he would have not consented to the use of a line of credit.
27 8.8 Thereafter, FA Pepe Ramos and Paine Webber/UBS-PR started to use Tito’s assets and future income to purchase additional securities and the line of credit to obtain leverage against those securities to pay Tito’s living expenses and future income taxes, using this line of credit to purchase and sell securities, and as Tito’s personal checking account, and they failed to make adequate payments to the line of credit debt, thereby unreasonably increasing Tito’s debt and risk exposure under the line of credit notwithstanding he had sufficient assets to cancel all debt.
8.9 Soon thereafter, and contrary to FP Pepe Ramos and Paine Webber/UBS-PR’s representations, Tito learned that there were certain Internal Revenue Service’s adjustments and penalties related to the filings, and late filings, of the 1999, 2000 and 2001, federal income tax returns, that amounted to around $12,000,000. FP Pepe Ramos and Paine Webber/UBS-PR are liable to Tito for these adjustments and penalties related to the filings, and late filings, of the 1999, 2000 and 2001, federal income tax returns, due to their failure to produce to Tito’s tax attorney the information that he had requested to file them on time, and due to their failure to adequately plan for having the money available for income tax payments. In addition, Pepe
Ramos was at fault for these deficiencies because of his failure to pay Tito’s estimated taxes during the course of the preceding natural year.
8.10 In January 2003, Pepe Ramos obtained a second loan from Tito in the principal amount of $50,000 for the production and sale of a commercial musical recording to be paid during one year after the launch of the record. On April 9, 2009, Pepe made a payment of
$5,000 to Tito and still owes him the rest of the loan.
8.11 Although Pepe Ramos took the first loan mentioned herein above from Tito prior to obtaining his license, he had the duty to report the existence of the loan when he came
28 to work for Paine Webber/UBS and later with Wells Fargo/Wachovia and he failed to do so.
Moreover, FINRA R 3240 required Pepe Ramos to obtain pre-approval in writing from Paine
Webber/UBS for this second loan and he also failed to do so. These were red flags about
Ramos’ mismanagement of Claimants’ accounts that went by unnoticed by Paine Webber/UBS and later with Wells Fargo/Wachovia. Ramos’ improper conduct of not disclosing the existence of the loan was permitted to go unnoticed because of Paine Webber/UBS and later with Wells Fargo/Wachovia’s lax supervision and lack of adequate supervisory standards. This notwithstanding the intrinsic conflict of interest and potential economic harm that Ramos borrowing from Tito entailed.
8.12 As of November 30, 2003, as per his personal financial statements, Tito’s investment securities were worth around $19,000,000, while his line of credit amounted to
$2,606,000, him having a positive equity of around $16,393,624.
8.13 In or around December 2003, FP Pepe Ramos and Paine Webber/UBS-PR recommended and had Tito obtain mortgages for the amount of around $4,484,100.00 over his principal residence and other real estate properties, to use those monies to make partial payments to his federal income tax debt to stop any collection effort and/or lien.
8.14 Thereafter and contrary to the representations made, FP Pepe Ramos and Paine
Webber/UBS-PR used those monies instead to, without Tito’s knowledge or authorization, purchase more securities and not to make payments to his income tax debt. For example, on
December 29, 2003 Ramos bought a participation in the Puerto Rico Fixed Income Fund in the total amount of $2,501,750 under Account Number JX 46356. This investment was paid by the mortgage proceeds that were supposed to be applied to the tax debt. Having Tito under the impression or belief that he had no other choice but to return to boxing to earn the monies that
29 he needed to make an immediate payment to the federal income tax debt, FP Pepe Ramos and
Paine Webber/UBS-PR lead Tito to fight again. And instead, FP Pepe Ramos and Paine
Webber/UBS-PR later used the purse generated from his fight with Ricardo Mayorga
(“Mayorga”) to buy additional investments, mostly consisting of CEFs and increasing thereby the unsolicited line of credit to $9,400,000.
8.15 In March, 2004, Tito announced his comeback and a fight against Mayorga was arranged for October 2, 2004.
8.16 In or around June, 2004, Pepe Ramos had certain disagreements with Aquino and he had Tito sign a letter prepared by him addressed to Paine Webber/UBS-PR requesting to have Pepe Ramos as his sole FA. This letter was addressed to the Paine Webber/UBS-PR’s
Branch Manager, Eugenio Belaval with copies sent to Héctor Sueiro, Miguel Ferrer, Angel
Aquino, Erick Sneider and Doel Garcia at Paine Webber/UBS-PR.
8.17 After Tito’s comeback was publicly announced and his fight against Mayorga was arranged, Pepe Ramos and Paine Webber/UBS-PR withdrew, without Tito’s consent and knowledge, around $8,267,333 from the credit line to make payments to Tito’s income tax debt and to pay certain professional fees that were owed by him to the CPA firm Ernst & Young contracted by Ramos to represent Tito at the IRS’ tax dispute claim. These monies were irresponsibly withdrawn by Pepe Ramos and Paine Webber/UBS-PR from the line of credit instead of using to make said payment the monies obtained from the mortgages proceeds as they had represented to do with Tito together with the monies that Tito was soon to receive from his upcoming Mayorga’s fight.
8.18 As a result thereof, on or around September 30, 2004, days prior to the Mayorga bout, Tito investment assets had been increased to around $29,472,699.32, and his line of
30 credit debt to around $10,926,971, accruing an approximate monthly interest amount of around
$20,932. Both Pepe Ramos and Paine Webber/UBS-PR continued to earn substantial fees and commissions through these transactions at Tito’s expense and risk.
8.19 From the Mayorga’s purse Tito received a net amount of around $6,691,400 that were used by FP Pepe Ramos and Paine Webber/UBS-PR to purchase additional securities and were not applied to decrease his line of credit debt, nor were used to pay his outstanding federal tax debt, as negotiated by Ernst & Young. Later, on December 17, 2004 the IRS informed that Tito still owed certain penalties in addition to interest thereon for the years audited by the IRS for the aggregate amount of $2,113,587.92. This tax debt was also paid by
FA Ramos from Tito’s line of credit. This determination by the IRS was motivated by the failure to timely pay the balance due for 2001, as determined and notified on October 6, 2004 by the IRS Internal Revenue Agent. For this reason the IRS later notified an additional tax of
$846,173.71 plus interest and penalties for 2001. The total interest and penalties paid by Tito due to the late filing and late payment of federal taxes for these years amounted to around
$3,000,000, plus the compensation payable to Ernst & Young of around $450,000.
8.20 On May 12, 2005, Tito then fought with Winky Wright (“Wright”). Tito’s earnings from the Wright’s fight were around $5,333,000. FP Pepe Ramos and Paine
Webber/UBS-PR then also use those monies to purchase additional securities and not to be applied to his line of credit debt or for paying the taxes resulting from this fight. Both Pepe
Ramos and Paine Webber/UBS-PR continued to earn substantial fees and commissions through these transactions at Tito’s expense and risk.
8.21 During the 07/2000 to 03/2007 period, FP Pepe Ramos and Paine Webber/UBS-
PR invested around $29,696,728.94 of monies earned by Tito in securities, and increased the
31 line of credit to purchase and sell securities, to increase his investment in securities from
$9,122,634 to around $31,073,636, and increasing his line of credit debt from 0 to $17,341,217 at extremely high interest rates (as a matter of fact Pepe solicited an increase of the line of credit to $18,000,000), and induced Tito to cancel around $2,606,000 in mortgage debt, to thereafter re-mortgage the same properties for around $4,484,100. Tito recently learned that these mortgages arranged by FP Pepe Ramos with the approval and recommendation of Paine
Webber/UBS-PR were a 15-year loan at a 6.5-7.9%, due on January 2019, with a balloon payment almost equivalent to the original loan amount. After all these transactions, Tito’s net worth was around $9,424,501. That is, very similar to his net worth when his Accounts were opened by FP Pepe Ramos with Paine Webber/UBS-PR, but his line of credit debt was increased from zero (0) to around $17,341,217, and his mortgage debt from $2,606,000 to around $4,484,100, for a total debt of around $21,649,134. Both FP Pepe Ramos and Paine
Webber/UBS-PR earned substantial monies in fees and commissions from all these transactions at Tito’s financial risk, costs and expense, and Tito’ has sustained severe financial loss, injury, and ruin, as a direct result of the same. It also should be noted that the interest accumulated for this period on the line of credit was $2,291,801.46 while the payment made was $2,137,147.82 and the difference of $54,459.17 was debited (capitalized) to the line of credit.
8.22 The economic losses proximately caused to Tito by Respondent UBS-PR’s wrongful conduct as alleged in great detail in the unsuitable Investment Strategy and the
Fraudulent Sale and Loan Schemes alleged herein below are estimated to be no less than as follows:
32 Interest on Broker Dealer Commissions Interest /C.L. Mtg. payment Total Compensatory $Inv. UBS-PR Compensatory 9,315,911.10 3,000,000.00 4,394,509.44 2,291,801.06 3,801,073.10 $22,803,294.70 to Abr.2007 *
Penalties, interest and associated $3,450,000.00 costs in income taxes
Mortgage $4,484,100.00 Loans
TOTAL $30,737,394.70
*Interest as of Feb 2014
B. Félix’s Transactions
8.23 In or around December 2000, Don Félix opened an account with Pepe Ramos at
Paine Webber/UBS-PR with a deposit of around $1,240,800 that he earned from the Vargas’ fight. Although at that time his accounts were maintained at Morgan Stanley Dean Witter
(“Dean Witter”), Don Félix gave those moneys to Pepe to invest because of desire to support him after he had recently passed his brokerage license.
8.24 Subsequently, Don Félix felt he had been deceived with the management of the investments that he had with Dean Witter, where although Félix had insisted in the protection of the capital of his investments said capital was being impaired through Dean Witter’s management of his accounts.
8.25 Don Félix’s disagreement with Dean Witter led to a claim made by him against
Dean Witter. Pepe Ramos was aware of this situation and assisted Don Félix in developing the grounds for said claim against Dean Witter. The Dean Witter’s claim produced a settlement in
July 2002.
33 8.26 After the settlement, Don Félix deposited at Paine Webber/UBS-PR to be managed by Pepe the settlement proceeds together with the other investments he had withdrawn from Dean Witter.
8.27 Don Félix made very clear to Pepe Ramos and Paine Webber/UBS-PR that he had withdrawn his investments from Dean Witter because it had not followed his investment objective to protect the capital of his investments and that his investments had to be made in guaranteed fixed income securities. Thereafter, Félix continued to make all deposits in the
Paine Webber/UBS-PR’s account.
8.28 At all times thereafter, when Don Félix met with Respondents FA Pepe Ramos and Paine Webber/UBS-PR to discuss his investments and performance of his investments, the
Respondents explicitly recommended Don Félix to invest or continue to invest his available liquid capital following the above stated investment strategy. This investment strategy was ordered, approved and/or allowed to be implemented by the Respondent Paine Webber/UBS-
PR.
8.29 On May 18, 2003, Pepe Ramos requested and obtained a loan from Don Félix for the amount of $175,000 for a maximum term of five years that was to be paid and disbursed from Félix’s line of credit at Paine Webber/UBS-PR. Pepe Ramos agreed to pay the monthly interest charged by the line of credit loan and to make periodic payments to principal.
Pepe made several monthly payments of $1,000/$1,500 to pay interest and to be applied to principal and then stopped making payments. FINRA R 3240 required Pepe Ramos to obtain pre-approval in writing from Paine Webber/UBS for this loan to Don Félix and he also failed to do so. The negligent supervision at Paine Webber/UBS permitted this loan without
34 disclosure, knowing the rules that forbid such conduct and knowing the intrinsic conflict of interest that borrowing from a client by the FA represents.
8.30 By the end of October 2004, Don Félix received his income from the 2004
Mayorga’s fight and instructed Pepe to pay-off the line of credit. However, Pepe did not agree and insisted on investing this money so to increase his return of investment. Pepe finally accepted to payoff the credit line due to Don Félix’s insistence and his offer to condone the balance of Pepe’s unpaid personal loan as a bonus to Pepe for his participation in
Tito’s/Mayorga’s fight. Pepe also informed Don Félix that the line of credit was left open for any future eventuality.
8.31 Thereafter, contrary to Don Félix’s prior requests, Pepe used Don Félix line of credit to pay his January 2005 income tax’s estimated return of $500,000 increasing the balance of the line to $751,358. In May 2005, Don Félix deposited new money in the amount of $2,640,000 coming from his income from the Winky Wright’s fight. Likewise, Pepe Ramos recommended Don Félix to invest this money instead of paying expenses. To address Don
Félix’s concern, in June Ramos opened new account #1G-03531 7S in the amount $1,700,000 that presumably would respond for and collateralize Don Félix’s line of credit and leave free the rest of Don Félix’s investments in the approximate amount of $5,000,000. Both Pepe
Ramos and Paine Webber/UBS-PR earned and continued to earn fees, interest and/or commission from the loan taken by Félix from the line of credit to in turn loan the monies to
Pepe Ramos, as well as over the rest of the loans taken by Félix against the line of credit.
8.32 As of March 31, 2007, Don Félix had assets at Paine Webber/UBS-PR with a value of around $6,647,515, a line of credit debt of around $1,325,851, and around $1,241,035 in his retirement account, for a net value of around $6,562,699.
35 8.33 Both Pepe Ramos and Paine Webber/UBS-PR earned substantial monies in fees and commissions, and interest from Félix investments and transactions at Félix’s financial risk, costs and expense.
8.34 The economic losses proximately caused to Don Félix by Respondent UBS-
PR’s wrongful conduct as alleged in great detail in the unsuitable Investment Strategy and the
Fraudulent Sale and Loan Schemes alleged herein below are estimated to be no less than as follows:
Broker Dealer Compensatory Commissions Interest on $Inv. Interest /C.L. Total UBS-PR Compensatory to 2,747,749.74 700,000.00 1,296,170.82 216,564.94 $4,960,485.50 Abr.2007 *
*Interest as of Feb 2014
IX. WELLS FARGO/WACHOVIA - 03/2007 TO 11/2010
A. Tito’s Transactions
9.1 In or around late March 2007, FP Pepe Ramos left UBS-PR and came to work for Wachovia Corporation (later acquired by Wells Fargo and hereinafter referred to as “Wells
Fargo/Wachovia”).
9.2 Tito’s Accounts at Paine Webber/UBS-PR, were transferred by FP Pepe Ramos to be managed through him at Wells Fargo/Wachovia.
9.3 FP Pepe Ramos used the Trinidad’s Accounts as a negotiation chip to obtain employment at Wells Fargo/Wachovia, and he received substantial monetary incentives for transferring these Accounts to Wells Fargo/Wachovia.
