Monday, February 23, 2015

Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

SEC Halts Colorado-Based Pyramid Scheme
February 18, 2015(Litigation Release No. 35)
The SEC has announced fraud charges against and emergency asset freezes on Kristine L. Johnson and Troy A. Barnes for their involvement in an alleged Ponzi/pyramid scheme. The SEC alleges that Johnson and Barnes’ company, Work With Troy Barnes Inc., raised over $3.8 million since April of last year by luring investors in with promises of 700% returns. These returns were claimed to be possible through an investment algorithm created, according to Barnes, by an expert programmer. The SEC alleges the company had no actual business operations, investors were being paid “returns” using money coming from new investors, and that Johnson and Barnes were using investor funds to pay for personal expenses such as credit card bills and a vehicle purchase. The investigation is ongoing.

SEC Charges New York-Based Brokerage Firm and CEO With Committing Fraud During CDO Liquidation Auctions
February 19, 2015(Litigation Release No. 36)
The SEC has charged NYC brokerage firm VCAP Securities and its CEO, Brett Thomas Graham, with deceiving participants of their CDO liquidation auctions. VCAP and its affiliates were barred from participating in the auction by their agreement with the CDO trustees. In order to secure CDOs that would bolster funds managed by VCAP, Graham conspired with a third party broker-dealer. He used confidential bidding information in order to guarantee the CDOs would go to the third party who would later sell them to the investment advisor affiliate. Over the course of five auctions, the investment adviser affiliate won 23 CDOs. VCAP and Graham have agreed to pay disgorgements and prejudgment interests of $1,149,599 and $127,733, respectively. Graham has been fined an additional $200,000 penalty and has been barred from the securities industry for at least three years.

SEC Charges Brothers-in-Law in Louisiana With Insider Trading
February 19, 2015(Litigation Release No. 37)
The SEC has announced charges against Scott Zeringue (former company executive of The Shaw Group, a Fortune 500 company) and his brother-in-law, Jesse Roberts III, with violations of the antifraud provisions of the federal securities laws. Zeringue had tipped Roberts with nonpublic information ahead of the company’s merger, making them and others (tipped by Roberts) nearly $1 million in combined illicit profits. Zeringue has previously pled guilty, settling the SEC’s charges by paying a total of $96,018. Zeringue will be prohibited from serving as an officer or director of a public-traded company for 10 years.


Friday, February 13, 2015

Enforcement Actions: Week in Review

SEC ENFORCEMENT ACTIONS

SEC Proposes Rules for Hedging Disclosure
February 9, 2015(Litigation Release No. 26)
The SEC has announced the approval of the issuance of proposed rules. The proposed rules require a company to disclose whether its directors, officers, and other employees are permitted to hedge the company’s equity securities. The proposed rules are mandated by Section 955 of the Dodd-Frank Act, and the rules are intended to better inform shareholders by increasing the transparency of hedging policies.

SEC Charges Former Brokerage CEO for His Role in Fraudulent Scheme
February 10, 2015(Litigation Release No. 27)
The SEC has charged Craig S. Lax for having ConvergEx subsidiaries under his control who engaged in a fraudulent scheme. The ConvergEx subsidiaries misled customers to pay greater amounts than disclosed commissions for buying and selling securities. The ConvergEx Group subsidiaries were previously charged by the SEC, paying $107 million to settle charges. In addition, the SEC has charged two former employees in that enforcement action, and the SEC even later separately filed a case against a different former ConvergEx subsidiary CEO. Lax admitted wrongdoing and agreed to settle the SEC’s charges by paying more than $783,000. Lax has agreed to be barred from the securities industry for at least five years.

SEC Announces Half-Million Dollar Clawback from CFOs of Silicon Valley Company That Committed Accounting Fraud
February 10, 2015(Litigation Release No. 28)
In compliance with an SEC order, former Saba Software CFOs, William Slater and Peter E. Williams III, have agreed to return almost a half million dollars to their former employer. Slater and Williams received $337,375 and $141,992, respectively, as bonuses and stock sales profits during the same time that their company was altering financial statements. From 2008 to 2012, during their consecutive terms as CFOs, Saba Software has been found to have overstated pre-tax earnings and made materially false statements concerning their revenue recognition protocol. Under Section 304 of the Sarbanes-Oxley Act, Slater and Williams must return profits and bonuses they received during the time of the fraud, regardless of whether they were involved. Neither has been personally charged with the fraud. Saba Software and two other former executives were charged by the SEC with accounting fraud last year.

SEC Announces Charges Against Atlanta Man Accused of Insider Trading in Advance of Tender Offer
February 11, 2015(Litigation Release No. 29)
Charles L. Hill Jr. has been accused for insider trading and charged by the SEC for exploiting nonpublic information that he learned from person who was a friend of a Radiant Systems executive. Hill illegitimately made approximately $740,000 by misusing nonpublic tender offer information, trading in the stock of Radiant Systems. The matter is scheduled for a public hearing and it is to be decided if any remedial actions are to be placed.

Heather Seidel Named Chief Counsel in SEC’s Division of Trading and Markets
February 11, 2015(Litigation Release No. 30)
The SEC has announced that Heather Seidel has been appointed as Chief of Counsel for the SEC’s Division of Trading and Markets. Given her new role, Seidel will be providing legal and policy advice to the Commission on matters that affect broker-dealers and securities markets along with other duties. Seidel’s professional experience that qualifies her the Chief of Counsel title include being an Associate Director in the Office of Market Supervision and having worked in the division as an Assistant Director, Senior Special Counsel, and Attorney Fellow.

SEC Charges Mutual Fund Adviser in Connection With Improper Handling of Fund Assets
February 12, 2015(Litigation Release No. 31)
An investment adviser was charge in connection to Water Island Capital LLC’s mismanagement of fund assets. Millions of dollars of the funds’ cash collateral were being maintained at broker-dealer counterparties instead of the funds’ custodial bank. Water Island Capital LLC was charged for failing to ensure that all cash collateral was held in the custody of the funds’ bank, roughly $247 million in cash was improperly handled. Water Island Capital LLC has agreed to the SEC’s cease-and-desist order, paying a $50,000 penalty to settle the SEC’s charges.

