Thursday, March 16, 2017

Santander’s First Puerto Rico Family of Funds: Same Defects, Similar Losses as UBS Puerto Rico and Popular Funds

By Craig McCann, Edward O'Neal and Susan Song

Introduction

We have previously posted our extensive research into UBS Financial Services of Puerto Rico’s closed end funds – some of which were co-managed and sold by Popular.

A summary of our UBS posts as of February 12, 2015 can be downloaded by clicking UBS Puerto Rico’s Bond Fund Debacle: What We Know so Far. That summary is also available in Spanish by clicking Lo que Sabemos hasta Ahora de la Debacle de los Fondos de Bonos UBS Puerto Rico.

Two subsequent UBS posts can be accessed by clicking UBS Puerto Rico Still Can’t Shoot Straight from October 30, 2015 and UBS Puerto Rico’s COFINA Conflicts Were Even Worse Than ERS Conflicts from October 24, 2016.

The UBS Funds suffered dramatic losses since 2013 because of the decline in Puerto Rico municipal bond prices, the Funds’ 2-to-1 leverage and their concentration in Employees Retirement System bonds UBS underwrote.

There have been nearly 2,000 FINRA arbitrations filed in Puerto Rico as a result of losses related to the UBS/Popular Funds, the Santander Funds and Puerto Rico municipal bond losses generally. Our report on these arbitrations can be downloaded in English by clicking Puerto Rico Securities Arbitration Report: 1874 Arbitration Filings, $226 million in Settlements and Awards so far and in Spanish by clicking Reporte de Arbitrajes de Valores en Puerto Rico: 1874 Reclamaciones de Arbitraje, $226 millones en Acuerdos Transaccionales y Laudos Arbitrales Hasta la fecha.

Santander’s Funds had the same (and more) defects and suffered similar extraordinary losses as the UBS and Popular Funds. This post describes the Santander Funds generally; subsequent posts will callout specific funds.

Santander’s First Puerto Rico Family of Funds

Santander sold at least twelve closed end funds and six open end funds in Puerto Rico, branded “First Puerto Rico” Funds. See Table 1.

Table 1 Santander First Puerto Rico Family of Funds


The inception dates for Santander’s closed end funds are listed in Table 2. There is an interesting story buried in these inception dates which we will develop further in a subsequent post. For now, notice that the first 11 of 12 funds commenced operations in the period from May 30, 2001 to January 12, 2005. On average, Santander launched a new fund every 4 months during this 3.6 year period. There was then a 7.8 year gap before the last fund, Tax-exempt Target Maturity Fund VII, commenced operations on October 31, 2012.

Table 2 Santander’s Closed End Funds
Also, notice that there is no Tax-exempt Target Maturity Fund VI in Table 2. Santander registered the Tax-exempt Target Maturity Fund VI on April 5, 2003 but Puerto Rico’s Department of State canceled the Fund’s certificate of incorporation in 2014 for failing to file annual reports or pay annual dues for at least the years 2008-2012.

At least four questions (which we will answer in subsequent posts) jump out of the pattern of inception dates in Table 2:

    1) Why did Santander wait 7.8 years to register another closed end fund after registering 11 funds in less than 4 years?

    2) Why did Santander liquidate Tax-Exempt Target Maturity Fund I in August 2012 by selling all the assets and distributing $10.07 per share when the fund was supposed to distribute the assets as they matured, were called or redeemed between June 2012 and June 2017?

    3) Why did Santander launch another leveraged closed end fund to hold more PR municipal bonds as those bonds became substantially riskier in November 2012 after shuttering Tax-Exempt Target Maturity Fund I rather than shrinking the size of existing funds by deleveraging existing funds and through share repurchases?

    4) What happened to Fund VI? Did it raise any money? Did it ever file annual reports and pay annual dues? If not, why did it take OCFI twelve years to cancel VI’s certificate of incorporation?

There was $3.4 billion in Assets in Thirteen Funds in 2013

Table 3 lists the total and net assets of eleven of the twelve closed end funds listed in Table 2 plus two open-end funds (Tax-Exempt Fund and Tax-Exempt Fund II). The Tax Exempt Target Maturity I is not included in the list because it was fully liquidated by August 2012.