9.4 At all times when Tito periodically met with Pepe Ramos and the Respondent
Wells Fargo/Wachovia to discuss his investments and performance of his investments, the
Respondents explicitly recommended the Claimants to invest or continue to invest their
36 available liquid capital in the purchase of PR Bonds, and CEFs; to hold and continue to hold these securities; to obtain or continue to maintain margin and other loans to purchase more or to hold these securities (hereinafter, “investment strategy”). This investment strategy was ordered, approved and/or allowed to be implemented by the Respondent Wells
Fargo/Wachovia.
9.5 Tito’s last boxing match was on January 19, 2008, with Roy Jones Jr. (“Jones”).
Tito’s earnings from the Jones fight were around $9,715,000. FP Pepe Ramos and Wells
Fargo/Wachovia used those monies to purchase additional securities and did not use them to pay his line of credit debt. Instead and notwithstanding this new cash deposit FA Ramos and
Wells Fargo/Wachovia, again without Tito’s consent, solicited an increase in Tito’s line of credit augmenting Tito’s credit limit to $21,000,000.
9.6 Throughout the 03/2007 to 11/2010 period, FP Pepe Ramos and Wells
Fargo/Wachovia continued to use Tito’s line of credit to purchase, sell and carry securities, and as Tito’s personal checking account, and they failed to make payments to the line of credit debt, thereby unreasonably increasing Tito’s debt and risk exposure under the line of credit notwithstanding he had sufficient assets to cancel all debt.
9.7 As a result thereof, during this period, Tito’s investment in securities was increased to around $41,051,734, the line of credit to around $21,791,301 and the mortgages over his personal residence and other real estate properties were not paid, for a total debt of around $25,706,239. This notwithstanding that from June 2000 through November 2010 Tito had made cash deposits of $48,534,000.
9.8 Both FP Pepe Ramos and Wells Fargo/Wachovia earned substantial monies in fees and commissions from all these transactions as well as significant monthly interest on the
37 line of credit amount at Tito’s financial risk, costs and expense, and Tito’ has sustained severe financial loss, injury, and ruin, as a direct result of the same.
9.9 The economic losses proximately caused to Tito by Respondent Wells
Fargo/Wachovia’s wrongful conduct as alleged in great detail in the unsuitable Investment
Strategy and the Fraudulent Sale and Loan Schemes alleged herein below are estimated to be no less than as follows:
Interest on Broker Dealer Commissions Interest /C.L. Total Compensatory $Inv. Wells Fargo Compensatory to 9,661,696.90 1,000,000 1,977,771.33 2,642,672.23 $14,282,140.46 Oct. 2010 *
*Interest as of Feb 2014
B. Félix’s Transactions
9.10 Félix accounts at Paine Webber/UBS-PR, were also transferred by Pepe Ramos to be managed by him at Wells Fargo/Wachovia.
9.11 At all times when Don Félix met with Respondents’ FA Pepe Ramos and Wells
Fargo/Wachovia to discuss his investments and performance of his investments, the
Respondents explicitly recommended Don Félix to invest or continue to invest his liquid capital following the above stated investment strategy. This investment strategy was ordered, approved and/or allowed to be implemented by the Respondent Wells Fargo/Wachovia.
9.12 In or around late March or early April 2007, Pepe Ramos had Félix transferred assets from Paine Webber/UBS-PR to Wells Fargo/Wachovia with a value of around
$6,591,354, a line of credit debt of around $1,338,753 and around $1,251,245 in his retirement account, for a net value of around $6,503,846. Thereafter, Don Félix made additional deposits of $4,620,000 from the income received from Tito’s boxing fight with Mayorga.
38 9.13 Both Pepe Ramos and Wells Fargo/Wachovia earned substantial monies in fees and commissions from Félix investments and transactions as well as monthly interest on the line of credit at Félix’s financial risk, costs and expense.
9.14 The economic losses proximately caused to Don Félix by Respondent Wells
Fargo/Wachovia’s wrongful conduct as alleged in great detail in the unsuitable Investment
Strategy and the Fraudulent Sale and Loan Schemes alleged herein below are estimated to be no less than as follows:
Broker Dealer Compensatory Commissions Interest on $Inv. Interest /C.L. Total Wells Fargo Compensatory to Oct. 3,511,640.52 300,000.00 718,840.80 198,670.00 $4,729,151.32 2010 *
*Interest as of Feb 2014
X. POPULAR SECURITIES/POPULAR INC./BANCO POPULAR SINCE ON OR AROUND 11/29/10 UP TO THE PRESENT
A. Tito’s Transactions
10.1 On or around November 16, 2010, FP Pepe Ramos left Wells Fargo/Wachovia and came to work for Popular Securities.
10.2 Tito’s Accounts at Wells Fargo/Wachovia were transferred by FP Pepe Ramos to be managed through or by him at Popular Securities.
10.3 FP Pepe Ramos used the Trinidad’s Accounts as a negotiation chip to obtain employment at Popular Securities, and he received substantial monetary incentives for transferring these Accounts to Popular Securities.
10.4 At all times when Tito periodically met with Pepe Ramos and the Respondents
Popular Securities/Popular Inc./Banco Popular to discuss his investments and performance of his investments, the Respondents explicitly recommended the Claimants to invest or continue to invest their available liquid capital in the purchase of PR Bonds, and CEFs; to hold and
39 continue to hold these securities; to obtain or continue to maintain margin and other loans to purchase more or to hold these securities (hereinafter, “investment strategy”). This investment strategy was ordered, approved and/or allowed to be implemented by the Respondents Popular
Securities/Popular Inc./Banco Popular.
10.5 As of the date of transfer, Tito’s Accounts had assets with the market value of around $38,650,110, a line of credit loan balance of around $21,850,188, with an equity of around $16,799,812, and an unrealized loss of around $5,480,158.54. By that time, Tito’s balance in his money market account was of $5,419,874.46 and neither FP Pepe Ramos nor
Popular Securities ever used this money to lower his line of credit or to pay debts and instead used these funds to buy new investments consisting in their majority of CEFs.
10.6 Throughout the 11/16/2010 and up to the present, FP Pepe Ramos and Popular
Securities continued to use the line of credit to carry, purchase and sell securities, and as Tito’s personal checking account, and they failed to make payments to the line of credit debt, thereby unreasonably increasing Tito’s debt and risk exposure under the line of credit notwithstanding he had sufficient assets to cancel all debt.
10.7 Both FP Pepe Ramos and Popular Securities earned substantial monies in fees and commissions from all these transactions at Tito’s financial risk, costs and expense. As a result of the Respondents’ fault in the management of Tito’s accounts as alleged in detail hereinafter, as of September 26, 2013, Tito’s Accounts had assets with the value of around
$26,194,056.57, and a line of credit loan balance of around $21,310,906. Days before, on
September 19, FP Pepe Ramos met with Tito and his accountant, Santos Gomez, to notify
Tito of a margin call of around $5,000,000.
40 10.8 To cover the deficiency, Pepe suggested Tito to use his money market account that by that time had a balance of approximately $5,000,000. By this time, Tito also learned that his principal residence had a mortgage of approximately $600,000.
10.9 Shortly thereafter, Don Félix and Blanca Nelly met with Pepe at their Palma
Real house. When Don Félix and Blanca Nelly inquired Pepe about their finances Pepe answered them that they had nothing to worry about, and recommended them to go ahead with their plans to remodel their house because they did have enough cash available to do so.
10.10 Tito concerned and extremely upset about what he had just learned from Pepe
Ramos reached out his father for help. At that time, Don Félix also asked his wife, Blanca
Nelly for assistance because she has a better understanding about numbers. Don Félix and
Blanca Nelly had not ever before assisted Tito in these matters because they did not want to intervene with Tito’s finances, they had trusted that Tito’s finances were safe in the hands of
Pepe Ramos, Popular Securities and the other Brokerage Firms that Pepe had worked for, and they did not want to be considered to be meddling in Tito’s financial matters.
10.11 Don Félix and Blanca Nelly met with Tito on September 23rd, 2013, to review and discuss the matter of his finances. When they reviewed Tito’s latest statements of August
2013 showing an investment market value of $41,921,288.98 they thought that this was not consistent with what Pepe had informed Tito that he had a deficiency of around $5,000,000.
10.12 Concerned about Tito’s finances, Blanca Nelly contacted Zaida Montalvo
(“Montalvo”) from Popular in an attempt to clarify this matter. Montalvo explained them that
Tito’s financial situation was very delicate because of the size of the line of credit debt and the recent drastic drop in the investment value of his accounts that as of said date were in around
$33,768,439.00. The stated value represented a loss of around $9,000,000 in market value in
41 three weeks. They scheduled a meeting for September 26, 2013, to register Tito’s account for internet access and to discuss the manner in which Tito’s principal residence could be paid-off.
10.13 The Trinidad met with Montalvo and she explained them that Tito had a great percentage of his investments in the CEFs that had tumbled and that this had negatively affected Tito’s portfolio but that the CEFs funds prices would eventually come to normal. As a matter of fact, the value of Tito’s investments as of the day of the meeting had drop down to
$26,194,056.57. The Trinidad also asked Popular to use the moneys in Tito’s money market accounts to payoff the mortgages over his properties and to apply any difference to the line of credit. Montalvo compromised herself to convey Tito’s proposal to Popular and to get back with the response to the Trinidad. Later that day, Montalvo called to notify that Tito’s
September 26th, 2013 work-out proposal was not accepted because his accounts were frozen and the regulatory requirements made compulsory that Tito cover the outstanding debt balance.
10.14 It was not until that day that Tito realized that Ramos and Popular had not complied with the financial responsibilities that Tito had entrusted them with, and that they had placed him in a financial position that they had assured him could never happen.
10.15 At the meeting Popular notified Tito that it was counting on his IBF’s
Retirement funds to be applied to his line of credit debt inasmuch Pepe Ramos had already committed those monies to said debt.
10.16 Both Pepe Ramos and Montalvo assisted to a September 27th, 2013 meeting that was held at Don Félix’s house. In this meeting, they had Tito sign a Pledge Agreement providing other accounts as additional guarantee for the outstanding line of credit loan debt.
Pepe Ramos reiterated that the reason for the refinancing of Tito’s properties was to pay Tito’s income tax debt. Pepe Ramos acknowledged to Don Félix that he had mismanaged Tito’s
42 investments and that his strategy had always been to seek remedies to solve problems instead of planning ahead. Pepe Ramos also stated that he believed that the only solution to solve
Tito’s financial crisis was for him to return to boxing.
10.17 Without Tito’s knowledge and consent and before the aforementioned meeting took place, Ramos and Popular Securities had already begun selling securities in Tito’s accounts to apply the proceed to the outstanding margin call and by September 26, 2013, they had already sold assets serving as collateral for the loans, in the amount of around
$5,631,952.69 that were applied to the loan debt, at a realized loss of around $817,527.66.
10.18 On September 30, 2013, at the Trinidad’s request Pepe Ramos was removed as
Tito and Don Félix’s FA and their accounts were placed on House Accounts.
10.19 Thereafter, on October 10, 2013, Tito was advised of another margin call of around $3,192,825. Popular Securities had initially placed this margin call on hold because Tito had insufficient assets in his investment Accounts than could be sold to cover the same. On
March 31, 2014, Respondent Popular, through Montalvo, advised Tito that the margin call debt then was $2,936,023 and granted Tito 20 days, that is until April 20, 2014, to cover said debt or it would take action against Tito’s pledged assets with Popular to cover the same.
10.20 Both FP Pepe Ramos and Popular Securities have earned substantial monies in fees, interest and commissions from all these transactions at Tito’s financial risk, costs and expense, and Tito has sustained severe financial loss, injury, and ruin, as a direct result.
10.21 The economic losses proximately caused to Tito by Popular Securities/Popular
Inc./Banco Popular’s wrongful conduct as alleged in great detail in the unsuitable Investment
Strategy and the Fraudulent Sale and Loan Schemes alleged herein below are estimated to be no less than as follows:
43 Interest on Broker Dealer Commissions Interest /C.L. Total Compensatory $Inv. Popular Securities & Popular One Compensatory 23,953,145.34 2,000,000 - 2,050,659.56 $26,003,804.90
B. Félix’s Transactions
10.22 Don Félix’s accounts at Popular Securities were treated in much the same way, without regards to suitability or his retirement age and purpose.
10.23 Félix’s accounts at Wells Fargo/Wachovia were also transferred by Pepe Ramos to be managed by him at Popular Securities, with a value of around $10,467,531, a line of credit debt of around $1,500,000 and around $2,874,320 in his retirement account.
10.24 At all times when Don Félix met with Respondents FA Pepe Ramos and
Popular Securities/Popular Inc./Banco Popular to discuss his investments and performance of his investments, the Respondents explicitly recommended Don Félix to invest or continue to invest his available liquid capital following the above stated investment strategy. This investment strategy was ordered, approved and/or allowed to be implemented by the
Respondents Popular Securities/Popular Inc./Banco Popular.
10.25 On or around December 9, 2011, Pepe Ramos requested and obtained another loan from Don Félix in principal amount of $175,000 to be disbursed from Félix’s line of credit with Popular, Inc./Banco Popular, with interest paid and discounted in advance, for the purpose of covering certain medical expenses incurred in the surgery of one of his daughters and to help a relative of his whose wife had recently died and was in financial need.
10.26 To carry out this transaction, Pepe Ramos arranged a withdrawal in the amount of $169,312 from Félix’s line of credit with Popular, Inc./Banco Popular that was deposited on
44 December 9, 2011 in Félix’s bank account at Scotiabank, and then on December 16, 2011, had
Félix issue a check from said account to Pepe Ramos for the same amount. Pepe Ramos agreed to pay the annual interest charged by the line of credit loan and to make periodic payments to principal. Thereafter Pepe Ramos made one payment of $24,000 to Don Félix in January 2013.
Pepe Ramos took the $24,000 to Félix in cash for the payment. Don Félix refused to take all the cash. He accepted $3,000 in cash and requested and had Pepe Ramos deposit the other
$21,000 into Félix’s Scotiabank account. Don Félix also requested Pepe Ramos to make a
$25,000 partial payment to the line of credit from his own funds but later learned that Pepe
Ramos failed to do so. Thereafter Pepe Ramos breached the agreement and has failed to make any more payments to pay the interest and/or repay the principal of the loan amount.
10.27 Ramos had the obligation to report the existence of the loan when he came to work for Popular Securities and failed to do so. This was a red flag about Ramos’ mismanagement of Claimants’ accounts that went by unnoticed by Popular Securities. Ramos’ improper conduct of not disclosing the existence of the loan was permitted to go unnoticed because of Popular Securities’ lax supervision and lack of adequate supervisory standards. This notwithstanding the intrinsic conflict of interest and potential economic harm that Ramos borrowing from Don Félix entailed.