SEC Announces Agenda, Panelists for Proxy Voting Roundtable
February 12, 2015(Litigation Release No. 32)
The SEC has announced the schedule, topics and panelists for its roundtable on possible improvements to proxy voting. The roundtable, scheduled for February 19th, will consist of two, one and a half hour panel discussions: “Universal Proxy Ballots” and “Retail Participation in the Proxy Process”. The first panel, consisting of ten, will be moderated by Keith Higgins, Director of the Divison of Corporate Finance and Michele Anderson, Chief of the Office of Mergers and Acquisitions, Division of Corporate Finance. The second panel, consisting of twelve, will be moderated by Keith Higgins and David Frederickson, Chief Counsel and Associate Director, Division of Corporate Finance. The roundtable will begin at 9:30 a.m. at the SEC’s DC headquarters and is open to the public. The event will also be shown live on the SEC website.

Pamela C. Dyson Named SEC Chief Information Officer
February 12, 2015( Litigation Release No. 33)
The SEC has announced the official appointment of Pamela C. Dyson as Chief Information Officer, who has served as acting CIO since October of last year. Since joining the SEC in 2010, Ms. Dyson has held other key positions including Deputy CIO, Office of Information Technology and Assistant Director, Enterprise Operations. As Chief Information Officer, Ms. Dyson be in charge of integrating technology with the efforts of the SEC in order to better serve investors and promote healthy, efficient markets.

SEC Announces Fraud Charges Against Purported Hedge Fund Manager
February 13, 2015(Litigation Release No. 34)
The SEC has charged Moazzam “Mark” Malik with stealing money from his investors. Malik conned investors into supporting his expensive lifestyle. Malik built up a façade claiming to be a hedge fund manager of Wolf Hedge LLC which supposedly had roughly $100 million in assets under management. In reality, Malik’s fund never held more than $90,177 in assets, and Malik was soliciting investors promising them consistent high returns when in reality. The SEC’s investigation is continuing. In the meantime, the SEC seeks final judgment to disgorge their ill-gotten gains, prejudgment interest and penalties, and seeks a temporary restraining order to freeze Malik and his fund’s assets to avoid further violations.

Thursday, February 12, 2015

Oil and Gas DPPs From Just Two Sponsors Have Caused $3.7 Billion in Losses

By Joshua Mallett , Craig McCann and Regina Meng

We have written extensively about direct participation programs, or DPPs. Our posts on non-traded REITs are here, and our discussion about equipment leasing DPPs is here. Oil and gas DPPs are another strain of the DPP epidemic: illiquid exposure to an existing underlying asset, loaded with confiscatory fees, conflicts of interest and unnecessary risk.

Oil and gas DPPs use some of investors’ money to drill and operate oil and gas wells. Oil and gas DPPs are sponsored and managed either by investment companies or oil and gas exploration companies, each of which suffers from its own conflicts of interest. We examine funds sold by Ridgewood Energy Corp, an investment company, and funds sold by Atlas Resource Partners, an energy exploration company.

Exploration companies acting as sponsors and managers, such as Atlas Resource, are incentivized to use the DPP to perform exploratory drilling that is in the best interest of the company, not the DPP. An exploration company can force a DPP it manages to drill many wells and, after seeing which wells succeed, can drill wells nearby for the benefit of the exploration company rather than the DPP. In addition, the exploration company’s ability to profit from knowledge of the DPP’s successful wells provides incentives for the exploration company to drill wells in more high-risk, high-return areas since the DPP investors bear all of the downside risk of dry holes but share the upside of producing wells with the exploration company.

The exploration company managers also take advantage of the DPPs by selling the DPPs they manage drilling services at a large mark-up and charging upfront costs that are not related to the success of the DPP. Finally, the managing companies keep an extra portion of net revenues for themselves. In short, energy exploration companies like Atlas Resource use oil and gas DPPs to charge retail investors high fees for accepting some of the exploration company’s risk without the corresponding reward.

The DPPs run by an investment company like Ridgewood Energy are exposed to some of the same conflicts of interest as the DPPs run by energy exploration companies. For example, Ridgewood Energy charges high upfront fees, a 2.5% annual management fee, and keeps 15% of any distributions despite having not invested in the DPP. Since - as with non-traded REITs and equipment leasing DPPS - some of the distributions to oil and gas DPPS are a return of investors’ capital, Ridgewood and similar investment companies are taking high upfront fees off the top, holding investors’ cash and returning a portion of it after deducting a further, large haircut.

DPP Investors Suffered $1.75 Billion in Net Out-of-Pocket Losses

We analyze 33 registered DPPs sponsored by Atlas Resource or Ridgewood Energy. Atlas Resource registered 19 funds with the SEC between July 2000 and April 2010 and raised $1.9 billion. The Atlas funds’ filings can be accessed here and here. Ridgewood registered 14 funds between April 2004 and October 2009 and raised $1.3 billion. The Ridgewood funds’ filings can be accessed here. Only one of the 33 DPPs paid investors back their entire initial investment. That is, 32 of the 33 funds suffered net out-of-pocket losses. The losses were not due to market forces, as an investable energy mutual fund beat all but two of the oil and gas DPPs. The persistently poor performance of the DPPs is driven by high fees, conflicts of interest (poor management incentives), and unnecessary risk.

Figure 1 shows that all of the Atlas funds we examined had out-of-pocket losses. The 19 funds lost a combined $1.1 billion of the invested $1.9 billion by December 31, 2013. The upfront fees accounted for $216.5 million of the losses.

Because the DPPs do not have a liquid secondary market, we estimate the value of the funds on an annual basis using data provided in each fund’s most recent 10-K. Specifically, we estimate the fund’s value as the sum of the standardized measure of discounted future net cash flows from known reserves, plus cash and short-term investments in marketable securities. We net the estimated value and the distributions paid against the contributed capital to calculate out-of-pocket losses.

Figure 1. Losses in Atlas DPPs as of December 31, 2013

Figure 2 presents the out-of-pocket losses for the 14 Ridgewood funds, which had total losses of $642 million as of December 31, 2013. Upfront fees and asset management fees are responsible for more than $349 million of the losses, and conflicts of interest are responsible for much of the remaining $293 million.

