CASES
UBS Puerto Rico Closed-End Fund Litigation
On January 4, 2013, the United States Court of Appeals for the First Circuit reinstated shareholder derivative claims filed by Gardy & Notis, LLP in the United States District Court for the District of Puerto Rico relating to UBS closed-end funds in Puerto Rico, including: Puerto Rico Fixed Income Fund II, Inc., Puerto Rico Fixed Income Fund III, Inc., Puerto Rico Fixed Income Fund IV, Inc., and the Tax-Free Puerto Rico Fund II, Inc.
Gardy & Notis LLP is co-lead counsel for plaintiff investors in the funds. The defendants are UBS Financial Services Incorporated of Puerto Rico, its affiliate UBS Trust Company of Puerto Rico, and the members of the funds' board of directors. The complaint alleges that defendants seized upon unique aspects of the Puerto Rico financial markets to craft a scheme that allowed them to wrongfully garner millions of dollars in fees for the UBS defendants, who operated on all sides of the transactions and manipulated the funds and the bond market to the detriment of the Funds and their unsuspecting investors.
In 2008, UBS Financial underwrote $2.9 billion of bonds issued by Puerto Rico's troubled Employee Retirement System, a public retirement system maintained by the government of Puerto Rico. Subsequently, UBS Trust 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 of the funds' assets. The funds were so heavily invested in the bonds that they suffered substantial losses when the value of the bonds soon depreciated. UBS financial, 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.
As a result of defendants' manipulative trading, boosting the price of the bonds and generating illicit profits, plaintiffs asserted various claims against the defendants, including derivative claims under the Securities Act and the Securities and Exchange Act, against UBS Trust and UBS Financial. The complaint also stated that pre-suit demand upon the funds' directors would have been a futile act because a majority of the board did not have the requisite disinterest and independence to evaluate plaintiffs' demand to bring this action on behalf of the funds.
After the District Court dismissed all of the claims, Gardy & Notis, LLP appealed the decision to the United States Court of Appeals for the First Circuit. The Court of Appeals reversed the dismissal of plaintiffs' claims. Finding that UBS played multiple roles in the individual defendants' lives, including “employer, underwriter, investor, and gate-keeper to Puerto Rico's capital markets," the Court of Appeals held that the plaintiffs' allegations established a reasonable doubt about the majority of the directors ability to evaluate plaintiffs' demand to bring this action on behalf of the funds with the disinterest and independence required under Puerto Rico law.
"[P]laintiffs' allegations have established with sufficient particularity a reasonable doubt about the ability of the six directors… to evaluate plaintiffs' demand to bring this action on behalf of the Funds with the disinterest and independence required under Puerto Rico law… [P]laintiffs have established [] that a pre-suit demand would have been futile. The district court erred in reaching a contrary conclusion. Plaintiffs' derivative claims should not have been dismissed."
The case is Union de Empleados de Muelles de Puerto Rico PRSSA Welfare Plan, et al. v. UBS Financial Services Incorporated of Puerto Rico, et al., No. 10-cv-1141 (ADC), filed in the United States District Court for the District of Puerto Rico.
For more information regarding the lawsuit or to obtain a copy of the complaint or any Court filings, please contact us.
On January 4, 2013, the United States Court of Appeals for the First Circuit reinstated shareholder derivative claims filed by Gardy & Notis, LLP in the United States District Court for the District of Puerto Rico relating to UBS closed-end funds in Puerto Rico, including: Puerto Rico Fixed Income Fund II, Inc., Puerto Rico Fixed Income Fund III, Inc., Puerto Rico Fixed Income Fund IV, Inc., and the Tax-Free Puerto Rico Fund II, Inc.
Gardy & Notis LLP is co-lead counsel for plaintiff investors in the funds. The defendants are UBS Financial Services Incorporated of Puerto Rico, its affiliate UBS Trust Company of Puerto Rico, and the members of the funds' board of directors. The complaint alleges that defendants seized upon unique aspects of the Puerto Rico financial markets to craft a scheme that allowed them to wrongfully garner millions of dollars in fees for the UBS defendants, who operated on all sides of the transactions and manipulated the funds and the bond market to the detriment of the Funds and their unsuspecting investors.
In 2008, UBS Financial underwrote $2.9 billion of bonds issued by Puerto Rico's troubled Employee Retirement System, a public retirement system maintained by the government of Puerto Rico. Subsequently, UBS Trust 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 of the funds' assets. The funds were so heavily invested in the bonds that they suffered substantial losses when the value of the bonds soon depreciated. UBS financial, 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.
As a result of defendants' manipulative trading, boosting the price of the bonds and generating illicit profits, plaintiffs asserted various claims against the defendants, including derivative claims under the Securities Act and the Securities and Exchange Act, against UBS Trust and UBS Financial. The complaint also stated that pre-suit demand upon the funds' directors would have been a futile act because a majority of the board did not have the requisite disinterest and independence to evaluate plaintiffs' demand to bring this action on behalf of the funds.
After the District Court dismissed all of the claims, Gardy & Notis, LLP appealed the decision to the United States Court of Appeals for the First Circuit. The Court of Appeals reversed the dismissal of plaintiffs' claims. Finding that UBS played multiple roles in the individual defendants' lives, including “employer, underwriter, investor, and gate-keeper to Puerto Rico's capital markets," the Court of Appeals held that the plaintiffs' allegations established a reasonable doubt about the majority of the directors ability to evaluate plaintiffs' demand to bring this action on behalf of the funds with the disinterest and independence required under Puerto Rico law.
"[P]laintiffs' allegations have established with sufficient particularity a reasonable doubt about the ability of the six directors… to evaluate plaintiffs' demand to bring this action on behalf of the Funds with the disinterest and independence required under Puerto Rico law… [P]laintiffs have established [] that a pre-suit demand would have been futile. The district court erred in reaching a contrary conclusion. Plaintiffs' derivative claims should not have been dismissed."
The case is Union de Empleados de Muelles de Puerto Rico PRSSA Welfare Plan, et al. v. UBS Financial Services Incorporated of Puerto Rico, et al., No. 10-cv-1141 (ADC), filed in the United States District Court for the District of Puerto Rico.
For more information regarding the lawsuit or to obtain a copy of the complaint or any Court filings, please contact us.
| Case Documents |
| January 4, 2013 Court of Appeals Decision |