10.28 On February 7, 2007, Don Félix and his spouse, Blanca Nelly met with Ramos at their home. In that meeting they expressed once again to Ramos their concern about the balance of the loan account and their desire to pay-off the line of credit. Ramos agreed to make payments to the loan account, with an initial payment of $75,000 that same day, and to make payments of $250,000 every six months until total payoff. Ramos stated that he was to use
“accumulated dividend surplus” that he was holding in Don Félix’s accounts. Ramos requested
45 Don Félix and Blanca Nelly to trust his representation that he would payoff the loan in around three years and that he did not recommend to pay off the line with a lump sum payment.
Ramos also guaranteed that Don Félix was to receive $38,000 in monthly income through the fixed income investments.
10.29 The following is a chart of certain transactions carried out by Pepe Ramos and
Popular Securities in Félix’s accounts in December 2012. These transactions were clearly made by Pepe Ramos and Popular Securities for Pepe to reach the year-end production goals, for him to receive a payout bonus and/or make the sales’ Club, as no other reason for these trades is rational or reasonable. These transaction entail no improvement whatsoever for Don
Félix’s accounts and are contrary to the representations made by Ramos and Popular to Don
Félix that there was no liquidity whatsoever in the accounts to pay off the line of credit.
10.30 Account PSL-005622
Balance line of (1,753,400.73) SALES: credit dec. 2012 PUERTO RICO AAA ______10.00 9.95 9.55 9.50 1,146,427.22 BUYS:
PUERTO RICO FIXED INCOME FD P R INVS TAX FREE FUND IV 4742 47,187.40 P R INVS TAX FREE FO V 25246 241,103.80 P R INVS TAX FREE FD VI 58000 551,004.50 PR cusir 7452761054 30000 300,004.50 TOTAL: 1,139,300.20 TOTAL ACCOUNT PSL-005622 1,139,300.20
Account PSL-005630
SALES:
PUERTO RICO AAA TARGET MAT FD 81959 881,384. PUERTO RICO SALES TAX FING CORP SALES 6.05% 2007-B 150000 161,284.88
46 TOTAL: 980,880.13 BUYS: PUERTO RICO INVS FLEXIBLE PRTFLIO 1 9.2 10870 100,008.50 PUERTO RICO INVS TAX FREE FO INC II 9.45 4810 45,459.00 PUERTO RICO INVS TAX FREE FO INC IIII 9.4 3778 35,517.50 PUERTO RICO INVS TAX FREE FD IV 9.5 6083 57,793.00 PUERTO RICO INVS TAX FREE FD INC I 9.3 11619 108,061.20 PUERTO RICO INVS TAX FREE FD VI 10 17635 176,354.50 PUERTO RICO TARGET MAT FD INC 8.3 12000 99,604.50 PUERTO RICO INV TAX FREE FD INC TR I 9.15 6664 60,980.10 PUERTO RICO INVS TAX FREE FD VI INC 10 9837 98,374.50 PUERTO RICO FIXED INCOME FUND 2 9.85 8113 79,917.55 PUERTO RICO FIXED INCOME FUND 3 9.95 14240 141,692.50 TOTAL ACCOUNT PSL-005630 1,003,762.85
10.31 On December 3rd, 2012, Ramos proceeded to sell Tax Free Puerto Rico Target
Maturity Fund, in Tito’s account PSL-005681 marked as solicited (contrary to the facts because Don Félix was not even notified of these transaction before or after they took place and hence, never authorized said transaction) at a cost, to then buy part of them at a higher price in Don Félix’s account PSL-05630. Ramos had the gall to conduct a cross between Tito and Félix’s accounts at a cost to both of them, charging commissions, taking a spread and charge against the already compromised Félix credit line account that was authorized by the
Popular Securities and by MSRB Rules approved by Popular Securities’ trading desk.
10.32 The fore identified December trades effected by Ramos and allowed by Popular
Securities’ management amounted to $2,143,063.05. These transactions were made at
Claimants’ expense without producing any reduction of the credit lines’ debt, improvement in quality of the securities, or liquidity, and compromising Don Félix’s position against his stated goals to protect the capital of his investments, reduce and payoff the line of credit debt, and his risk profile.
47 10.33 Incidentally, and separate and apart from these transactions made by Ramos and
Popular Securities to purchase additional securities, Don Félix and Blanca Nelly inquired why they had no used those moneys to pay off the line of credit debt. Pepe answered that the debt could not be paid because several of their investments had reduced considerably in value, that it was not the time to sell, and that they should wait.
10.34 In or around June 2013, Don Félix’s wife, Blanca Nelly, asked for a meeting with Montalvo in view of the fact that Ramos’ compromise to reduce the credit line debt was not carried out and to discuss the possibility of establishing a trust for Don Félix’ retirement.
Montalvo held the meeting sometime around June 2013, and agreed to come up with a solution.
10.35 In July 2013, the meeting was held and Don Félix and Blanca Nelly received a proposal that suggested to borrow more money to produce more income instead of what they wanted, which was to reduce the debt.
10.36 On or around, December 18, 2013, Don Félix wrote to Popular Securities notifying that the aforementioned sale transactions, although unauthorized, had generated sales proceeds of $2,127,307.35 that according to his instructions should have been applied to the repayment of the line of credit and/or deposited in his Money Market Account. However, and notwithstanding Pepe Ramos’ misrepresentation that the securities could not be sold to provide
Don Félix the liquidity he had we requested, shockingly, the funds obtained from those unauthorized sales were used without his permission, knowledge, or authorization to make additional purchases of CEFs in the amount of $2,143,063.05. Don Félix requested Popular
Securities to revert all these transactions, to produce their value as of the date they were made,
48 and to apply the proceeds from the sales to cancel the balance of the credit line as of that time, and to deposit the difference in his Money Market Account.
10.37 Both Pepe Ramos and Popular Securities have earned substantial monies in fees, interest and commissions from all these transactions at Félix’s financial risk, costs and expense, and Félix has sustained severe financial loss and injury as a direct result of the same.
10.38 The economic losses proximately caused to Don Félix by Popular
Securities/Popular Inc./Banco Popular’s wrongful conduct as alleged in great detail in the unsuitable Investment Strategy and the Fraudulent Sale and Loan Schemes alleged herein below are estimated to be no less than as follows:
Interest on Broker Dealer Compensatory Commissions Interest /C.L. Total $Inv.
Popular Securities & Popular One
Compensatory 5,406,933.02 600,000.00 - 174,500.00 $6,181,433.02
XI. THE CEFs AND PR BONDS
A. Respondents’ Role In The Underwriting And Management Of The CEFs
11.1 UBS-PR and Popular Securities are the major underwriters of PR Bonds. UBS-
PR acted as managing underwriter in the initial public offerings of the shares of twenty-nine
(29) CEFs with a total market capitalization of approximately $5 billion. Seven funds, begun between 1995 and 1999, were co-sponsored with Popular Securities, and 16 funds begun between 2001 and 2008 were sponsored solely by UBS-PR. UBS-PR and its affiliates manage most of these CEFs. Popular Securities and UBS-PR and their affiliates co-manage at least the following CEFs: Puerto Rico Investors Tax-Free Fund; Puerto Rico Tax Free Target Maturity
49 Fund; Puerto Rico Investors Flexible Allocation Fund - Income Portfolio; Popular Income Plus
Fund; and Popular High Grade Fixed-Income Fund.
11.2 The members of the Boards of Directors and/or Boards of Advisors of the CEFs are selected and appointed by UBS-PR and/or Popular Securities and they exercises de facto control over the CEFs and their investments. UBS-Del exercises de facto control over UBS-PR and Banco Popular over Popular Securities.
11.3 With each PR Bond issuance, UBS-PR and Popular Securities not only charged multi-million dollar fees for their role in bringing the PR Bonds to market, but they then packaged these bonds into CEFs, and sold the CEFs shares to PR investors under the guise that they were buying secure fixed income PR Bonds.
11.4 UBS-PR and Popular Securities charge a 4.75% “front end load” commission at the time of the Claimants’ purchase of the CEFs shares and a 1% management fee of the CEFs’ net assets. The management fee percentage increases with the CEFs’ leveraged purchases of assets. The CEFs have generated and generate approximately fifty per cent (50%) of the total gross revenues of UBS-PR, and represent the largest single source of revenues for UBS-PR.
B. Respondents’ Market Dominance
11.5 UBS-PR and its affiliates are by far the largest asset managers in Puerto Rico, with over one hundred thirty (130) advisors or registered representatives and tens of thousands of retail accounts. UBS-PR holds around half of the brokerage licenses in all of Puerto Rico.
The other Respondent Broker Dealers also have a substantial share of brokerage market in
Puerto Rico.
50 C. The CEFs Structure
11.6 The CEFs are organized Corporations under Puerto Rican law, with the OCFI’s approval, requiring 67% of Fund assets to be invested in Puerto Rico. The Funds are considered a pass-through entity, which supposedly distribute approximately 90% of their income to be considered as tax-exempt dividends. The result is that the Funds’ assets consist of at least 67% Puerto Rican assets and 33% U.S. assets most of which is invested in agency paper, primarily fixed rate long-term securities and PR and US “zero coupon” bonds. The
CEFs are very similar to each other, they invest in similar securities and have similar investment portfolios.1
11.7 A Fund prospectus was furnished to purchasers in the IPO, but not to purchasers in the secondary market. According to the CEFs prospectuses, the “investment objective is to provide [the investors] with current income, consistent with the preservation of capital” and they are suitable only as part of a diversified investment portfolio. The UBS Funds’ prospectuses also stated the funds were not permitted to “concentrate [their] investments, e.q.
1 The new Puerto Rico Investment Companies Act of 2013 makes several improvements to the regulatory oversight of the island’s $11 billion-plus fund industry. Existing funds are for the most part grandfathered in the Investment Companies Act of Puerto Rico of 1954, except for having to comply with new rules with respect to affiliate transactions, tighter governance over fund directors and officers, and uniformity over repurchasing fund stock from investors. These changes closer align local investment companies with protections already in place for U.S. mutual funds under the U.S. Investment Company Act of 1940, as amended. Moreover, shareholder approval is needed to convert existing funds to the new law.
Under the old law, Puerto Rico investment companies invest mainly in municipal debt issued by the island’s government, in line with a 67 percent minimum investment requirement. The new law notably lowers the Puerto Rico investment requirement to 20 percent for Puerto Rico investment companies which invest in municipal debt and eliminates it completely for Puerto Rico investment companies that do not invest in municipal debt, which should lead to greater diversification of closed-end fund portfolios. To date, Fitch’s ratings of debt issued by PR CEFs were constrained in part by the concentrated exposure to Puerto Rico obligors. The changes are intended to improve retail confidence in new Puerto Rico mutual funds, while at the same time allowing fund managers to invest in local equity of Puerto Rico companies.
The new law also formalizes leverage limits to 50 percent of assets for traditional leveraged funds, and allows an additional 5 percent cushion when authorized by the Puerto Rico. Commissioner of Financial Institutions. Caribbean Business, Wednesday, January 29, 2014
51 invest a relatively high percentage of [their] assets in Municipal Obligations (e.q. revenue PR
Bonds) issued by entities which may pay their debt service obligations from the revenues derived from similar projects, such as hospitals, multifamily housing….” without explicit authorization of the Board of Directors and prior written approval from the Funds’ shareholders. Thus, while the CEFs were permitted to invest up to sixty seven (67) percent of their total assets in tax-exempt securities issued by the Commonwealth of Puerto Rico, they were not permitted to concentrate their holdings in a single issuer’s low quality PR Bonds.
D. Lack of Federal Registration
11.8 Each of the CEFs is incorporated under the laws of Puerto Rico. Generally, close-end funds fall under the purview of the Investment Company Act of 1940 (the
“Investment Act”). The CEFs in this case are unusual in that they are exempt from federal registration under the Investment Company Act pursuant to its section 6 (a) (1), which provides an exemption from registration for certain funds organized in Puerto Rico, as long as securities issued by that fund are sold only to residents of Puerto Rico. See, 15 U.S.C. §80 a-6
(a) (1). This exemption allows the CEFs to engage in conflicts of interest and high leverage percentages that are otherwise prohibited by the Investment Act.
11.9 As shares of the CEFs are traded only in Puerto Rico, also they have not been registered under the Investment Company Act with the Securities and Exchange Commission
(“SEC”). They have been registered only with the OCFI and they are neither listed, nor traded or quoted in any national securities exchange or quotation service. The investment portfolios of the CEFs are generally concentrated in PR Bonds that produce tax-free interest income, and the dividends paid by the CEFs to their shareholders are represented as being tax-exempt to residents of Puerto Rico. The basis for the exemption appears to be a no-action letter.
52 E. The CEFs’ Costs
11.10 The 4.75% “front end load” and 1% management fee of the CEFs’ net assets charged by UBS-PR.
F. The Degrading Quality and Creditworthiness of the PR Bonds and CEFs’ Assets
11.11 The worrisome economic situation brewing for years in Puerto Rico made foreseeable the degradation of the quality and creditworthiness of the PR Bonds and in turn of the assets of the CEFs that were highly invested and leveraged in these Bonds, that could substantially reduce and eventually drive the price of the CEFs shares down to zero, as a result, among other, of Puerto Rico’s: outstanding debt of around $70 billion; increasing deficit now up to around 2.2 billion; pattern of the issuing new deb to balance its budget and repay debt coming to be due; shrinking economy; high unemployment rate, at relevant times in around
15.5%; high percentage of public sector employees, at relevant times in around 265,000, or around 30% of the total jobs; soaring cost of living; pervasive crime; poor and inefficient public services; and the exodus of professionals and middle-class Puerto Ricans.
11.12 Moreover, the CEFs failed to comply with the investment limitations contained in the above stated prospectus statement and instead bought any PR Bonds into the Funds, without giving any consideration to their quality ratings and creditworthiness, concentrating their holdings in single issuer’s of low quality PR Bonds, such as when the related entity UBS
Trust purchased from UBS-PR nearly $1.5 billion worth of the Bonds issued by the Puerto
Rico’s troubled Employee Retirement System (“ERS”) and then UBS Trust resold the ERS bonds to the CEFs.
53 G. The CEFs’ High-Risk Leverage
11.13 The CEFs are allowed to borrow one dollar for every dollar of capital. Using leverage, the Funds are able to hold twice the amount of assets as the amount of equity. Interest rates are significant to the Funds because they mainly use short-term financing and the difference between the return on assets and the cost of funding is the amount of dividends the
Funds can pay.