Figure 2. Losses in Ridgewood DPPs as of December 31, 2013
DPP Investors Missed an Additional $1.9 Billion in Returns

With the high fees, conflicts of interest, and unnecessary risk, it is no surprise that oil and gas DPPs consistently underperform other investments with similar exposure. For example, the Vanguard Energy mutual fund (ticker: VGENX) charges low fees (0.38% per year), and is independently managed, diversified, and liquid. Figure 3 compares the returns for each of the 19 Atlas Resource funds to the returns investors would have experienced if they had instead purchased shares of VGENX. All of the Atlas funds lost money, and all of them performed worse than the Vanguard energy fund. Even in the two cases where the energy benchmark lost money, it performed much better than the DPPs. Overall, by December 31, 2013, the VGENX benchmark had gained $1 billion while the DPPs had lost $1.1 billion. Thus, investing in the 19 Atlas DPPs had cost investors $2.2 billion.

Atlas Resource became publicly traded shortly before Atlas America Series 27-2006 started raising capital. This allows us to compare the performance of the DPPs to the performance of the manager, which itself is an oil and gas exploration company. Investors in Atlas America 27-2006 and the 8 subsequent registered DPPs have suffered $870 million in combined net out-of-pocket losses. If these same investments had been made directly in Atlas Resource, investors would have earned $8.5 billion in net gains. This $9.4 billion shortfall reflects, at least in part, the DPPs’ high upfront costs and Atlas Resource’s ability to transfer resources and opportunities from its DPP investors to itself.

Figure 3. Out-of-Pocket Gains for the Atlas DPP Benchmark (VGENX) as of December 31, 2013
Figure 4 presents a similar analysis for the Ridgewood Energy funds, with similar findings. For each of the 14 funds, the VGENX investment would have resulted in a net gain instead of a net loss. In total, investors would have earned $860 million instead of losing $642 million if they had invested in the benchmark index instead of the DPPs. Thus, investing in the 14 Ridgewood DPPs had cost investors $1.5 billion as of December 31, 2013.

Figure 4. Out-of-Pocket Gains for the Ridgewood DPP Benchmark (VGENX) as of December 31, 2013
High Upfront Fees

The DPPs’ consistent losses can be partially explained by the investments’ high fees, conflicts of interest, and unnecessary risk. The 19 funds Atlas Resource registered with the SEC between July 2000 and April 2010 raised $1.9 billion in total and charged 12.5% in upfront fees on average. The fund sizes and fee rates are shown in Figure 5. Atlas Resource stopped registering new funds in 2010, but its 2013 10-K shows it sold more than $100 million in DPPs each year from 2011-2013. This suggests Atlas Resource made a conscious choice to reduce the transparency of the high-risk, high-fee investments it sells.

Figure 5. Upfront Fees Charged in Atlas Resource’s FundsFigure 6 presents the fund sizes and fee rates for the 14 funds Ridgewood Energy registered with the U.S. Securities and Exchange Commission between April 2004 and October 2009. The funds, which raised $1.3 billion in total, charged 16% in upfront fees on average. Ridgewood has not registered any new funds since early 2009, but was offering new funds as late as January 2014 (see article). Like Atlas Resource, Ridgewood chose to move away from transparency.

Figure 6. Upfront Fees Charged in Ridgewood Energy’s Funds
Although both sponsors charged high upfront fees, they went about it in different ways. Atlas Resource, which is an energy exploration company, contributed equipment, leases, and the upfront fee costs to the drilling programs, and claimed to not charge investors the upfront fees because the fees were paid out of the sponsor’s capital account. Ridgewood, on the other hand, contributed nothing to the drilling program and directly charged investors the upfront fees. Either way, the sponsors took the upfront fees and gave investors a 13-16% loss on the first day.

Sponsors’ Incentives

The problems with oil and gas DPPs continue after day one. Sponsors’ interests are, in many cases, exactly opposed to investors’ interests. These misaligned incentives include the sponsor’s ability to receive flat fees and operating profits while avoiding losses, the sponsor’s use of the DPP as exploratory drilling for its own benefit, and the sponsor’s mark-up on drilling and operating services performed for the DPP.

One way to see the incentive problems inherent in having an exploration company manage an oil and gas DPP is to look at how else the sponsor could have financed the wells. The exploration company sponsor is an oil and gas exploration company, and so already has all of the equipment, labor, and land necessary to drill wells. If it needs money, it can issue more stock or borrow from a bank. Those investors would then have exposure to the company’s entire operation, which should have a system of checks and balances designed to control risk and maximize the company’s value.

Instead, the sponsor creates a separate entity (the DPP), controlled entirely by the oil and gas exploration company, and uses it to raise money. The new entity charges high upfront fees to investors, which the investors would have avoided by investing in the company itself. The exploration company then sells equipment, labor, and land to the DPP. Because the sponsor/manager/operator has absolute control, the DPP often pays an above-market rate for the equipment, labor, and land. For example, the 2010 10-K for Atlas Resources Public 18-2009C states, “Drilling contracts to drill and complete wells for the Partnership are charged at cost plus 18%. The cost of the wells includes reimbursement to the Partnership’s [sponsor] of its general and administrative overhead cost” (p. 32). In other words, Atlas has passed on all of its costs to the DPP, at an 18% mark-up. Atlas also charges the DPP additional administrative costs and monthly fixed-rate well supervision fees (see 2010 10-K, p. 32).

The structure of the DPP also encourages the sponsor to take more risk than it otherwise would. The sponsor has invested little if any money in the DPP, and so does not have much downside risk. On the other hand, the sponsor often receives a large portion of profits. For example, Atlas Resource receives an additional 10% of revenues beyond its contributed capital. In addition to the sponsor’s risk-reward imbalance that encourages risky behavior, the sponsor is encouraged to take risks with the DPP because the sponsor can apply what it learns from the successes and failures of the DPP’s wells to the sponsor’s proprietary drilling.

Like Atlas Resource, Ridgewood Energy has misaligned incentives. However, because Ridgewood is not an energy exploration company, it cannot profit from marking up drilling costs. Instead, Ridgewood charges a higher upfront fee and a 2.5% annual management fee. In addition, Ridgewood keeps 15% of all distributions, despite not having invested in the fund. These different incentives encouraged different behaviors by the sponsors. Atlas was incentivized to drill as many holes as quickly as possible, while Ridgewood was incentivized to prolong the drilling and pay out high distributions. Importantly, in neither case was the primary incentive to drill and operate successful wells.