Table 3 Thirteen Santander Funds Held $3.4 Billion in Total Assets



Overall, these thirteen Santander Funds had slightly more leverage than the UBS Puerto Rico Funds and the two Santander Open End Funds were the most leveraged by a small amount.

Santander Marketed the Funds as High Income, Consistent With Preservation of Capital

Santander marketed the funds listed in Table 3 for investors with an investment objective of high current income consistent with preservation of capital. Table 4 is a screen shot of the December 31, 2012 Fact Sheet for the Tax Exempt Fund. Each Santander Fund’s quarterly Fact Sheet, Annual Report and Prospectus had similar “capital preservation” language.

Table 4 Example Santander Fact Sheet



Investors in the Thirteen Santander Funds Lost Nearly $1 billion from 2013 to 2015.

Table 5 reports the losses suffered by investors in the 13 Santander Funds listed in Table 3. Setting aside the two AAA funds, the NAVs of the remaining eleven funds marketed for investors wanting capital preservation declined 56% on average and the prices dropped by 64%.

Table 5 Santander Fund Losses, 2013-2015




Given the relative size of the Santander and UBS/Popular Funds and their relative losses it is surprising that less than 200 arbitrations have been filed against Santander in Puerto Rico while 1,500 have been filed against UBS PR to date.

Someone should look into this.

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Friday, February 17, 2017

$9 million Romero v UBS PR Award

In February 2017, a FINRA arbitration panel in San Juan, PR ordered UBS Financial Services and UBS Financial Services of Puerto Rico to pay $7,983,230 in net compensatory damages and $1 million in punitive damages. You can read the award here. Dr. McCann testified on liability and damages over UBS Puerto Rico's sale of UBS Puerto Rico municipal closed end bond funds.


Tuesday, February 14, 2017

$600,000 Matus v UBS of Puerto Rico Award

In February 2017, a FINRA arbitration panel in Aventura, FL ordered UBS Financial Services and UBS Financial Services of Puerto Rico to pay $339,000 in compensatory damages, $24,500 in expert witness costs, at least $111,870 in interest plus attorney's fees to be determined by a court pursuant to FL Statute 517. You can read the award here. Dr. McCann testified on liability and damages over UBS Puerto Rico's sale of UBS Puerto Rico municipal closed end bond funds.

Thursday, February 2, 2017

Extreme (Expungement) Makeover: Is Scrubbing a 30-Year Record Really Legal?


We have written extensively about problems with FINRA’s BrokerCheck system. Our blog posts on BrokerCheck can be found here.

Others have written about expungement abuses. For example, see Susan Antilla’s “The Unbelievable Story of One Broker and Her Firm Fighting to Clean Her Tarnished Record” available here.

Two weeks ago a FINRA panel rendered an extraordinary expungement award, recommending expungement of 8 awards and 3 settlements. The award in Joseph Anthony La Ferla, Jr. vs. UBS Financial Services Inc. is available
here

A former broker, Mr. La Ferla (CRD 725905), sued his previous employer UBS FSI in a FINRA arbitration requesting expungement of the 8 awards and 3 settlements from 1984 to 1991 currently reflected on his BrokerCheck report. 

Mr. La Ferla’s current BrokerCheck report reflecting 11 customer disputes is available here.  


Since the panel recommended expungement of all 11 awards and settlements, before long Mr. La Ferla’s BrokerCheck report may well be changed to answer No to the question “Are there events disclosed about this broker?” and the Customer Dispute panel will read NA instead of 11 unless FINRA opposes the cleansing of this broker’s history. His BrokerCheck report as it existed on January 31, 2017 is available here.