11.14 CEFs leverage their respective investment portfolios by financing approximately one half of their total assets. Said leverage permits the CEFs to purchase and hold securities with an aggregate market value equivalent to approximately two hundred per cent (200%) of their aggregate net worth, with the concomitant risk. For every dollar invested, a Fund can buy two dollars of securities with the second dollar of purchases financed with borrowed funds. Funds similar to the CEFs existing in jurisdictions of the United States of
America other than Puerto Rico use less leverage than the UBS Funds, and their average debit or loan payable balance is equivalent to approximately twenty two per cent (22%) of the market value of their total assets. In other words, the CEFs use more than twice the leverage than similar closed-end mutual funds in jurisdictions of the United States other than Puerto
Rico.
11.15 The undisclosed high leverage of the CEFs to purchase PR Bonds, by itself, and more so when it is combined with their overconcentration in the same or similar PR Bonds, devaluated PR Bonds, and the other undisclosed parts of the Fraudulent Sale and Loan
Schemes, made the CEFs a very high-risk investment. Moreover, the artificial market demand for the PR Bonds created by the Fraudulent Sale and Loan Schemes caused an excessive surplus and supply that exceeded by much any market demand that made such investments
54 much less credit-worthy. Therefore, the Claimants were deceived and defrauded by
Respondents when they were sold the CEFs and PR Bonds as secure fixed income securities without advising them of the risks created by the fore stated omitted material facts. More so, when Respondent used the FA practical control over the Claimants accounts to invest all or almost all their liquid capital into the CEFs and, in some cases PR Bonds.
H. The CEFs’ Illiquidity, Price And Market Manipulation
11.16 CEFs investors, such as the Claimants Customers must have a FA inasmuch they cannot place trades directly. The shares of the CEFs are not traded in any exchange or quoted in any independent quotation service. To assure that shares of those exempt CEFs are sold only to residents of Puerto Rico, the securities they issue contain special restrictions with respect to whom the CEFs shares may be sold or transferred, and as to who may purchase or acquire them. As a consequence, the pool of potential buyers for these CEFs is limited to residents of Puerto Rico and is much smaller than the pool of investors usually available to a typical large, closed-end mutual fund. As a result of this restriction, the true market price of these CEFs is quite volatile, subject to manipulation and there is no independent way for the
Claimants to verify it.
11.17 UBS-PR is the only secondary market dealer of the shares of the CEFs. Any secondary market sales investors wanted to make depended largely on UBS’s ability to solicit additional customers or willingness to purchase shares into its inventory. The value of the shares of the CEFs is determined by UBS-PR, in its sole discretion.
11.18 UBS PR knew investors such as the Claimants were seeking stable, consistently priced securities to protect their investment or retirement income. UBS PR was also aware that
55 consistently high share prices were important to promoting the dividend reinvestment program, which relied on high market price premiums relative to the Funds’ NAVs.
11.19 Throughout 2008 and early 2009, UBS-PR priced the CEFs to reduce volatility and maintain high premiums to NAV. UBS PR used its CEFs inventory account to purchase any excess supply of shares for which UBS PR could not find customers.
11.20 As a result of excessive supply and lack of demand, during the years 2008-
2009, the markets for the CEFs were illiquid. On May 15, 2008, UBS-PR could not sell and could not purchase for inventory the $10.2 million it had in executable Good Till Cancelled
(GTC) orders because adding that amount to its existing $36.8 million inventory would have caused UBS-PR to exceed its inventory limit. The supply/demand imbalance continued throughout the year 2008, and by December 16, 2008, the inventory limit of CEFs had been increased and the inventory was at around $50 million. By that time, the market imbalance conditions, excessive supply and lack of demand, thought to be temporary turned out to be more serious and permanent
11.21 In the spring of 2009, UBS’s parent company determined that UBS’s growing
CEFs inventory represented a financial risk to the firm. The parent company directed UBS to substantially reduce its inventory of CEFs shares to the $30 million inventory limit. To accomplish the reduction UBS executed a plan dubbed “Objective: Soft Landing” in one document, in which UBS routinely offered and sold its CEFs shares at prices that undercut pending customer sell orders. In order to reduce its inventory the firm UBS implemented a strategy by purchasing from clients the minimum amount of shares possible, and lowering their price to keep ahead of any client open orders in terms of lowest offer price in the market. UBS
56 also lowered market prices of 15 to the 23 funds to one penny below the best customer orders, rendering $14 million customer orders “non–marketable”.
I. New CEFs Offerings
11.22 Notwithstanding the lack of demand and excess of supply of CEFs, the “market drag,” “product fatigue,” “weak secondary market” for CEFs shares, the concentration of customers’ investments such as the Claimants in the CEFs, and without disclosing the for stated adverse material facts to the Claimants, as part and in furtherance of the Fraudulent
Sales Scheme, UBS arranged several new PR Bond underwritings and CEFs offerings that further exacerbated the supply/demand imbalance and placed at great risk the value of the
CEFs and PR Bonds owned by the Claimants.
11.23 For example, as mentioned herein above, in 2008, UBS-PR underwrote $2.9 billion of Bonds issued by the ERS, a public retirement system maintained by the government of Puerto Rico. Subsequently, UBS Trust, an affiliate of UBS Financial, purchased approximately $1.5 billion worth of the Bonds, selling approximately $757 million of the
Bonds to the Funds while serving as the Funds' investment adviser and administrator. As a result, the Bonds accounted for more than thirty percent (30%) of the Funds’ assets. The Funds were so heavily invested in these Bonds that they suffered substantial losses when the value of the Bonds soon depreciated. UBS-PR, however, shared in underwriters’ fees of $27 million for its role in bringing the bonds to market, while UBS Trust garnered millions in fees for managing the Funds.
11.24 During the same period of 2008, UBS-PR opened the Puerto Rico Fixed Income
Fund V and Puerto Rico Fixed Income Fund VI, and issued additional shares in the AAA
Portfolio Fund II. During that year, the CEFs business produced $94.5 million in revenue for
57 UBS-PR. Moreover, on June 2008, two (2) new municipal bond offerings totaling $1 billion were also announced – pension obligation bonds (POB) and Puerto Rico sales tax revenue bonds.
11.25 That is, during the year 2008, while the CEFs were experiencing a lack of demand and excess of supply, and while UBS-PR continued to underwrite Bonds and make new offerings of CEFs that highly exacerbated the supply/demand imbalance and placed at great risk the value of the CEFs and PR Bonds owned by the Claimants, UBS-PR earned at the least $27 million for its role in the underwriting of the low creditworthy ERS PR Bonds, plus
$94.5 million produced by the CEFs business, for a total of $121.5 million in revenues for that year.
11.26 On June 1, 2013, UBS-PR and Popular Securities made a joint offering of
Puerto Rico Investors Tax-Free Funds I, II, III, IV, V, and VI, and Puerto Rico Investors Bond
Fund I, where both UBS-PR and Popular Securities and/or their affiliates acted as managers of the CEFs and dealers of the CEFs shares or notes. According to UBS-PR and Popular
Securities public disclosures in the prospectus, the CEFs’ primary objective was to provide a high level of income, free of federal and Commonwealth taxes for residents of Puerto Rico, consistent with capital preservation.
11.27 Both UBS-PR and Popular Securities engaged in this offering notwithstanding
Respondents’ were well aware of the excessive surplus of CEFs shares on the market, their lack of demand and liquidity, their artificially inflated prices, and their foreseeable substantial drop in price and creditworthiness. Both UBS-PR and Popular Securities earned multimillion dollars as a result of this offering, and by their management of the CEFs at the risk of causing, as they did cause great economic harm to the investors and the Claimants.
58 J. The SEC’s Cease and Desist Order
11.28 On or about May 1, 2012, the SEC issued an “Order Instituting Administrative and Cease and Desist Proceedings” (“Cease and Desist Order”) against UBS and two of its senior officials, including the former Chief Executive Officer of UBS-PR and several UBS-PR affiliates in Puerto Rico, as well as members of the senior management team of UBS-Del.
According to the Cease and Desist Order, UBS incurred in the following wrongdoing:
a) It misrepresented and omitted disclosing material facts regarding the CEFs’ prices and the 2008-09 CEFs’ market imbalances.
b) It reduced its inventory by undercutting customer sell orders.
c) It misrepresented its support of the CEFs’ market and failed to disclose its conflicts of interest to CEFs investors.
d) While UBS-PR was selling its inventory, it pushed financial advisors to boost demand for CEFs shares.
XII. RESPONDENTS’ JOINT AND SEVERAL BREACHES OF THEIR SUITABILITY DUTIES
A. Respondents’ Unsuitable Recommended Investment Strategy
12.1 At the opening of the accounts, and at the times when the Claimants periodically met with the Respondent Broker Dealers Paine Webber/UBS-PR, Wells
Fargo/Wachovia and Popular Securities/Popular, Inc./Banco Popular to discuss their investments and performance of their investments, the Respondents explicitly recommended the Claimants to invest or continue to invest their available liquid capital in the purchase of
Puerto Rico (“PR”) Bonds, and Closed End Funds (“CEFs”); to hold and continue to hold these securities; to obtain or continue to maintain margin and other loans to purchase more or to hold these securities (hereinafter, “investment strategy”). This investment strategy was ordered, approved and/or allowed to be implemented by the Respondent Broker Dealers.
59 12.2 Moreover, and in spite of the difference in age and therefore different investment profiles and needs of the Trinidad, Respondents invested all of their accounts using the same investment strategy, in exactly the same manner and composition, demonstrating their lack of care for the Claimants’ different suitable investment needs.
B. Unsuitable Securities For the Claimants
12.3 Claimants’ investment objective required the investment in securities where the capital was secure and that produced a fixed income rate of return. Therefore, the Respondent
Broker Dealers had the duty to put together an investment strategy consisting of a diversified portfolio of securities that was suitable to the Claimants’ manifested objective of investing their monies in secure fixed income securities, where the preservation of the capital investment was the main objective. Each subsequent Broker Dealer that acquired the Claimants’ accounts had the independent duty to verify their prior investment strategy and portfolios to make any recommendations that would have been necessary to ensure that their were adequate to fulfill the Claimants’ investment objective to invest in securities where the capital was secure and that produced a fixed income rate of return.
12.4 The Respondents explicit recommendation that the Claimants invest all their liquid capital to purchase and hold to CEFs shares and PR Bonds on other occasions was unsuitable for said objective because the capital of said investment was not protected and exposed to undue risks as a result of the lack of liquidity, excess surplus, high leverage, over concentration in Puerto Rico debt, and the foreseeable degrading quality of said debt.
Respondents’ aforesaid recommended investment strategy unnecessarily exposed Claimants to well known risks caused by “having all their eggs in one basket”. Therefore, any drop in the
60 value of the PR CEFs or Bonds would foreseeably greatly reduce the overall value of the
Claimants’ portfolio.
12.5 Moreover, in 2013 the PR Bonds and CEFs market situation was exacerbated by the failing creditworthiness of PR debt and the looming storm of credit downgrades.
Respondents also breached their suitability duties when, instead of advising the Claimants of the impending doom of the CEFs and PR Bonds and having them get rid of the same, they had the Claimants hold to and acquire additional CEFs, and to borrow moneys to acquire more
CEFs. Respondents also invested the Claimants’ money in highly leveraged US CEFs, therefore exposing them to the same leverage and liquidity risks that they had in the PR CEFs, but in another jurisdiction.
12.6 Respondents had the Claimants engage in said investment strategy in manifest disregard for their conservative risk profiles, objective of capital preservation, liquidity and safety needs, and in direct defiance of all indicators that the Respondents were aware of that made evident that they needed to implement an immediate exit strategy for the Claimants.
C. Unauthorized Trading
12.7 Claimants specifically allege that their accounts were treated by the FAs and the
Respondents as if they had discretionary powers when no such authorization was ever conceded by the Claimants, and Claimants have positively alleged that unauthorized trading occurred within their accounts all under the supervision of Respondents, or lack thereof.
FINRA Rules allow for a more ample discovery when unauthorized trading occurs and/or discretionary authority is assumed when no discretionary powers, documents or authority was ever issued.
61 D. Respondents’ Downplayed And Failed To Notify Claimants About The Findings Of The Cease And Desist Order
12.8 The Cease and Desist Order is a SEC public document that was readily available to all Respondents. The Respondents must be found to have either actual or constructive knowledge of the findings of the Cease and Desist Order in view of the nature of the Order, their employment or business relationship with the Respondents in those proceedings, and the duty of care and fiduciary duties that the Respondents owed to the
Claimants when they recommended them to purchase or hold the CEFs shares or PR Bonds.
12.9 The nature of the Cease and Desist Order was a red flag and required that its findings be informed by the Respondents to the Claimants at the time it was entered if they owned any CEFs or PR Bonds, before the Respondents recommended the Claimants to purchase CEFs or PR Bonds and/or to hold the CEFs or PR Bonds that they already owned, and before the Respondents offered the Claimants to obtain or hold the lines of credits against the CEFs or PR Bonds. Most important Respondents had a duty to inform Claimants the true material facts that the SEC had determined that had been up to then either misrepresented or omitted to them.
12.10 After the May 1, 2012, the SEC Cease and Desist Order the Respondents had the duty to advise and recommend the Claimants to divest form the CEFs and PR Bonds due to the reports about their lack of or declining market, artificial high prices, and the CEFs market and price manipulation. Instead, with the intent to defraud Claimants in connection with their purchase, hold and obtain loan against the CEFs and PR bonds, Respondents never disclosed to
Claimants that: (1) the prices were not “market price” but randomly created by the Fixed
Income Desk; (2) the magnitude of UBS-PR’s control of the secondary market; (3) the market was completely illiquid; (4) UBS-PR was selling off its own holdings at prices slightly below
62 pending customer sales at the direction of UBSFS; (5) the risks associated with leverage and double leverage; (6) that their inducement to misrepresent the purpose of a loan could be construed as an illegal conduct; (7) that the CEFs could go to zero value if the PR Bonds continued deteriorating; and, (8) that it was not prudent to carry an overconcentration in investments in Puerto Rico, or have any concentration in PR Investments whatsoever, in view of PR diminishing credit ratings and credit watch by the Bond Rating Agencies, or the prospect of default in PR’s Debt.
12.11 The fore stated material facts had to be informed by the Respondents to the
Claimants at those relevant times for the Claimants to possess the information that was necessary and material for them to make an informed decision to hold, purchase, obtain or maintain loans against the CEFs or PR Bonds. Respondents’ failure to so inform the Claimants constitutes a fraudulent omission or a material fact in connection with the purchase or sale of the CEFs and/or PR Bonds.
E. Lack Of Adequate Diversification
12.12 The Respondents explicit recommendation that the Claimants invest all their liquid capital to purchase and hold to CEFs shares was unsuitable because it concentrated all of
Claimants liquidity in these securities of the same or similar PR CEFs, all of which were in turn over concentrated in the same or similar PR debt. Respondents’ recommended overconcentration in the CEFs was unsuitable as per the express terms of their prospectus that stated that they should be only as part of a diversified investment portfolio. Through this overconcentration the Respondents wantonly failed to follow the principle of diversification that is well recognized in the industry as a means to reduce investment risks by investing in a variety of distinct assets, in different markets or industries and form different geographical
63 regions. By doing so, the Respondents unnecessarily exposed the Claimants to sustain as they did sustain foreseeable great economic loss as a result of the lack of market and degrading value of the PR Bonds and CEFs.