Unnecessary Risk

The high fees and incentive problems discussed above should make anybody wary of investing in a DPP. However, even if those problems didn’t exist, the unnecessary risks inherent in DPPs should warn off investors and advisors alike. There is not an active secondary market for oil and gas DPPs, meaning investors’ DPPs are extremely illiquid. Lack of liquidity is a risk, and investors should be compensated for it by receiving a higher return. However, DPPs do not have a way to generate the required higher return. The DPPs are drilling wells exactly like the much more liquid energy exploration companies, so the best a DPP can expect to do is earn the industry average. Because it is not possible for DPPs to compensate investors for the liquidity risk, investors are taking an unnecessary, uncompensated risk by investing in a DPP. In addition to the uncompensated liquidity risk, DPPs are exposed to small company risk and concentration risk. The high fees and poor sponsor incentives make it impossible to achieve outcomes sufficient to overcome the small company and concentration risks. By investing in an energy index or even just a publicly traded energy exploration firm, investors could drastically reduce their risk while increasing their expected return. While we don’t advocate a focused investment in oil and gas exploration, if you’re so inclined an oil and gas DPP is the worst way to get this exposure.

We have written extensively about direct participation programs, or DPPs, in prior posts. Each type of DPP share such undesirable traits that no retail investors should buy these products and no unconflicted advisor would recommend them. Virtually all of the oil and gas DPPs we have seen failed to return investor capital as a result of high fees, conflicts of interest, and unnecessary risk, while mutual funds with similar exposures posted large gains.

UBS Puerto Rico’s Bond Fund Debacle: What We Know so Far

By Craig McCann, PhD, CFA and Edward O'Neal, PhD, CVA Versión en Español

Over the past year, we’ve posted a dozen short commentaries to our blog post here. We thought it would be helpful to summarize what we know so far. This summary is available in Spanish by clicking the “En Español” button at the top of the page. We have also translated our prior UBS Puerto Rico blog posts into Spanish as well. You can find all the Spanish-language blog posts by clicking here.

We discussed the national exposure of the UBS Puerto Rico losses in October 2013 in Trouble in Paradise: UBS Puerto Rico Bond Fund Investors Hit Hard. The losses only got worse thereafter. In calendar year 2013, a series of municipal bond closed-end Funds managed by UBS Asset Managers of Puerto Rico and sold by UBS Puerto Rico brokers declined by up to 60% in price.

Table 1 shows the NAV and Capital Losses by Fund. The NAV total returns for 2013 ranged from -22.2% to -58.7%. The approximate dollar losses across the 19 funds were $2.1 billion based on the NAVs and $2.85 billion based on bid prices.1

Table 1. NAV and Capital Losses from December 31, 2012 to December 30, 2013

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1This calculation uses a constant value for the shares outstanding obtained from each of the Funds’ annual report closest to December 31, 2012. The Funds have different fiscal year end dates and hence the calculation is an approximation.

The average US mainland municipal bond fund only fell about 2.5% in 2013. Figure 1 plots the value over time of six large UBS Puerto Rico Funds along with the value of the S&P Municipal Bond Puerto Rican Index, Vanguard 500 Index Fund and Vanguard Total Bond Market Index Fund, all standardized to $10 on December 31, 2012. While Puerto Rican municipal bonds lost 20% the UBS Funds lost 50% to 60%.

Figure 1. The UBS Puerto Rico Funds Lost Three Times as Much as PR Bonds.



In “Diversification and UBS Puerto Rico Bond Fund Losses” we show that the UBS funds were concentrated in the bonds of two issuers in 2013. For most of the Funds, the securities of either the Employee Retirement System (ERS) or of the Sales Tax Financing Corporation (COFINA) accounted for over 25% of the fund’s gross assets - and over 40% of the Fund’s gross assets for the two issuers combined. We also showed that the allocation of the $1.7 billion in losses investors in the UBS Puerto Rico Funds suffered between December 31, 2012 and September 30, 2103 were directly related to how much UBS concentrated the Funds into the bonds of these two issuers.

Table 2 shows the concentrated holdings in the two issuers in the 19 UBS PR funds which were not in the distribution phase as of December 2013. The table also shows the losses incurred by each of the Funds. Funds with higher concentrations on ERS and COFINA bonds suffered greater losses.

Table 2. 2013 NAV and Bid Price Total Return; Percent Invested in COFINA and PR Employee Retirement System Bonds as of June 30, 2013.


In The Use of Leverage in the UBS Puerto Rico Closed-End Funds Magnified Losses we show that losses in the value of Puerto Rican bonds in 2013 were magnified in the UBS Puerto Rico Funds by UBS’s high use of leverage.

Mainland closed-end funds are generally limited to borrowing no more than 33% of their gross assets unless they issue preferred stock in which case they can borrow up to 50% of their gross assets. Closed-end funds can leverage more if they issue preferred stock because doing so exposes fund investors to less risk than if the funds use short term borrowing. The UBS Puerto Rico Funds could - and did - borrow 50% of their gross assets without issuing preferred stock so investors who bought UBS Puerto Rico Fund shares had a 2-1 leveraged exposure to the Fund’s holdings.

Table 3 lists the UBS Funds’ borrowing as a percent of gross assets on June 30, 2013. The borrowing ranged between 44.01% and 50.74% of gross assets - right at the 50% maximum amount allowed by Puerto Rican securities regulations. Figure 2 shows that the UBS Puerto Rico Funds used leverage much more aggressively than other closed-end municipal bond funds.

Table 3. Borrowing by UBS Funds as a Percent of Gross Assets, June 30, 2013


Figure 2. Borrowing as a Percent of Gross Assets by Closed-end Municipal Bond Funds, September 30, 2013


In addition, some media reports have also pointed out that investors may have been encouraged to borrow money to invest in the UBS Funds. This leverage, external to the funds, would further magnify investor losses.