8 Disclosed Awards
The 1st of 8 listed awards is of a 1991 $180,000 NYSE award rendered in the customer’s favor over allegations of churning and covered call writing in an IRA. There is no mention of whether the broker or the brokerage firm was ordered to pay the award.
The 2ndt of 8 listed awards is a 1987 $10,000 AAA award rendered in the customer’s favor over allegations of churning, unsuitability and misrepresentations. The broker statement says he did not contribute to payment of the award.
The 3rd of 8 listed awards is a 1989 $51,655 (or possibly $65,825) NYSE award rendered in the customer’s favor over allegations of churning, unsuitability and misrepresentations. The broker was ordered by the panel to pay the Claimant $14,170.
The 4th of 8 listed awards is a 1988 $31,000 NYSE award rendered in the customer’s favor over allegations of churning, unauthorized trading, unsuitability and misrepresentations. The broker statement says he did not contribute to payment of the award.
The 5th of 8 listed awards is a 1990 $20,000 NYSE award rendered in the customer’s favor over allegations of churning, unauthorized trading, unsuitability and misrepresentations. The broker statement says he did not contribute to award.
The 6th of 8 listed awards is a 1989 $30,295 NYSE award rendered in the customer’s favor over allegations of churning, unsuitability and misrepresentations. The panel found the broker and brokerage firm jointly and severally liable for the entire award although the broker statement says that he did not contribute to the payment of the award.
The 7th of 8 listed awards is a 1989 $35,000 NYSE award rendered in the customer’s favor over allegations of churning, unsuitability and misrepresentations. The broker statement says his employer paid the award.
The 8th of 8 listed awards is a 1991 $180,000 NYSE award rendered in the customer’s favor over allegations of churning, unsuitability and other claims. The panel found the broker, a second broker and the brokerage firm jointly and severally liable for the award.

The Broker Has 3 Disclosed Settlements
The 1st of 3 listed settlements is a 1991 $40,000 settlement over covered call writing in an IRA account.
The 2nd of 3 listed settlements is a 1991 $35,000 settlement over covered call writing in an IRA account.
The 3rd of 3 listed settlements is a 1991 $35,000 settlement over covered call writing in an IRA account.
The Expungement Award
The 2016 FINRA Panel recommended expungement of the 8 customer awards and 3 settlements.
Paraphrasing the award:
The broker sued UBS for expungement of 8 awards and 3 settlements on his BrokerCheck.
UBS responded that it would not participate in the arbitration and did not oppose the broker’s request for expungement.
The panel required the broker to provide proof that he attempted to contact the Claimants in the 11 arbitration proceedings from 25 to 30 years ago and gave the Claimants 30 days to respond. No response was received from any of the Claimants in the 11 arbitrations.
The broker testified that he did not contribute to the 3 settlements although actual settlement documents could be located for only 1 of the settlements.
The broker testified he was not involved in the conduct which gave rise to 8 different arbitration panels rendering customer awards – despite 3 of the panels finding him either jointly and severally liable for the entire award ordering him to personally contribute to the award.
Shockingly, the panel has substituted its judgement based on the unchallenged testimony of events occurring over 30 years ago from a broker with 11 customer disputes resulting in settlements and awards. Only 0.07% of all brokers have 10 or more customer disputes so the panel has recommended a truly awful broker’s record be sanitized. At least 3 contemporaneous panels hearing all the evidence found this broker responsible and now 25 years later this panel recommended expungement of all 8 awards and 3 settlements.
Why would Mr. La Ferla go to the trouble of hiring a lawyer and scrubbing his BrokerCheck decades after the settlements and awards? The answer appears to be that Mr. La Ferla wants clients coming to his new advisory firm to believe he has a clean - rather than extraordinarily checkered - disciplinary history. Mr. La Ferla has started an RIA, The La Ferla Group. The new firm’s website includes an interesting “About Us” page available here that lists 4 previously FINRA-registered brokers. 


The bios for two of these brokers include prominent hyper-links to BrokerCheck reports so you can check out their clean disciplinary history. Mr. La Ferla’s bio omits a similar link to his BrokerCheck report with 11 customer disputes. Here’s betting a nickel that as soon as FINRA posts a pristine BrokerCheck report for Mr. La Ferla omitting the 11 customer complaints a link to his scrubbed BrokerCheck will appear giving the false impression that he has not been subject to customer complaints.

Someone should be looking into this.