12.13 Respondents’ overconcentration of Claimants’ monies and investments in the
CEFs, and the continued holding of these funds, breached Claimants’ main objective to preserve the capital of their investments and caused them to sustain huge financial losses.
12.14 Overconcentration occurred in the Claimants’ accounts as the bulk of theirs investments are in Puerto Rico CEFs and in some CEFs from the Continental USA, together with an overconcentration in Puerto Rico debt related investments and an overconcentration in
PR municipal bonds. The following pie charts show the concentration in PR CEFs per account as the accounts were administered by Ramos under the supervision of the other Respondents through the transitions from Respondent Brokerage Firm to Brokerage Firm:
In these illustrations we have the accounts as they were transferred to Popular Securities in November 2010 from Wells Fargo/Wachovia
PSL – 005665 16,322,792 MONEY MARKET PR 967,452 6% UNITED STATES 105,510 1% PUERTO RICO 15,248,308 93%
11/30/2010 PSL – 005665 $967,452 105,510 Money Market PR US $15,248,308 PUERTO RICO
64 PSL – 005681 14,466,087 MONEY MARKET PR 565,068 4% UNITED STATES 82,580 1% PUERTO RICO 13,818,439 95%
PSL – 005681 $ 565,068 82,580
Money Market PR $ 13,818,439 OTHER PUERTO RICO
PSL – 005630 1,553,064 PUERTO RICO 1,419,000 91% OTHER 174,000 9%
PSL – 005630 $ 174,000
Puerto Rico $ 1,419,000 Other
PSL – 005649 624,000 PUERTO RICO 250,000 40% OTHER 374,000 60%
PSL – 005649
$ 250,000 PUERTO RICO $ 374,000 OTHER
65
PSL – 008737 2,459,000 MONEY MARKET PR 225,000 10% PUERTO RICO 1,797,000 73% OTHER 437,000 17%
PSL – 008737 $ 225,000
$ 437,000 MONEY MARKET PR
$ 1,797,000 PUERTO RICO UNITED STATES
PSL – 005690 7,861,000 MONEY MARKET PR 3,887,000 50% UNITED STATES 3,619,000 46% PUERTO RICO 353,000 4%
PSL – 005690 $ 353,000
$ 3,887,000 Money Market PR $ 3,619,000 OTHER PUERTO RICO
12.15 As part of the overconcentration in CEFs both from Puerto Rico and United
States CEFs, in 2008 Respondents had already over-concentrated the Claimants accounts in
66 such CEFs, and had experienced a fall in equity in the US CEFs of more than 35%, yet they did not apply this to this experience and to lessons learned. Respondents did not change the
Claimants’ portfolio compositions nor address the substantial losses that the Claimants had sustained. Instead, Respondents held meetings with the Claimants to tell them otherwise, mainly that there were no losses, that they were producing them substantial earnings, and that there was no risk involved in CEFs or the lines of credits obtained to acquire them.
12.16 For example, in account PSL-005622, by May, 2011 Ramos and Popular were already carrying $3,286,958 in PR CEFs for 99% of the asset allocation and an unrealized loss for Don Félix’s of $563,478 or 17% of a $3,292,323 in Total assets. By December, 2012,
Ramos and Popular had allowed without notice to the Claimants a 40% unrealized loss in the
US CEFs portion of Don Félix’s account PSL-005649 for $198,000, out of $595,398 of Total market value of that account. The risks to the Félix’s accounts posed by a concentrated position were compounded by Respondents’ approval and facilitation of margin borrowing in the accounts.
F. Unreasonably High Leverage
12.17 The unreasonable risks caused by Respondents’ overconcentration in PR CEFs was compounded by Respondents’ approval of unreasonably high margin borrowing in
Claimants’ accounts because leverage was being used through margin and a significant amount of borrowing collateral was provided by single PR Bond positions, and it was foreseeable to the Respondents a drop in the value of the particular PR Bond would significantly affect the available margin for debt, or worse, exhaust what said margin requiring a sale of securities or a deposit of new funds to cover the debt. It was in Respondents’ best interest to allow, as they did allow, Claimants’ accounts to maintain an unreasonably high margin balance to maximize
67 the interest revenue and fees and commissions over the margin transactions that they could collect in the accounts but this was done by the Respondents at Claimants’ expense and risk to sustain, as they did sustain, great economic injury and harm.
12.18 All the way to the acceleration of the debacle in Puerto Rico debt that started in
September of 2013, Ramos was still over concentrating the accounts in PR. At that time in account PSL-05665, that had accumulated unrealized losses of $1,979,789 and that had almost no margin available, Ramos bought $100,000 PR sales tax 5.50% of maturity in August 1,
2037 at a price of 92 on August 18, 2013 and August 23, 2013 another $50,000 of PR
Government Development Bank 5.50% maturing on August 1, 2020 at 95.75.
12.19 Respondents’ overconcentration of Claimants’ monies and investments in the
CEFs, and the continued holding of these funds, breached Claimants’ main objective to preserve the capital of their investments and caused them to sustain huge financial losses.
G. CEFs’ High Costs
12.20 The 4.75% “front end load” and 1% management fee of the CEFs’ net assets charged by UBS-PR are extremely high costs when compared to other alternatives on the market and unsuitably reduced the total returns available to the Claimants.
H. Lack Of An “Exit Strategy”
12.21 Respondents failed to establish a safe “exit strategy” hat would have monitored
Claimants’ investments to divest the accounts of the PR Bonds and CEFs when their loss in value made them unsuitable for Claimants’ investment objective of capital preservation. Had the Respondents implemented said exit strategy it would have prevented the unwarranted loss of the capital invested by the Claimants in these securities.
68 I. Respondents’ Financial Gain At Claimants’ Unnecessary Risk And Expense
12.22 Respondents’ investment strategy recommendations trustfully adopted by the
Claimants that consisted in the overconcentration of their investment in the CEFs and PR
Bonds and the holding of these investments had the intended purpose of obtaining financial gain at great expense and unnecessary risk to the Claimants’ main objective to preserve the capital of their investments.
XIII. RESPONDENTS’ JOINT AND SEVERAL FRAUDULENT SCHEMES
A. Respondents’ False And Fraudulent CEFs Representations
13.1 Respondents deliberately made gross false representations about the following material facts regarding the CEFs and PR Bonds to have the Claimants purchase and hold to them: that the CEFs are “fixed income” securities and/or “PR Bonds”; that the PR Constitution guaranteed the payment of the CEFs capital investment and rate of return; that the CEFs and
PR Bonds were reasonably liquid, that they could be sold and the Claimants could have their monies available when needed; that the price of the CEFs and Bonds was fixed by the market and stable; and that the CEFs and PR Bonds were risk free investments.
13.2 When the Respondent FAs recommended the Claimants to purchase, hold, or obtain and maintain margin and other loans to purchase or to hold to the CEFs they represented to them that the CEFs were “Bonds” and that their return and payment when due was secure because it was guaranteed by the PR Constitution. That the PR Constitutional duty to pay the
CEFs and PR Bonds was preeminent before any other PR obligations. These material representations were false because the CEFs were not Bonds and because only the Government
Obligation or GO’s and the “Commonwealth Guaranteed Debt” are covered by Article VI
69 Section 2 of the General Dispositions in the PR Constitution. This amounts only to around
$16.233 billion out of around $70 billion of its total Bond debt.
13.3 Although a high percentage of the investment portfolios of the CEFs consist of
PR Bonds, which are fixed income securities, the shares of the CEFs are not fixed income securities. They are equity shares of the CEFs and certainly are not Bonds. Nevertheless,
Respondents generally materially misrepresented the true nature of the CEFs when they referred to the CEFs as “fixed income securities” in the monthly account statements and as
“PR Bonds” in their communications with the Claimants.
13.4 The CEFs are not fixed income securities, as materially misrepresented by the
Respondents and falsely stated in the monthly account statements, because the dividends payable to their shareholders are not fixed, since they could fluctuate, did fluctuate and do fluctuate depending on the following factors, inter alia:
a) the loan balances as a percentage of the total assets of each fund;
b) the prevailing loan interest rates payable by each fund, that were not fixed;
c) the weighted average interest rate of the fixed income securities included in each fund’s investment portfolio, and the market value of said securities;
d) the management fees payable to the UBS affiliates for managing the funds; and
e) the legal and accounting fees and other expenses incurred by or charged to each of the funds and at each sale or liquidation of shares.
13.5 That the CEFs and PR Bonds were reasonably liquid, that they could be sold and the Claimants could have their monies available when needed, that the price of the CEFs and PR Bonds was fixed by the market and stable, and that the CEFs and PR Bonds were risk free investments were also material misrepresentations as per the facts alleged in this Claim.
70 B. Respondents’ Willful Failure To Disclose Material Facts
13.6 As part and in furtherance of the Fraudulent Sales Scheme Respondents also deliberately failed to disclose the following material facts to the Claimants about the CEFs and
PR Bonds to have the Claimants purchase and hold to them: (1) the significant secondary market supply and demand imbalance; (2) the excess of CEFs surplus and lack of demand; (3) that UBS was using its inventory account to support CEFs market prices and liquidity to prevent price declines and maintain yields; (3) that CEFs’ prices and liquidity were highly dependent on the efforts of UBS sales force to maintain customer demand for the shares; (4) that at a given point in time UBS was attempting to sell ahead of them around $20 million
CEFs shares it had in inventory; (5) the illiquidity, market and price manipulation of the CEFs;
(6) that the CEFs prices were artificially high; (6) the undue risks caused by the CEFs high leverage of and overconcentration in PR securities; (7) the undue risks caused by taking margin on the CEFs and PR Bonds and in the overconcentration in PR securities; (8) the May 1, 2012, the SEC Cease and Desist Order findings; (9) the CEFs high purchase and management costs when compared to other alternative investments that reduced their investment return; (10) and the degrading quality of the PR Bonds and CEFs’ assets.
C. The Broker Dealers’ Exacerbated Conflicts Of Interest
13.7 UBS’s conflicts of interest with the Claimants were exacerbated because it controlled the market for the CEFs, and the Claimants could not go to another broker dealer to sell their CEFs shares. The Claimants had to compete with UBS to sell shares in a market that
UBS dominated and controlled. In addition, some customers attempting to sell CEFs shares during this time were senior retail investors who had substantial amounts of their net worth
71 invested and concentrated in the CEFs and other preferred customers whose orders were given preference over the orders of the Claimants.
13.8 Respondents UBS-PR and Popular Securities had a conflict of interest when they sold to, or had the Claimants hold to a non-diversified portfolio of CEFs managed or co- managed by them to earn fees and commissions at the expense and risk of causing, as they did cause, great financial loss to them.
D. Respondents’ Unreasonable And Fraudulent Transactions
13.9 The egregiousness of Respondents’ breaches of their many duties are exemplified by the astonishing trading and margin balance figures accumulated in short periods of time in Claimants’ accounts, and by the nature and volume of the activities conducted in the accounts. These transactions were unfair, unreasonable and fraudulently performed for the sole purpose of generating fees, commission and interest at Claimants’ cost, expense and undue risk to the capital of their investments. This occurred under Respondents’
Broker Dealers watch and facilitated by them through the services that they offered to the
Claimants. The Respondent Broker Dealers clearly either failed to review the Claimants’ account activities for suitability purposes or knowingly allowed the unfair, unreasonable and fraudulent management of the Claimants’ account.
E. Respondents’ Fraudulent Multiple Accounts Practice
13.10 Respondents’ modus operandi in managing Claimants’ accounts was to have many open accounts, and to report the assets and line of credit debt in separate statements, such as to create confusion in Claimants’ potential understanding of the transactions made by
Respondents in their accounts. This method of operation had a dual purpose, first for the
Respondents to be indispensable, because without them the claimants would be lost in the sea
72 of transactions and reports, and second for Respondents to mask the losses sustained in the
Claimants’ accounts.
13.11 Respondents created the confusion by opening many accounts and justifying the requirement of so many accounts by saying to the Claimants that each new account was necessary in order to carry on certain financial and tax planning through them, something that had no reasonable basis and in fact makes no sense.
13.12 Then Respondents would carry on transfers between the Claimants’ accounts that were not necessary to give the impression that moneys were being generated in the accounts, when actually the moneys were merely transfers from their other accounts. This was done with malice, the intent to deceive and defraud, to hide from the Claimants the fact that they were taking serious losses in those accounts. For example, Respondents would transfer securities from one account into other of Claimants’ accounts so that the acquisition price would not be reflected in that account and the realized profit or loss would then not be reported by the Respondents to the Claimants in their statements of account for lack of information.
13.13 In addition to the aforementioned, the egregiousness of Respondents’ breaches of their many duties are exemplified by the astonishing trading and margin balance figures accumulated in short periods of time in Claimants’ accounts, and by the nature and volume of the activities conducted in the accounts. This occurred under Respondents’ Brokerage Firms watch and facilitated by them through the services that they offered to the Claimants.
Respondents’ Broker Dealers also clearly failed to comply with their supervisory responsibilities when they either recklessly failed to review the Claimants’ account activities for suitability purposes or knowingly allowed the unsuitable management of the Claimants’ accounts to take place.
73 13.14 Further, Respondents had Anti-Money Laundering (“AML”) monitoring/reporting and other regulatory duties and responsibilities, especially when considering the sheer volume of the Claimants’ accounts transactions, loan balances, and
Demand Deposit Account transactions often involving small checks.2 Respondents’ Broker
Dealers monitoring in compliance with their regulatory duties was another source for the
Respondents’ Brokerage Firms to know that those transactions were unsuitable for the
Claimants and that they were being pervasively made to increase the Claimants’ accumulating debt for the Respondents’ brokers benefit at the Claimants’ undue risk and expense.
F. Respondents’ Unfair And Unreasonable Commissions In Excess Of 5%
13.15 Respondents violated FR Rule 2123 (Charges and Fees for Services Performed) governing fees derived from NASD Rule 2440 (Fair Prices and Commissions), NASD IM-
2440-1 (Mark-Up Policy), NASD IM-2440-2 (Additional Mark-Up Policy for Transactions in
Debt Securities, Except Municipal Securities), NASD Rule 2430 (Charges for Services
Performed), and Incorporated NYSE Rule 375 (Missing the Market).These rules in general require that securities be sold to or purchased from the Claimants at fair prices and, be subject to fair commissions or commission-equivalent charges.