The Concentrated Positions Were Built Exclusively in UBS-underwritten Bonds

The concentration in the UBS Funds was built exclusively in bonds that were underwritten by UBS and bought by UBS into the Funds’ portfolios at prices retail investors typically pay in the offering. UBS’s purchases of entire issues it underwrote into the Funds at the initial offering created a significant conflict of interest between UBS as underwriter and UBS as fund manager with a fiduciary obligation to fund investors. UBS, as an underwriter, received underwriting fees which in part compensated UBS for selling effort which UBS minimized by selling directly into its proprietary funds. In addition, UBS’s management and marketing of the Funds allowed UBS to underwrite more bond issues than it otherwise could without the funds as repositories for the large bond positions that UBS underwrote. UBS also minimized fund managerial effort by relying on in-house underwritten bonds rather than researching and purchasing appropriate bonds in the secondary market or from other underwriters.2

In UBS Stuffed $2.5 Billion of ERS and COFINA Bonds it Underwrote in Its Puerto Rican Funds in 2007 and 2008 we illustrated how UBS dramatically changed the UBS Puerto Rico Funds in late 2007 and early 2008 using the Tax Free Puerto Rico Fund II and Puerto Rico Fixed Income Fund II as examples. UBS sold off $350 million other bonds and bought $530 million of ERS and COFINA bonds it underwrote in these two funds alone.

Table 4 summarizes the market value of Tax Free Puerto Rico Fund II holdings by issuer on June 30, 2007 (from 2nd Quarter 2007 Quarterly Review available here), November 30, 2007 (from the Annual Report available here) and on November 30, 2008 (from the Annual Report available here).

The Tax Free Puerto Rico Fund II held no COFINA bonds on June 30, 2007. UBS participated in COFINA underwritings on July 13, 2007 (COFINA Series 2007A Offering Circular available here) and on July 18, 2007 (COFINA Series 2007B Offering Circular available here). The Tax Free Puerto Rico Fund II Fund owned $20.3 million of COFINA bonds on November 30, 2007. UBS was the sole underwriter of the (COFINA Series 2008A Offering Circular available here.)

The Tax Free Puerto Rico Fund II held no ERS bonds on November 30, 2007. UBS participated in underwriting three series of ERS bonds in 2008. The Series 2008A Offering Circular is available here, the Series 2008B Offering Circular is available here and the Series 2008C Offering Circular is available here.

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2Concentrated portfolios in general (regardless of whether they are concentrated in affiliate-underwritten securities) require less managerial effort because fewer issuers must be researched and followed by the fund manager.

Table 4. Tax Free Puerto Rico Fund II Holdings by Issuer Category


Between June 30, 2007 and November 30, 2008 UBS caused the Tax Free Puerto Rico Fund II to pay $188,943,300 for the ERS and COFINA bonds and these two issuers’ bonds went from 0% of the Tax Free Puerto Rico Fund II portfolio to 50% of the gross assets and 98% of the net assets of the Fund. UBS sold roughly $190 million of other issuers’ bonds out of the Tax Free Puerto Rico Fund II to make room for the ERS and COFINA bonds it was underwriting.

Table 5 presents holdings by issuer for the Puerto Rico Fixed Income Fund II on June 30, 2007 (from Quarterly Review available here), November 30, 2007 (from the Annual Report available here) and on November 30, 2008 (from the Annual Report available here).

The Puerto Rico Fixed Income Fund II held no COFINA or ERS bonds on June 30, 2007. Between June 30, 2007 and November 30, 2008 UBS caused the Puerto Rico Fixed Income Fund II to pay $340,357,374 for the ERS and COFINA bonds and these two issuers’ bonds the ERS and COFINA bonds went from 0% of the Puerto Rico Fixed Income Fund II portfolio to 44% of the gross assets and 88% of the net assets of the Fund. UBS sold roughly $335 million of other issuers’ bonds out of the Puerto Rico Fixed Income Fund II to make room for the ERS and COFINA bonds it was underwriting.

Table 5. Puerto Rico Fixed Income Fund II Holdings by Issuer Category


UBS Compromised Its Investors Underwriting and Buying Unmarketable Bonds

In UBS Succumbed to Conflicts and Purchased $1.7 Billion of Employee Retirement System Bonds into its Puerto Rican Municipal bond Funds in 2008 we showed that the dramatic change in the UBS Funds documented above occurred because UBS underwrote unmarketable ERS bonds in 2008 and had to buy them into the UBS Funds or lose out on tens of millions of dollars of underwriting fees. These conflicted ERS bonds turned out to be the source of most of the losses in the UBS Funds in 2013.

The Puerto Rican Employee Retirement System was acutely and chronically underfunded. Figure 3 is a plot of the PR funding ratio and the median of the 50 states’ funding ratios. The states’ median funding ratio fluctuated between 80% and 100% from 1990 to 2013 while the PR funding ratio was approximately 20% until 2008 after which it dropped even further. For context, the next three worst average funding ratios from 2007 to 2011 were Illinois at 51%, Connecticut at 58% and Kentucky at 59%.

Figure 3. Puerto Rico Employee Retirement System Funding Ratio 1990-2012


Merrill Lynch attempted to sell $7 billion of ERS Pension Obligation Bonds in 2007 but failed. Near contemporaneous analysis of Merrill Lynch’s failed attempt to underwrite ERS bonds and the harm to ERS caused UBS’s subsequent involvement can be found in Conway MacKenzie, Inc., October 2010, Review of the Events and Decisions That Have Led to the Current Financial Crisis of the Employees Retirement System of the Government of Puerto Rico available here.

UBS replaced Merrill Lynch as advisor to the ERS and was the lead underwriter of the ERS $1,588,810,800 2008 Series A bonds. The 2008 Series A Offering Circular is available here. We don’t currently have information on how much of the 2008 Series A ERS bonds UBS committed to sell but we do know that UBS purchased 41% of the issue into its Funds. We also know that UBS bought some 2008 Series A bonds into individual Puerto Rican customer accounts.

Table 6. UBS Purchased 41% of ERS 2008A Bonds for Its Proprietary Funds



The first page of the 2008 Series A ERS Offering Circular includes the following language.

The System currently contemplates offering additional parity Bonds (the “Series B Bonds”) in other jurisdictions. The Series B Bonds would be offered by means of one or more separate Official Statements and may not under any circumstances be purchased by residents of Puerto Rico.
The 2008 Series A Offering Circular language was unambiguous protection for Puerto Rican investors in the 2008 Series A bonds since the Series B bonds, which would be on par with the Series A bonds, would only be issued if the Series B bonds passed the market test.

The Offering Circular for the $1,058,634,613 2008 ERS Series B was published on May 28, 2008 and is available here). Something dramatic happened between January 29, 2008 and May 28, 2008. Rather than only being available to non-Puerto Rican residents as promised four months earlier, the 2008 Series B ERS bonds would only be sold to Puerto Rican residents. See Figure 4.

