SEC Charges UBS Subsidiary, Two Executives with Fraud

The Commission instituted proceedings against UBS Puerto Rico and two of its former senior executives alleging that misrepresentations were made in connection with the sale of shares in non-exchange traded closed end funds about the pricing and the market. The action involving UBS Puerto Rico or UBS PR settled. In the Matter of UBS Financial Services Inc. of Puerto Rico, Adm. Proc. File No. 3-14863 (Filed May 1, 2012). The proceeding against Respondents Miguel A. Ferrer, former CEO of UBS PR, and Carlos J. Ortiz, former Managing Director of Capital Markets of the subsidiary, did not. In the Matter of Miguel A. Ferrer, Adm. Proc. File No. 3-14862 (Filed May 1, 2012).

Since 1995 UBS PR, a subsidiary of UBS Financial Services, Inc., has been the primary underwriter of fourteen separately organized closed-end companies' shares. Those companies had a market capitalization of about $4 billion. The firm was also co-managed nine offerings of similar fund shares. Those had a market capitalization of about $1 billion. The shares in the funds are not listed on an exchange or quoted by any quotation service. They are only available to residents of Puerto Rico. The majority of the funds held Puerto Rico municipal bonds. The firm is the only secondary dealer for the funds it underwrote. It is the dominant dealer for the others.

Fund share prices were effectively set by the UBS PR head trader. The firm priced the fund shares to maintain a high premium to net asset value or NAV throughout 2008 and early 2009. Nevertheless, customers were told that the prices were set through supply and demand. Those prices were also listed on the client account statements as "market values." In fact that statement was false, according to the Order.

The reinvestment program for the funds was an important sales tool. Under this program investors could elect to receive dividend reinvestment shares at net asset value or NAV. Those shares could immediately be resold to UBS PR at the then existing market price which could earn a premium of up to 45% because of the manner in which the firm priced the fund shares.

By the spring of 2009 the parent firm concluded that the inventory of fund shares held by UBS PR was too large. The subsidiary was directed to reduce the inventory because it represented a potential risk to the firm. Subsequently, UBS PR regularly sold fund shares at prices which were below those reflected in pending customer sell order. The firm was undercutting customer orders, effectively preventing them from selling their shares.

From March to September 2009 UBS PR sold about 75% of its inventory to investors. Throughout the period the firm continued to misrepresent the manner in which it set secondary market prices and the liquidity of the market. The firm also did not disclose that it was withdrawing support from the market. By fall, when the inventory reduction was completed, market prices of certain funds declined by 10 - 15%. The Order as to the firm alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(c).

The firm settled, consenting to the entry of a cease and desist order based on the Sections cited in the Order as well as to a censure. In addition, to complying with its undertakings, the firm agreed to pay disgorgement of $11.5 million along with prejudgment interest and a civil penalty of $14 million.

The Order as to the two executives, alleges violations of Securities Act Section 17(a)(1), (2) and (3) and Exchange Act Section 10(b). It also claims that Messrs. Ferrer and Oritz substantially assisted UBS PR's principal violations and willfully aided and abetted those violations. That action is proceeding to hearing.

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