13.16 FINRA Rule 2121(b)(1) provides that when a member firm charges a markup, markdown or commission in excess of 5%, a presumption exists that it is unfair and unreasonable. FINRA recognizes that 5% is significantly higher than the average markup, markdown or commission currently charged by most member firms in customer transactions.
When a customer sells one security and buys a second security at the same time, using the proceeds of the securities position liquidated to pay for the second position, the “proceeds
2 Money laundering “Red Flags” can be found on page 10 of Special NASD Notice to Members 02-21.
74 provision” in NASD IM-2440-1(c)(5) requires that both trades be treated as a single transaction for markup, markdown and commission purposes, with the result that the total remuneration for both transactions generally cannot exceed the remuneration amount for a single transaction.
13.17 For example, as detailed in the Unreasonable Trades Chart below, Ramos sold
41,568 units of the PR AAA Portfolio Bond Fund Inc. on April 27, 2013 in account PSL-
05665 to invest that money in the PR Investors Tax Free Fund VI that had holdings of considerably less credit rating or quality, exposing the Claimants to considerably more risk and volatility at an excessive 5% plus commission on the swap, not even considering that the proceeds should have been applied, at least, to lowering the margin debt in the account.
13.18 The Respondents’ Broker Dealers follow the use of Return on Assets (“ROA”) metrics to determine the commission level charged by the FA over his assets to have an idea of when an FA might be incurring in “churning” or excessive commissions. The use of leverage in the Claimants’ accounts resulted in excessive commissions, not only in relation to the assets traded but multiplied in relation to the equity in the accounts. The metric of ROA masked the fact that Ramos was generating twice as much commission as a percentage to the equity in the
Claimants’ accounts.
13.19 In the same way, the metrics to detect “churning” do not take into account that
Ramos was trading the Claimants’ equity excessively instead of the assets because he had the accounts leverage, which meant that there were more assets in the accounts that he was trading at a multiple of two. In reality, Ramos was trading the Claimants’ equity by four times a year.
13.20 The following trades together with the trades listed in section 9.22, were trades effected at year end, or when the account should not have been buying because of the
75 impermissible level of margin, or trades that produce a high level of broker compensation or were effected at the worst possible time in view of market conditions for a conservative low risk profile, in essence: unreasonable trades. These are examples of trades that occur for no other possible reason than to generate commissions allowed by and benefiting Respondents:
Unreasonable Trades Chart
Account # Date Quantity Description Cost for Purchases or Proceeds for sales PSL-05665 09/25/2013 38,907 units Popular high grade fixed Sold-$264,570
Inc.
PSL-05665 09/24/2013 3,600 shares Powershare multi sector oil Sold-$99,195
PSL-05665 09/24/2013 1,500 shares Powershare multisector com Sold-$42,563
PSL-05665 09/24/2013 2,500 units Annaly Capital Mngmt, Inc. Sold-$30,275
PSL-005681 08/19/2013 200m Bonds COFINA 2037 5.5% Bought -$184,008**
PSL-005681 02/25/2013 100m Bonds PR Pub Bldg. 2030 5.6% Bought -$101,844
PSL-005681 02/28/2013 50m Bonds Barclays Bnk 2028 3.125% Bought -$50,004
PSL-005681 02/28/2013 100m Bonds Barclays Bnk 2028 6% Bought -$100,004
PSL-005681 02/28/2013 100m Bonds Citigroup 2033 0% Bought -$100,004
PSL-005681 12/03/2012 98,007 units Tax Free PR Target Mat Fd Sold-$789,931
PSL-005681 12/03/2012 13,000 units PR Investor Tax Free Fd Tr Bought -$120,254 I PSL-005681 12/03/2012 23,000 units PR Investors Tax Free Fd II Bought -$216,204
PSL-005681 12/03/2012 47,620 units PR Investors Tax Free Fd V Bought -$450,013
PSL-005681 12/10/2012 1,500 units Nuveen Select Qlty Muni Bought -$25,230
76 PSL-005681 12/21/2012 200m bonds JP Morgan 2027 8.5% Bought -$200,000
PSL-005681 12/21/2012 4,243 units PR Investor Tax Fr Fd Tr I Bought -$38,191
PSL-005665 04/27/2012 41,568 units PR AAA Port. Tax Free Tr. Sold-$411,934 ***
PSL-005665 04/27/2012 41,600 PR Investors Tax Free Tr VI Bought$413,924 ***
PSL-005665 3/28/2011 7,780 units Popular Income Plus Cl A Bought -$75,000
*PR Budget problems cause budget freeze and $2MM extra COFINA borrowing for general funds deficit. Sales were unauthorized, to fulfill a margin call without notice. **Barrons had published a front page article warning of the Economic debacle in Puerto Rico and the massive bond sales occurring because of the inherent risks in PR Bonds. *** Ramos sold the CEF units that were supposed to be of better quality holdings as purported by the CEFs name of PR “AAA” Portfolio Bond Fund Inc. and exchanged them for the worst quality holdings, PR Investors Tax Free and actually had the Claimants pay more for that lesser quality CEF units.
G. Respondents’ Joint and Several Fraudulent Loan Scheme
a) At all relevant times the Respondents acted as agents and alter egos of each other.
13.21 UBS-PR, UBS-Del and UBS Bank are affiliates and related entities. At all relevant times, UBS-PR, UBS-Del, the UBS affiliates that manage the CEFs, and UBS Bank acted as agents and alter egos of each other. These UBS affiliates have substantial overlap in directorships and senior management, and otherwise disregard corporate distinctions in the ordinary course of their business, to engage in the illicit transactions object of this Claim, such as the manipulation of the market value of the shares of CEFs and their financing through the
Fraudulent Sale and Loan Schemes.
13.22 Popular, Inc./Banco Popular and Popular Securities are also affiliates and related entities. At all relevant times, Popular, Inc./Banco Popular and Popular Securities acted and continue acting as agents and alter egos of each other. These Popular affiliates have
77 substantial overlap in directorships and senior management, and otherwise disregard corporate distinctions in the ordinary course of their business, to engage in the illicit transactions object of this Claim, such as the ones alleged in the Fraudulent Sale and Loan Schemes herein.
13.23 The Respondent affiliate Banks actively participated in the creation and implementation of the Fraudulent Loan Scheme with their affiliate Broker Dealer Respondents, and they are jointly responsible with their affiliate Respondents for the losses they jointly inflicted upon the Claimants.
b) Respondents’ implementation of the Loan Scheme.
13.24 As the CEFs, per se, are highly leveraged entities, no margin is suitable or licit for the financing of their respective shares, as such “double leverage” entails inadmissible risks, is not permitted by existing rules and regulations, and is unsuitable for individual retail investors, such as most shareholders of the CEFs. The shares of the CEFs are not eligible as collateral for margin loans under the applicable laws and regulations. Therefore, the OCFI does not allow that the CEFs shares be margined, nor are they marginable by definition in any of the
Broker Dealers providing services in Puerto Rico.
13.25 To circumvent the prohibition against leveraging shares of CEFs with margin loans or similar financing from securities firms, the Respondent Broker Dealers and FAs designed, created and implemented the following imprudent, illicit and fraudulent scheme, which permitted the illicit, fraudulent and imprudent financing of hundreds of millions of dollars in shares of the CEFs (the “Fraudulent Loan Scheme”).
13.26 Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular’s registered representatives (including but not limited to Pepe Ramos) would contact the Claimants and would offer them unsolicited loans secured by CEFs shares. The loans would be granted
78 through lines of credit, repos or similar arrangements. On occasions, the loan applications and loan documents would be signed in blank by the Claimants, and Respondents acting as agents and financial intermediaries of the financial institutions would fill them with false information about the use of the loan proceeds; committing thereby, without Claimants’ actual knowledge, bank fraud.
13.27 The proceeds of the loans would be credited to or deposited in checking accounts of the clients in banks unrelated to the Broker Dealers (the “Unrelated Bank
Accounts”). The loan proceeds deposited in the Unrelated Bank Accounts would then be transferred back to the clients’ accounts at the Respondent Broker Dealers, UBS, deposited in the clients’ security accounts, and used to purchase more shares of CEFs. Each client’s portfolio of shares of CEFs would increase by an amount equal to the proceeds of the loan. The principal amount of the loan would fluctuate and sometimes reach maximums close to 80% of the value of the shares of CEFs that collateralized the loans.
13.28 Respondents induced their clients to unknowingly permit the Fraudulent Loan
Scheme in their respective accounts, and the Respondent Broker Dealers offered and paid bonuses and incentives to the FAs for each new client that opened a line of credit and was included in the Fraudulent Loan Scheme.
13.29 Respondents knew that the Fraudulent Loan Scheme was an illegal and fraudulent mechanism to circumvent margin loan rules, with the sole fraudulent objective of generating exorbitant revenues for the Respondents and the registered representatives that handled the Claimants’ Accounts that were induced (through deceit and misrepresentations) to permit the implementation of the Fraudulent Loan Scheme in their accounts. This was openly discussed and of common knowledge in the Respondent Broker Dealers.
79 13.30 As another means to circumvent the restriction against using the line of credit to purchase the CEFs, the Respondents would have Pepe Ramos use the new moneys deposited by Tito in his accounts to be used to pay any of his debts, such as his IRS debt, used instead by him to buy new CEFs and then request an increase in the line of credit by a corresponding amount to pay the debt.
c) Respondents’ fraudulent inducement to prevent Claimants from paying off the loans.
13.31 As part and in furtherance of the Fraudulent Sale and Loan Schemes, the
Respondents induced the Claimants, and used the practical control they had over the
Claimants’ accounts, to have the monies earned by the Claimant in their investment accounts, or from other sources that were deposited into the accounts, to invest those monies to purchase additional CEFs shares or PR Bonds instead of using those monies to reduce the fraudulent loan balances, compounding thereby the borrowing.
13.32 In addition, when the Claimants needed money and wanted to sell shares of the
CEFs or PR Bonds, the Respondents encouraged them to instead borrow the funds from UBS
Bank or Popular Bank rather than selling the PR Bonds or their shares of CEFs. To induce the
Claimants to hold to the securities and to take loans to cover their needs the Claimants misrepresented them that as the loan interest rate charged by UBS Bank or Popular Bank to the
Claimants clients/borrowers would be always be lower than the CEFs’ dividends, the
Claimants clients/borrowers would always earn a positive spread or arbitrage, thus increasing without any risk the net return on their equity.
d) Respondents’ fraudulent failure to disclose the high risks created by the loans collateralized by the investments. 13.33 The Fraudulent Loan Scheme made the Claimants/borrowers’ investments in
CEFs and PR Bonds extremely risky and vulnerable in the event of declines in the market
80 value of the relatively illiquid shares of the CEFs, while the CEFs per se, as highly leveraged entities, were simultaneously undertaking significant market and credit risks in their own leveraged investments in PR Bonds and similar securities. The undisclosed high leverage of the
CEFs, when it was combined with the other undisclosed parts of the Fraudulent Sale and Loan
Schemes, made the leverage of the Claimants’ Investment Accounts highly risky and did expose Claimants to huge financial losses of their capital investment and beyond through their personal liability in the event the value of the assets could not cover the balance of the loans.
13.34 Although the shares of CEFs owned by the Claimants/borrowers collateralized the loans, the Respondent Broker Dealers and their affiliate Banks now claim that they are also personal obligations of the Claimants, that are personally responsible to cover any deficits in the event the proceeds of the liquidation of the collateral did not suffice to cover the outstanding loan balances. These matters were not informed by the Respondents to the
Claimants when decided to obtain or maintain margin on their accounts. Respondents had a duty of care and a fiduciary duty to advise the Claimants about these risks, and much more so in light that Claimants’ had expressed that their main investment objective was to protect the capital of their investments.
13.35 When the Claimants asked about any risks associated with the loans, or when they got concerned about the size of the loan debts and requested to payoff the loans, the
Respondents, through the FAs, fraudulently assured them that the loans entailed no risk to the capital investment because the CEFs were secure fixed income instruments, that their return was guaranteed by the PR Government and its Constitution, that there was no way the return could not be paid, and that they would always have the spread to cover the loan interest payments. As part and in furtherance of the Fraudulent Loan Scheme Respondents willfully
81 failed to properly advise Claimants about the market and credit risks and personal obligations and responsibilities resulting from said financings. The Claimants’ concerns were dissipated by the FAs’ false assurances because they always trusted and relied upon Respondents’ false and fraudulent representations, explanations and advice.
13.36 Respondents, with total disregard for the risk exposure they were subjecting the
Claimants to, induced them to borrow money against these already leveraged CEFs, compounding the exposure by buying the same investment vehicles on borrowed money from the “non purpose loans” without Claimants’ consent or even knowledge. Even as late as July of
2013, Respondents Popular presented a “Wealth Management Report for Mr. Juan F. Trinidad
Rodríguez and Blanca Nelly Trinidad” that in its Financial Statement Tab or Page 12 recommended an increase in loan amount from their current 10% of their investment portfolio, if not of their total net worth, up to 50%, although it should not exceed a 36%.
13.37 To add to the Respondents misrepresentations to the Claimants and their acts to mislead them, one only needs to take a look at Respondents’ Statement of Account format. For example, in Popular Securities overview part of the monthly statement the Respondents would list the Realized profits or losses and never the unrealized profits or losses. In Félix’s statement for May 2013 in account PSL 5657, their realized gains listed in a separate section were short term: $7,250.99 and long term ($3,281.03) whereas it fails to separately list that their unrealized losses were $326,700.94.
13.38 The Claimants were deceived and defrauded by Respondents when they obtained loans against their investments, and when they used those loans to purchase additional
CEFs and PR Bonds, without being advised by the Respondent about the material serious risks that those loans created to their main objective of the preservation of the capital of their
82 investments. More so, when the FAs had the practical control over the management of
Claimants’ accounts that extended to the origination of the loans.
e) Respondents’ fraudulent intended effect of the Loan Scheme.
13.39 The Fraudulent Loan Scheme’ intended effect was to:
A. Facilitate the marketing and sales of the CEFs and PR Bonds that flooded the limited and shallow local market with an excessive surplus of CEFs shares and PR Bonds.
B. Artificially increase and maintain the demand, liquidity and market value of the PR Bonds bought by the CEFs and of the CEFs shares.
C. Increase the clients’ risks associated with their investments in PR Bonds and shares of CEFs.
D. Increase the revenues of the Respondent Broker Dealers, their FAs and supervisors, through the extra commissions and other fees they generated through the sale of the additional shares of CEFs and PR Bonds financed with the proceeds of the loans, and through the bonuses and/or incentives paid by the Respondent Broker Dealers and affiliate Banks for the opening of the new lines of credit to illegally finance the purchase of additional shares of CEFs and PR Bonds, and through the commissions charged over the loan balances and assets.