Figure 4. Excerpt from page 7 of ERS 2008 Series B Offering Circular.



Not only was there no market outside of Puerto Rico for the 2008 Series B ERS bonds on the terms they were being offered, there apparently was no market for the bonds in Puerto Rico either. UBS bought 89% of the 2008 Series B ERS bonds into its proprietary funds. See Table 7.

Table 7. UBS Purchased 89% of ERS 2008B Bonds for Its Proprietary Funds


There was a third and final ERS bond series issued in 2008 – the Series C bonds. UBS was the lead underwriter of the $300 million offering in June 2008. The ERS 2008C Offering Circular is available here. As with the 2008 Series A and Series B ERS bonds, the 2008 Series C bonds could only be purchased by Puerto Rican residents. UBS purchased 38% of the 2008 Series C issue into its proprietary bond funds.

The most interesting non-public documents in the UBS Puerto Rico municipal bond saga will likely be the internal emails and memos at UBS and the communications between UBS and the ERS as they realize that there was no market for the 2008 Series B ERS bonds and the 2008 Series A ERS promise that the Series B bonds will not be sold on the island had to be abandoned.

But It Gets More Interesting… In 15 Days in Puerto Rico Cost UBS Clients Over $1 Billion we point out that even a little earlier in 2008, UBS knew the jig was up. A Moody’s January 4, 2008 Ratings Report available here and Standard & Poor’s January 14, 2008 Ratings Report here demonstrate that at least as late as January 14, 2008 ERS and UBS were intending to issue $4 billion of ERS POBs in the two weeks left in January 2008 and another $3 billion later in the year.

Whatever happened in the fifteen days between January 14, 2008 and January 29, 2008 it was dramatic. ERS and UBS realized they could only sell $1 billion – not $4 billion – of the ERS bonds on the terms they were being offered in January 2008. $650 million of the $1.6 billion Series A bonds were bought by the UBS Funds so there was a market for at most $1 billion. It must have become clear no one else would buy the bonds and UBS was about to lose out on lucrative underwriting fees.

COFINA 2007 Series A and Series B

In UBS PR Funds Also Bought $1.35 Billion of UBS Underwritten COFINA Bonds in 2007 and 2008 we show similar conflicts which led UBS to underwrite unmarketable 2008 ERS bonds and stuff them into the Funds led UBS to underwrite unmarketable 2008 Puerto Rico Sales Tax Financing Corporation (COFINA) bonds and stuff them into the Funds. COFINA issued two series of bonds in 2007 and one Series in 2008.

UBS Investment Bank was 1 of 19 co-underwriters of the $2.7 billion Series A bonds targeting mainland investors. The COFINA 2007 Series A Offering Circular is available here. UBS Financial Services of Puerto Rico was the lead underwriter (with 11 co-underwriters) of the $1.33 billion 2007 Series B bonds sold only to Puerto Rican investors. The COFINA 2007 Series B Offering Circular is available here.

We don’t know how much of the COFINA 2007 Series B bonds UBS committed to sell but we do know UBS purchased $614 million or 46% of the $1.33 billion COFINA 2007 Series B bonds into its proprietary funds. See Table 8.

Table 8. UBS Purchased $614 million of COFINA 2007 Series B Bonds for Its Funds


COFINA 2008 Series A

In 2008, UBS Financial Services of Puerto Rico was the sole underwriter of the $737 million Series B bonds marketed only to Puerto Rican investors. None of the other 18 underwriters of the 2007 Series A or of the other 11 underwriters of the 2007 Series B COFINA bonds participated in the 2008 Series B COFINA bonds. The COFINA 2008 Series A Offering Circular is available here. UBS purchased 100% of the $737 million COFINA 2008 Series A bonds into its proprietary funds. See Table 9.

Table 9. UBS Purchased $735 million of COFINA 2008 Series A Bonds for Its Funds


As with the ERS bonds, UBS bought the COFINA bonds it underwrote in 2007 and 2008, making room for these bonds by selling other portfolio holdings. There was no other market for the COFINA 2008 Series A bonds or UBS used its control of its proprietary funds to maximize its fees from underwriting and selling the 2008 COFINA Series A bonds.

UBS Charged Its Puerto Rico Bond Funds Excessive Markups

In Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups? we identified preliminary evidence that UBS may have charged its UBS Puerto Rico Funds excessive markups.

Oppenheimer Rochester VA Fund (ORVAX) purchased $1,645,000 of a Puerto Rican municipal bond (CUSIP 74527EFA1) in October 2011 at a full spread of $0.404 or half-spread of $0.202 per $100 face value. This markup was consistent with the published literature including our own research which documents larger markups on smaller trades.

The total spread on the Oppenheimer purchase of a Puerto Rican municipal bond was $6,645.80 and the half-spread was $3,322.90. The published literature shows municipal bond markups decline dramatically in percentage terms as trade size increases because median markups flatten out at around $6,000 regardless of trade size.

Unlike mainland bond funds, the UBS Puerto Rico Funds don’t report holdings quarterly but we can tell that the UBS Puerto Rico Fixed Income Fund IV purchased $7,500,000 par amount of the ERS CUSIP 29216MBA7 between March 31, 2010 and March 31, 2011. The MSRB EMMA data reflect some large trades at very low markups but the reported trades which likely reflect the Fixed Income Fund IV purchases in this CUSIP were at a $1.25 markup.

The total spread on the UBS Fixed Income Fund IV $7,500,000 purchase appears to have been $93,750 and the half spread $46,875. On just this one trade, UBS appears to have charged its Fund’s investors $40,000 to $80,000 in excessive markups.

UBS Asset Managers of Puerto Rico (UBS-AM) objected when we first identified evidence that UBS was charging its UBS Puerto Rico Fund investors excessive markups. UBS argued that since we couldn’t identify which trades in the EMMA data were the UBS bond fund trades and UBS wasn’t providing the data, we shouldn’t speculate about whether UBS charged excessive markups or not. We received a threatening letter from UBS-AM’s attorneys on December 24, 2013 which we posted in Merry Christmas from UBS Asset Managers of Puerto Rico.

It turns out, as we showed in Did UBS Charge its Proprietary Puerto Rico Bond Funds Excessive Markups? Part II that we can identify at least some of UBS’s purchases of Puerto Rican municipal bonds for the UBS Funds and those purchases tell an interesting story.

Table 10 shows UBS PR Funds’ $86.95 million holdings face value of the 6.45% coupon, long term Puerto Rican municipal bond (CUSIP: 29216MAN0) issued in January 2008 by the Employees Retirement System.

Table 10. UBS Funds Owned All $86,950,000 of ERS 2008A 29216MAN0 Bonds


Table 11 lists the trading activity in this bond and it shows that the UBS Funds were the only purchasers of this $87 million bond issue and that the funds paid the $100 offering price.

Table 11. UBS Bought Al of ERS 2008A 29216MAN) Bonds in the Offering


There are many other examples in which the UBS Funds bought all, or virtually all, of a UBS underwritten bond from an issuer (ERS) whose bonds the mainland funds wouldn’t touch. This raises a number of issues which we address in later posts. For today, we will just address the markup issue.

Our example bond was part of the 2008 A Employees Retirement System deal. The Official Statement can be found here. The underwriters paid $98.95 on average for the bonds. UBS resold these bonds, which it paid the Employee Retirement System approximately $86,033,050 in the when-issued market, to its proprietary mutual funds for $86,950,000. UBS charged its mutual fund investors a $916,950 markup over the price UBS paid the issuer in what was, economically at least, a riskless principal trade. This was a 1.05% markup on an $86 million institutional purchase.

Breen, Hollifield, and Schurhoff (2006) find the average underwriting spread on municipal bonds is 0.8% and that more than half of this spread is provided to the brokerage firm as a sales credit or gross commission to motivate the sales force. They also find that a significant fraction of large trades are done below the reoffering price at the time of the offering. There were no retail brokers to compensate for selling this bond, yet UBS charged its mutual fund investors an additional $616,950 over the average $300,000 underwriter spread on this CUSIP which would have been roughly the average non-sales credit component of the spread. Thus UBS paid the Puerto Rican Employee Retirement System hundreds of thousands of dollars less than it should have or UBS caused its mutual fund investors to pay hundreds of thousands of dollars too much – or both.

UBS Succumbed to Self-Interest and Fund Investors Suffered the Consequences

In What Hell Hath UBS Puerto Rico Wrought we demonstrated that the disastrous losses suffered by investors in the UBS PR Funds in 2013 are directly traceable to UBS putting its interests ahead of its clients underwriting and buying ERS and COFINA bonds into the Funds in 2008. Consider three examples.

Fixed Income Fund II

Table 12 categorizes the Fixed Income Fund II’s November 30, 2012 holdings into ERS, COFINA and Other. ERS bonds are 27.5% of the portfolio, COFINA bonds are 21.3% of the portfolio and Other Investments are 51.1% of the portfolio. The ERS bonds lost 50.3% of their value from November 30, 2012 to December 13, 2013. The COFINA bonds lost 29.7% from November 30, 2012 to December 13, 2013. Other investments in the Fund lost between 4.8% and 15.8% of their value between November 30, 2012 and December 31, 2013. We estimated a range of possible losses on the Funds’ portfolios because the Funds do not produce financial statements for the periods over which we have spanning holdings data and the number of units of each fund changes significantly over time. If the ERS and COFINA bonds had only suffered the losses suffered on the rest of the Fixed Income Fund II’s portfolio, the Fund would have only lost $140.2 million instead of between $201 and $251 million.

Table 12. Fixed Income Fund II Asset and Losses Allocation


Fixed Income Fund III

The same pattern found in the Fixed Income Fund III can be observed in the other UBS PR funds. Table 13 presents similar analysis for Fixed Income Fund III. ERS bonds are 28.1% of the portfolio, COFINA bonds are 15.1% of the portfolio and Other Investments are 56.8% of the portfolio.

The ERS bonds lost 45.4% from June 30, 2013 to December 13, 2013. The COFINA bonds lost 26.2% from June 30, 2013 to December 13, 2013. Other investments in the Fund lost between 2.6% and 12.5% of their value between June 30, 2013 and December 31, 2013. If the ERS and COFINA bonds had only suffered the losses suffered on the rest of the Fund’s portfolio the Fund would have only lost $103.6 million instead of between $151 million and $197 million.

Table 13. Fixed Income Fund III Asset and Losses Allocation


Fixed Income Fund IV

Table 14 presents similar analysis for Fixed Income Fund IV. ERS bonds are 25.2% of the portfolio, COFINA bonds are 19.4% of the portfolio and Other Investments are 55.4% of the portfolio.

The ERS bonds lost 44.8% from March 31, 2013 to December 13, 2013. The COFINA bonds lost 27.7% from March 31, 2013 to December 13, 2013. Other investments in the Fund lost between 8.0% and 12.2% of their value between March 31, 2013 and December 31, 2013. If the ERS and COFINA bonds had only suffered the losses suffered on the rest of the Fund’s portfolio the Fund would have only lost $107 million instead of between $185 million and $206 million.

Table 14. Fixed Income Fund IV Asset and Losses Allocation


We estimate these three funds lost between $537 million and $654 million. The UBS underwritten ERS and COFINA bonds lost $464 million of the $537 million to $654 million in losses. That is, between 71% and 86% of the billions of dollars the UBS PR Funds lost in 2013 was the direct result of the UBS underwritten ERS and COFINA bonds for which there was no market.

Taxes

In Taxes, Puerto Rico Municipal Bonds and the UBS Funds we show that preferential tax treatment for Puerto Rican investments cannot justify what would otherwise be unsuitable concentrations of investors’ portfolios in Puerto Rico municipal bonds.

Puerto Rican residents don’t pay federal income tax but do pay very high income taxes. The Puerto Rican maximum marginal income tax rate is 33%, reached at only $50,000 per year of taxable income. The income on Puerto Rican municipal bonds is exempt from the state income tax that would be paid by Puerto Rican investors who bought municipal bonds issued in other states. This difference in tax treatment is one of the justifications offered for the alarming concentration of UBS clients in UBS proprietary closed end funds stuffed with Employee Retirement System bonds underwritten by UBS.