E. Increase the clients’ cost and expenses in commissions, mark-ups and mark-downs.
F. Facilitate excessive trading and churning in the accounts.
G. Increase the revenues of Respondent Broker Dealers’ affiliates Banks resulting from the management fees of the CEFs.
H. Generate profits and other loan revenues for Respondent affiliate Banks, as the interest charged by the Banks for the illicit loans substantially exceeded the cost of the funds to the Respondents and their affiliate Bank. f) Respondents’ violations of the banking laws.
13.40 When opening lines of credit and disbursing loans to their clients pursuant to the Fraudulent Loan Scheme, the Respondents’ affiliate Banks did not comply with the customary loan procedures that FDIC insured institutions must follow. This type of conduct
83 resulted in the above stated agreement between UBS Bank and UBS-PR after an investigation by the OCFI. On the contrary, in granting such loans, the Respondent affiliate Banks relied solely on the alleged market value established by UBS-PR for the CEF shares, and did not make any proper disclosure to the Claimant client/borrowers, become familiar with the particular Claimant clients/borrowers financial statements, their income, and their assets other than the shares of CEFs, their other liabilities, their expenses and/or their funding needs. These loans were illicit and were made merely as an accommodation to facilitate the sale of shares of
CEFs by the Respondents to the Claimants.
13.41 Acting as agents and alter egos of the Respondent affiliate Banks and implementing the Fraudulent Loan Scheme, the PR Respondents FAs acted as financial intermediaries when they opened the Bank loan accounts for the Claimants with the respective
Respondent affiliate Banks in Puerto Rico and they charged and received commissions or fees for said services. Puerto Rico laws and regulations govern the commercial activities of financial intermediaries. In so doing, Respondents breached several provisions of the applicable laws and regulations including, inter alia:
a) the Respondent affiliate Banks are not registered to conduct banking business in Puerto Rico;
b) the failure by any of the Puerto Rico Respondents to obtain the licenses required to act as financial intermediaries and to charge and receive commissions or fees for said services;
c) the Respondent affiliate Banks’ procurement of illicit loans through their conception, design and implementation of the Fraudulent Loan Scheme;
d) the Respondent affiliate Banks’ failure to comply with the capital requirements set forth by the applicable regulations;
e) the Respondents’ failure to obtain and post a bond, as required by the applicable regulations;
84 f) the Puerto Rico Respondents’ failure to execute written agreements with Claimant regarding the former parties’ services as financial intermediaries for the loans, as required by the applicable regulations;
g) the Respondents’ failure to provide to Claimant adequate information and orientation as to the nature, import, risks and possible consequences of the loans taken by Claimant pursuant to the Fraudulent Loan Scheme, and failure to provide to Claimant copies of all documents related to the loans as required by the applicable regulations;
h) the Respondents’ failure to submit to the Commissioner of Financial Institution the semiannual list or report required pursuant the applicable regulations; and
i) the Respondents’ failure to comply with the prohibition to require or accept documents executed by Claimant with spaces in blank, as the applicable regulations. H. Respondents’ Acted With Scienter
13.42 Defendants’ false and materially misleading statements and omissions were made with scienter and were intended to, and did: deceive the Claimants; artificially create, inflate, and maintain the market for, and market price of, the CEFs and PR Bonds; and cause
Claimants to purchase, obtain loans against and hold the CEFs and PR Bonds at artificially inflated prices.
13.43 Moreover, Respondents, wantonly and knowingly, mislead and unsuitably had the Claimants purchase, obtain loans against and hold to the PR Bonds and CEFs while they well aware that their prices were artificially inflated, that their demand was continuingly decreasing, that the market was saturated, that the prices had to come markedly down to correct the market, and that when this would happen the losses to the Claimants could be huge due to the price and market manipulation and imbalances that had been created by the
Fraudulent Sale and Loan Schemes.
13.44 The Fraudulent Loan Scheme, combined with the misconduct of the Fraudulent
Sales Scheme, as described, supra:
85 a) demonstrates a complete absence of any good faith, honesty or compliance with fair dealing standards;
b) was illegal, tortious, fraudulent, and imprudent; and,
c) was conceived and implemented with the sole fraudulent objective of generating exorbitant revenues for the Respondents in bad faith, with the intent to deceive and defraud, and with utter disregard of the best interests, and at the expense of causing severe injury to the Claimants knowingly and wantonly exposing them to the risk of financial ruin.
I. Injury Causation
13.45 As detailed herein, Respondents explicitly recommended the Claimants the above stated unsuitable investments strategy that was followed by them. The Respondents also made the above stated false and misleading statements and failed to disclose the above stated material facts that artificially inflated the price of CEFs and operated as a fraud or deceit on the
Claimants. Respondents, wantonly and knowingly, mislead and unsuitably had the Claimants purchase, obtain loans against and hold to the PR Bonds and CEFs. The Claimants trusted upon the FA’s advise. As a direct and proximate result of Respondents’ joint and several fraudulent conducts, the Claimants sustained the severe economic injury claimed herein.
J. Claimants’ Severe Economic Injury
13.46 At on or around the end of September 2013, the CEFs had to liquidate securities in their respective portfolios to cover the excess loan debt over assets value. As of that time the moneys used for interest rate swaps was also representing a substantial loss. Funds or investors who expect a change in interest rates or the relationships between them use interest rate swaps speculatively. Traditionally, fixed income investors who expected rates to fall would purchase cash PR Bonds, whose value increased as rates fell. Today, investors with a similar view could enter a floating-for-fixed interest rate swap; as rates fall, investors would pay a lower floating rate in exchange for the same fixed rate. Furthermore, the holdings of the Fund include large
86 amounts of PR Bonds from the Employees Retirement Fund that according to official government numbers could go into default unless there is a bailout of the retirement fund.
13.47 As a result thereof, as of September 30, 2013, although no significant net withdrawals were made from the Claimants’ accounts, Tito’s accounts had practically no equity in them, and Trinidad’s accounts had sustained a substantial loss. From August 31, 2013 up to October 31, 2013, the gross value of the assets therein had declined around 50% of their original investment, and in the accounts that had loans the outstanding debit or loan payable balance claimed all of the accounts net worth.
13.48 As of the date of this Statement of Claim, Claimants’ estimate that Tito’s accounts have no value, and may even have a negative net worth. Don Félix’s accounts have also sustained a substantial loss.
13.49 Had the Respondent Broker Dealers complied with their professional responsibility to put together a suitable investment strategy consisting of a diversified portfolio of securities that was suitable to the Claimants’ manifested objective of investing their monies in secure fixed income securities, where the preservation of the capital investment was the main objective, the Claimants would have received a fixed return sufficient to meet their investment objectives and would have sustained no loss of the capital of their investments. As a result thereof, the Respondents are liable for the loss sustained to the capital of Claimants’ investments.
13.50 The economic losses adequately caused to Tito by Respondents’ joint and several wrongful conduct are estimated in no less than $63,089,240.06. See Table herein below.
87 13.51 The economic losses adequately caused to Don Félix by Respondents’ joint wrongful conduct are estimated in no less than $15,871,069.84. See Table herein below.
DAMAGE’S TABLE
THE DAMAGES SUFFERED BY TITO TRINIDAD.
*ESTIMATED INTEREST CALCULATED AT BARCLAYS BOND INDEX 5.6% YLD. 5 YEAR
Interest on Broker Dealer Commissions Interest /C.L. Mtg. payment Total Compensatory $Inv. UBS-PR Compensatory 9,315,911.10 3,000,000.00 4,394,509.44 2,291,801.06 3,801,073.10 $22,803,294.70 to Abr.2007 * Penalties, interest and associated $3,450,000.00 costs in income taxes Mortgage $4,484,100.00 Loans TOTAL $30,737,394.70 Interest on Broker Dealer Commissions Interest /C.L. Mtg. payment Total Compensatory $Inv. Wells Fargo Compensatory 9,661,696.90 1,000,000 1,977,771.33 2,642,672.23 $14,282,140.46 to Oct. 2010 *
Interest on Broker Dealer Compensatory Commissions Interest /C.L. mtg. payment Total $Inv. Popular Securities & Popular One Compensatory 23,953,145.34 2,000,000 - 2,050,659.56 $26,003,804.90
TOTAL $63,089,240.06 *Interest as of 2/2014
88 THE DAMAGES SUFFERED BY FELIX TRINIDAD.
*EST. INTEREST CALCULATED AT BARCLAYS BOND INDEX 5.6% YIELD.
Broker Dealer Compensatory Commissions Interest on $Inv. Interest /C.L. Total UBS-PR Compensatory to 2,747,749.74 700,000.00 1,296,170.82 216,564.94 $4,960,485.50 Abr.2007 *
Broker Dealer Compensatory Commissions Interest on $Inv. Interest /C.L. Total Wells Fargo Compensatory to 3,511,640.52 300,000.00 718,840.80 198,670.00 $4,729,151.32 Oct. 2010 *
Broker Dealer Compensatory Commissions Interest on $Inv. Interest /C.L. Total
Popular Securities & Popular One
Compensatory 5,406,933.02 600,000.00 - 174,500.00 $6,181,433.02
*Interest as of Feb 2014 TOTAL $15,871,069.84
13.52 The fore stated loss was proximately caused by Respondents’ illicit, grossly negligent, tortious, imprudent and fraudulent conduct, from the Respondents Lack of
Supervision and from their mismanagement of the accounts.
K. Respondents’ Joint and Several Liability
13.53 Both the Fraudulent Sales Scheme and the Fraudulent Loan Scheme were carried out in concert, and with the knowledge and approval of the Respondent Broker Dealers and their affiliate Banks. At all times the Respondent Broker Dealers acted as alter egos of each other and as an agent of their affiliate Banks, for their economic benefit. All the
Respondents gained bountiful fees and commission at all the stages of the commercial transactions related to the Fraudulent Sales and Loan Schemes at the stake of causing severe
89 economic injury and financial ruin to the Claimants. Therefore, all the Respondents are jointly and severally liable for their own misconduct, and that of their of their associates, affiliates, agents and employees.
13.54 The Respondent Broker Dealers had a supervisory duty to establish, maintain and review policies and procedures reasonably designed to achieve their respective agents and employees identified herein compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations. FR 3130. Therefore, the Respondent Broker Dealers are also supervisory liable for the conduct of their FAs, agents and employees identified in this claim because they failed to establish, maintain and review any such policies and procedures.
13.55 The Respondent Broker Dealers are also vicariously liable for the conduct of their respective FAs, agents and employees identified herein because their conduct falls within the scope of their employment or agency, furthered a desire to serve and benefit of the
Respondent employers or principals’ interest, and resulted in an economic benefit to them.
Vernet v. Serrano-Torres, 566 F.3d 254, 261 (1st Cir. P.R. 2009).
XIV. FIRST CLAIM FOR RELIEF - SECURITIES EXCHANGE ACT
14.1 Claimants reproduce and reaffirm, as if alleged herein, each and every one of the preceding allegations.
14.2 Through the conduct described above, Respondents knowingly and willfully violated: Section 17(a) of the Securities Act, 15 USCS § 77q,3 which prohibits fraudulent
3 (a) It shall be unlawful for any person in the offer or sale of any securities . . . by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly-- (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
90 conduct in the offer and sale of securities; Sections 10(b), 15 USCS § 78j,4 and 15(c) of the
Exchange Act, 15 USCS § 78o5; Exchange Act Rule 10b-5, 17 CFR 240.10b-56 which prohibit fraudulent conduct in connection with the purchase or sale of securities; and FR 20207 which prohibit manipulative, deceptive or other fraudulent device or contrivance in connection with the purchase or sale of securities. These violations are actionable under 15 USCS § 78aa.8
14.3 At all relevant times Respondents engaged in the fore stated fraudulent conduct with scienter, with the intent to, and did, deceive, manipulate, and defraud Claimants in the purchase of, issuance of loans against, and to hold to, the CEFs and PR Bonds, and as a
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. 4 It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange-- (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement[,] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 5 (c) Use of manipulative or deceptive devices; contravention of rules and regulations. (1) (A) No broker or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than commercial paper, bankers' acceptances, or commercial bills), or any security-based swap agreement by means of any manipulative, deceptive, or other fraudulent device or contrivance. (B) No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security or any security-based swap agreement involving a municipal security by means of any manipulative, deceptive, or other fraudulent device or contrivance. (C) No government securities broker or government securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or to attempt to induce the purchase or sale of, any government security or any security-based swap agreement involving a government security by means of any manipulative, deceptive, or other fraudulent device or contrivance. 6 It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 7 No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance. 8 (a) In general. The district courts of the United States and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this title [15 USCS §§ 78a et seq.] or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this title [15 USCS §§ 78a et seq.] or the rules and regulations thereunder.
91 proximate cause thereof the Claimants suffered the total loss of their investments. Claimants demand herein payment from Respondents in the full amount of all the aforesaid losses, plus interest from the date of this Statement of Claim until full payment thereof.
XV. SECOND CLAIM - PUERTO RICO SECURITIES ACT - 10 L.P.R.A. §890
15.1 Claimants reproduce and reaffirm, as if alleged herein, each and every one of the preceding allegations.
15.2 By its express terms, Section 890, 10 L.P.R.A., imposes liability upon “[a]ny person who” “offers or sells” a security in violation of its provisions and upon “[e]very person who directly or indirectly controls a seller liable under” the statute.
15.3 Respondents marketed, sold or caused that the CEFs and PR Bonds were sold to
Claimants, making untrue statements of fact, as well as omitting material facts concerning the market demand, liquidity, safety, and returns for the CEFs. Respondents thereby violated 10
L.P.R.A. §890(a)(2). Respondents are therefore liable to Claimants for “the price paid for the security, in addition to the interest at the rate applicable to judicial awards as provided by the regulations approved to such effects the Financing Board created by §§2001 et seq. of Title 7, starting on the date in which the payment, costs and reasonable Attorney's fees were made less the sum of any income received on, upon the tender of the security, or for damages if he no longer owns the security.”
XVI. THIRD CLAIM - FAULT, FRAUD, DECEIT, RECKLESSNESS AND NEGLIGENCE
16.1 Claimants reproduce and reaffirm, as if alleged herein, each and every one of the preceding allegations.
16.2 At all times, pursuant to the Account Agreements Respondent Pepe Ramos acted as the Claimants’ FA and as Tito’s FP. Under the Account and Financial Agreement it
92 was the FA’s and the Broker Dealers professional responsibility to put together a portfolio of investments that was suitable to the Claimants’ manifested objective of investing their monies in secure fixed income securities, where the preservation of the capital investment was the main objective.
16.3 Pursuant to the Account and Financial Advisor Agreement, and to the Financial
Planning and Management Agreement with Tito, Respondents are bound, not only with regard to the fulfillment of what was expressly stipulated therein, but also with regard to all the consequences thereof which, according to their character, are in accordance with good faith, use, and law. 31 L.P.R.A. § 3375.
16.4 Through the conduct described above, Respondents, jointly and severally, are guilty of fraud (“dolo”)9, deceit, fault, recklessness and negligence in fulfilling the contractual and fiduciary obligations they owed the Claimants pursuant to the Financial Advisor and
Account Contracts, and to the Financial Planning and Management Agreement with Tito.
Respondents are thereby subject to indemnify Claimants for the losses and damages caused thereby. 31 L.P.R.A. § 3018.
16.5 The losses in the Claimants’ accounts were the foreseeable, direct, and proximate result of Respondents’ failure to know their customers, their approval of margin for the accounts, and their failure to appropriately monitor Ramos and the activities in the account, and their failure to securely plan for and manage Tito’s finances, all of which constituted fault and conduct falling beneath the applicable standards of care. Respondents were at fault and negligent in the supervision of their representatives, employees, and agents, including its registered representative Pepe Ramos.
9 Under Puerto Rico contract law, “dolo” or “dolus” is an equivalent of scienter, fraud or deceit.
93 16.6 Respondents are liable to indemnify Claimants not only for the amount of the actual losses that they have suffered, but also that of the profits which the Claimants have failed to realize as a result thereof. 31 L.P.R.A. § 3023. Because Respondents’ conduct that caused Claimants’ injury was fraudulent, Respondents shall also be liable for all the losses and damages suffered by the Claimants that originate from Respondents’ misconduct. 31 L.P.R.A.
§ 3024.
16.7 Claimants demand herein payment from Respondents in the full amount of all the aforesaid losses, the profits which the Claimants have failed to realize as a result thereof, and all the losses and damages suffered by the Claimants that originate from Respondents’ misconduct, plus interest from the date of this Statement of Claim until full payment thereof, plus any amounts required to liquidate the illicit debit loan payable balance in the accounts.
XVII. FOURTH CLAIM - RESCISSION OF CONTRACT A. Nullity of Purchases and Loans
17.1 Claimants reproduce and reaffirm, as if alleged herein, each and every one of the preceding allegations.
17.2 As alleged above, Respondents directly or indirectly engaged in fraudulent acts and practices in order to deceive as they did deceive and induce the Claimants to execute contracts to purchase and obtain loans against the CEFs and PR Bonds, which without said deceit the Claimants would not have execute. See, 31 L.P.R.A. § 3408. The deceit was serious and gives rise to the nullity of these contracts because without it the Claimants would have not purchased and obtained loans against the CEFs and PR Bonds. See, 31 L.P.R.A. § 3408.
Because Claimants had nothing to do with the illicit consideration, they reclaim herein the monies they gave to Respondents for the purchase of the CEFs and PR Bonds, and any fees,
94 expense or payments made on the loans, and they cannot be obliged to give anything in return to the Respondents. See, 31 L.P.R.A. § 3517.
17.3 As a result of the foregoing, Claimants request the nullity of the purchases of the CEFs and PR Bonds, and of the loans obtained against the CEFs and PR Bonds. The
Claimants further request to be reimbursed, jointly, by the Respondents all monies that they paid for said securities, and loans, including for all related fees and commissions, and that a finding be entered that they owe nothing to the Respondents.
17.4 The Claimants further request the nullity of all the unauthorized investments in shares of CEFs in their Account and all illicit loans made by Respondents in connection with their accounts that resulted in losses because they were made without their consent. See, 31
L.P.R.A. § 3391. Claimants demand herein the reimbursement to Claimants of all the aforesaid losses or, in the alternative, the rescission of all the aforesaid unauthorized transactions and other proper remedies, including, without limitation the payment to Claimants of a reasonable return on all assets respectively deposited by Claimants in the accounts.
17.5 Claimants demand herein payment from Respondents in the full amount of all the aforesaid losses, the profits which the Claimants have failed to realize as a result thereof, and all the losses and damages suffered by the Claimants that originate from Respondents’ misconduct, plus interest from the date of this Statement of Claim until full payment thereof, plus any amounts required to liquidate the illicit debit loan payable balance in the accounts.
B. Nullity of Waivers
17.6 When Respondents initiated the Fraudulent Loan Scheme in the accounts, they asked Claimants for their signatures in several printed pages, with blank spaces not filled, informing each of them that they were routine requirements to maintain the accounts, and
95 without allowing any of them to properly review said documents or to consult them with their respective legal counsel. But for Claimants’ lack of knowledge and information about the following provisions, among others, included or which may be included in said printed pages, the Claimants would not have signed them:
All provisions creating any obligation by Claimants to cover any deficits in the event the sale, disposition or liquidation of the securities which collateralized the loans would not suffice to pay in full the outstanding loan balance, including principal and interest. 17.7 The Claimants request the nullity of the fore stated waivers because they were obtained without their informed consent. See, 31 L.P.R.A. § 3391.
XVIII. FIFTH CLAIM - PUNITIVE OR EXTENDED DAMAGES
18.1 Claimants reproduce and reaffirm as if alleged herein, each and every one of the preceding allegations.
18.2 Each and every one of the acts and omissions described above constitutes a gross violation of the securities laws and other laws, norms, rules and regulation of the United
States of America and of the securities and other laws, norms, rules and regulations of Puerto
Rico. Further, the aforesaid acts and omissions constitute direct violations of the Respondent
Broker Dealers Internal Manuals, Rules and Regulations that govern the conduct and supervision of registered representatives or financial advisors employed by them.
18.3 Moreover, the aforesaid acts and omissions perpetrated by Respondents, in utter disregard of the best interests of Claimants (to whom they owed fiduciary duties) also constitute fraud in the purchase and sale of securities, bank fraud, gross and wanton negligence, fraudulent appropriation of funds belonging to Claimants, (through commissions and interest in improperly authorized transactions), “dolo” and egregious breach of the duties of good faith and fair dealing that securities brokers owe their clients, through insidious
96 machinations, all of which should have never been committed or tolerated and allowed to be committed by the Respondent Broker Dealers.
18.4 The arbitrators are empowered to award substantial punitive or extended damages to deter other individual brokers (such as Pepe Ramos), Broker Dealers (such as
Paine Webber/UBS-PR, Wells Fargo/Wachovia and Popular Securities), and banks (such as
UBS Bank and Banco Popular) from incurring in the future in the egregious acts of misconduct described in this statement. A substantial award of punitive or excess damages jointly and severally against Respondents is required to send the correct message to other brokers, managers, and brokerage houses that recklessness, fraud and deceit will not be tolerated, and that they are required to strictly comply with the law and with the proper and fair norms of
FINRA and other self-regulatory organizations of the securities industry and banking when dealing with the customer funds that are entrusted to them.
18.5 As a result of the foregoing, Claimants demand that punitive or extended damages be assessed, jointly and severally, against Respondents, and paid to Claimants, in an amount of not less than THREE TIMES (3) THE AMOUNT OF COMPENSATORY
DAMAGES.
XIX. SIXTH CLAIM - DEMAND FOR INTEREST, ATTORNEY’S FEES & OTHER EXPENSES
19.1 Claimants reproduce and reaffirm, as if alleged herein, each and every one of the preceding allegations.
19.2 Pursuant to the laws of the Commonwealth of Puerto Rico, any person or legal entity that is obstinate in fomenting litigation and/or protracting litigation, or refusing to recognize an obligation, is liable for attorney’s fees incurred by Claimants in the prosecution of their claim. In addition, pursuant to the laws of the Commonwealth of Puerto Rico, any person
97 or legal entity that is adjudged obstinate is also liable for pre-judgment interest over any monetary award from the date of the filing of the claim.
19.3 Respondents have been obstinate in that, although they have been on notice of the nature and extent of the damages suffered by Claimants, they have taken no action on the matter and have, in fact, fomented this arbitration proceeding. Therefore, Claimants demand from Respondents the reimbursement of their attorney’s fees, in no less that 33% of the monetary awards, plus of all consultants’ fees, arbitration costs and expenses, and legal interest over all the monetary awards from the date of the filing of this Claim.
XX. SEVENTH CLAIM - DEMAND FOR DISGORGEMENT OF COMMISSIONS, INTERESTS AND/OR SERVICE AND FOR LOAN FEES
20.1 Claimants reproduce and reaffirm as if alleged herein each and every one of the preceding allegations.
20.2 The aforesaid illicit, unsuitable, imprudent, grossly negligent and unauthorized leveraged investment in the shares of the CEFs in the accounts generated illegal commissions, markups and/or markdowns and/or trading profits and interests and other income for
Respondents, in amounts that cannot be determined as of this time, but estimated at around
$8,000,000. Claimants respectfully demand the disgorgement by Respondents of the aforesaid commissions, markups, markdowns and/or trading profits and/or interests and/or other fees, and their reimbursement, jointly and severally, by the Respondents to the Claimants, at pro rata with Claimants’ losses.
XXI. EIGHTH CLAIM - URGENT INJUNCTIVE RELIEF
21.1 Claimants reproduce and reaffirm as if alleged herein each and every one of the proceeding allegations.
98 21.2 Claimants respectfully request urgent orders from the arbitrators to Respondents or any of them to:
A. Stay or cause the staying of any efforts by Respondents or any of them to collect from Claimants any alleged margin or debit balances allegedly owed in connection with the accounts and bar efforts to withhold dividends and interests.
B. Make no collection efforts of alleged debit or loan balances, allegedly owed in connection with the accounts, or withholding of dividends, other than through these arbitration proceedings.
C. Prohibit the destruction or disposition by Respondents or any of them of documents and/or evidence related to the accounts and the transactions described herein, including but not limited to electronic and digital records.
D. Prohibit any public disclosures and discussions by the Respondents of any and all information pertaining to the matters subject of this Claim.
XXII. STATUTES OF LIMITATIONS AND FRAUDULENT CONCEALMENT TOLLING
22.1 The Claimants’ claims under Sections 10(b) of the Exchange Act must be brought “not later than . . . 2 years after the discovery of the facts constituting the violation.”
28 U.S.C. § 1658(b). The Claimants’ P.R. Law claims based on securities transactions are subject under PRUSA to a two-year limitations period, running from the date of the “sale contract”. 10 L.P.R.A. § 890(e).
22.2 The Claimants’ Puerto Rico law claims pursuant to 31 L.P.R.A. §301810 for
Respondents’ fraud or negligence in the fulfillment of contractual obligations are subject to a
10 31 L.P.R.A. §3018, states that “those who in fulfilling their obligations are guilty of fraud, negligence, or delay and those who in any manner whatsoever act in contravention of the stipulations of [their contractual obligations] . . . shall be subject to indemnify for the losses and damages caused thereby.” “Puerto Rican law imposes the duty of good faith performance on contracting parties. See An-Port, Inc. v. MBR Industries, Inc., 772 F. Supp. 1301, 1314 (D.P.R. 1991) (‘The requirement of good faith between the parties in a contract . . . must guide all contacts between the contracting parties during the existence of the relationship.’); AMECO v. Jaress Corp., 1970 PR Sup. LEXIS 80, 98 D.P.R. 838 (1970) (contracting parties have obligations by law that extend ‘to cover not only what has been expressly stipulated, but also the consequences which, according to their nature, are in accordance with
99 fifteen-year term statute of limitations.11 Claimants’ contract recession and nullity claims are subject to a four year statute of limitations.12
22.3 On the other hand, the doctrine of fraudulent concealment operates to toll the statute of limitations as to all claims such as here where the Claimants injured by the fraud remained in ignorance of it without any fault or want of diligence or care of their part until the fraud was discovered, though there be no special circumstances or efforts on the part of the
Respondents to conceal it from them.13
22.4 All of Claimants’ claims were tolled under the doctrine of fraudulent concealment until the matter of Respondents’ fraudulent conduct came to light shortly after on or around August 31, 2013 when the CEFs market sustained a substantial drop in value that initiated public market inquiries that brought the alleged fraud to light. It was only thereafter when the Claimant investors, in the exercise of reasonable diligence, could have discovered the alleged fraud. Positive action did not accrue until the damage occurred.
XXIII. PRAYER FOR RELIEF
WHEREFORE, Claimants respectfully pray that an award be entered for them
and jointly and severally against the Respondents, in each one every one of the
preceding claims for relief, and that the Panel finds that the Respondents shall:
A. Pay Claimants total compensatory damages in the approximate amount of $54,597,076.62.
B. Pay Claimants such interest award as it may deem appropriate.
good faith’); see also P.R. Laws Ann. 31 § 3375 (1990).” Adria Int'l Group, Inc. v. Ferre Dev., Inc., 241 F.3d 103, 108-109 (1st Cir. P.R. 2001). 11 Ramos Lozada v. Orientalist Rattan Furniture Inc., 130 D.P.R. 712,729-730 (P.R. 1992). 12 31 L.P.R.A. §3512. 13 See Cooperativa de Ahorro y Credito Aguada v. Kidder, Peabody & Co., 799 F. Supp. 261, 263-264 (D.P.R. 1992); (Reversed on other grounds by Cooperativa de Ahorro y Crédito Aguada v. Kidder, 993 F.2d 269 (1st Cir. 1993)); See also See also PaineWebber Inc. of P.R. v. First Boston, 136 DPR 541546-547 (1994).
100 C. Disgorge all commissions and other revenue generated by them from the accounts in the estimated amount of around $4,600,000.
D. Reimburse Claimants for all costs and expenses incurred, including the FINRA’s filing fees and all arbitration fees and expense.
E. Pay Claimants a reasonable award for their attorney fees.
F. Pay Claimants punitive damages in accordance with law for no less than three (3) times the award for compensatory damages.
G. Reimburse Claimants all monies that they paid for the securities, and loans, including for all related fees and commissions, and that a finding be entered that the Claimants owe nothing to the Respondents.
H. Comply with requested injunctive relief.
I. Provide the Claimants such other and further relief as the arbitration panel deems just and appropriate.14
RESPECTFULLY SUBMITTED, in San Juan, Puerto Rico, this 2nd day of April, 2014.
/s/Eric Quetglas Jordan /s/ Luis E. Miñana
Eric Quetglas Jordan, Esq. Luis E. Miñana, Esq.
USDC-PR No. 202514 USDC-PR No. 225608 QUETGLAS LAW OFFICES ESPADA, MIÑANA & PEDROSA LAW OFFICES, PSC PO Box 16606 San Juan PR, 00908-6606 122 Calle Manuel Dómenech [email protected]; Altos Urb. Baldrich [email protected] San Juan, PR 00918 Tel: (787) 722-0635/722-7745 [email protected]; [email protected] Fax: (787) 725-3970 Tel.: (787) 758-1999 Fax: (787) 773-0500
14 These damages have been estimated for the Claimants. Damages and interest will be updated and supplemented by all other consequential damages to be proved at the arbitration hearing.
101