This tax justification for concentrating Puerto Rican investors in Puerto Rican municipal bonds is economically identical to arguing that investors ought to concentrate their portfolio in the single stock with the highest expected return. For example, it is equivalent to arguing that investors should put 100% of their investments (or to take the UBS approach, substantially more than 100% of their investments) in Zoom.inc because it has the highest beta and therefore the highest expected return. You don’t have to be old enough to remember the tech wreck to know this is unsound advice because it ignores the very high risk associated with a concentrated and leveraged investment in Zoom.inc.

We plot the annualized return and risk from 2003 to 2012 derived from Standard and Poor’s Municipal Bond Indexes in Figure 5. The red dots represent combinations of risk and return for state specific indexes, the blue dots represent national portfolios and the green dot is Puerto Rico. Notice that Puerto Rican municipal bonds had lower returns and higher risk than the mainland states and national municipal portfolios before the losses in 2013.

Figure 5. Average Annual Pre-Tax Total Returns in excess of the risk-free rate and Standard Deviations for Puerto Rico, 26 States and 9 National Municipal Portfolios.


The slope of a line from the origin to a point on the graph is the ratio of realized returns to realized risk. This is sometimes referred to as a Sharpe Ratio. Portfolios with higher returns per unit of risk (i.e. steeper slopes) are preferred.

Ignoring taxes, Puerto Rican municipal bonds experienced lower risk-adjusted returns than the 26 individual states with 10 years of data. Contrary to parties defending the concentration in Puerto Rican investors’ accounts, that judgment still holds when we incorporate taxes.

We plot the returns and risk from Figure 5 after reducing the returns by the maximum marginal income tax rate in Figure 6. The cloud of red and purple dots have become triangles and shifted in toward the origin but remain above the dotted line connecting the origin with Puerto Rico’s realized risk and return.

Figure 6. Average Annual After-Tax Total Returns and Standard Deviations for Puerto Rico, 26 States and 9 National Municipal Portfolios.


We could complicate this analysis further by separating out coupon interest from capital gains and losses but the result remains unchanged. The tax benefit Puerto Rican investors receive increases the after tax returns and risk of investing in Puerto Rican municipal bonds relative to investing in the municipal bonds issued in other states – and the Puerto Rican municipal bonds were already much more risky than bonds from other states.

Differences in estate taxes also don’t explain the concentration observed in Puerto Rican investors’ accounts. Exemptions from estate taxes available to Puerto Rican investors apply to other assets – not just municipal bonds and funds that hold them – and so don’t justify such concentrations in the UBS Funds and UBS underwritten bonds.

1. Exemptions from estate taxes available to Puerto Rican investors apply to other assets – not just municipal bonds and funds that hold them – and so don’t justify such concentrations in the UBS Funds and UBS underwritten bonds.
2. Other estate planning techniques allow diversified portfolios to pass from one generation to the next in Puerto Rico.
3. Portfolios were concentrated in UBS Funds and UBS underwritten bonds without regard to whether the estates are small or large.
4. Portfolios were concentrated in UBS Funds and UBS underwritten bonds without regard to the age of the accountholder.
To sum up, taxes are painful but they don’t justify concentrating Puerto Rican investors’ portfolios in the UBS Funds or the Puerto Rican municipal bonds more generally any more than high betas justified concentrating portfolios in tech stocks.

In UBS Puerto Rican Funds Did Not Belong in Puerto Rican Investors’ Portfolios we demonstrate that Puerto Rican investors should not have had their portfolios concentrated in the UBS Funds.

Pre-Tax Efficient Frontier

In Figure 7, we plot the annualized total returns to diversified portfolios of stocks and bonds ranging from 100% bonds to 100% stocks. Total returns are calculated using monthly returns from January 2003 through December 2012. We use the Vanguard S&P 500 Index fund (VFINX), and the Vanguard Total Bond Market Fund (VBMFX) to reflect the pre-tax returns investors earned during this 10 year period in taxable investments.

Figure 7. Pre-tax Risk and Return 2003-2012


We also plot the risk and return of the unleveraged S&P Puerto Rican municipal bond index and the risk and return of the prototype UBS Puerto Rico closed end fund in Figure 7. There is not enough trading in the UBS PR funds and the prices UBS set on the funds was unchanged for weeks at a time so we cannot estimate the true risk of the UBS Puerto Rican Funds. The UBS closed end funds were leveraged 2:1. So if the Funds’ portfolios matched the S&P Puerto Rican Index they would have been twice risky as the S&P PR Index. In fact, the UBS Puerto Rican Funds had more of a barbell shaped risk profile with roughly 1/3 of the portfolios in lower risk agency bonds and over 1/3 of the portfolio in much higher risk ERS bonds after 2007. Given the UBS PR Funds fell by more than twice the decline in the S&P Puerto Rican Index in 2013 it appears our estimate of the true risk of the UBS Puerto Rican Bond Funds is fairly accurate.

We can see in Figure 7 that on a pre-tax basis, the UBS Puerto Rican Funds fall well below the “efficient frontier.” If Puerto Rican municipal bonds received the same tax treatment as the stocks and taxable bonds plotted in Figure 1, no rational or informed investors should buy the UBS Funds because the investors could achieve the same returns with lower risk or higher returns at lower risk.

We estimate that, on a pre-tax basis, the UBS Puerto Rican Bonds Funds have the risk of a portfolio invested 85% in stock and 15% in bonds.

After-Tax Efficient Frontier

Puerto Rican residents did not pay income taxes on Puerto Rican municipal bond income but would have paid taxes on interest and capital gains paid on the stock and bond portfolios plotted in Figure 7. We adjust for this difference in tax treatment by reducing interest distributions by 33% and capital gains by 10% paid by the stock and bond portfolios. Figure 8 plots the after-tax risk and returns.

Figure 8. After-tax Risk and Return 2003-2012


Figure 8 shows that even after adjusting for taxes, the UBS Puerto Rican Funds fall below the efficient frontier. It also shows that on an after-tax basis, the UBS Puerto Rican Funds were about as risky as a portfolio invested 95% in stock and 5% in bonds. This last point is especially dramatic given that UBS described these funds as suitable for investors interested in income consistent with capital preservation. Portfolios with the risk and return of 95% in stock and 5% in bonds are clearly not consistent with the investment objective of “income consistent with capital preservation.”

I. Summary

Investors lost nearly $3 billion in 2013 in closed-end municipal bond funds managed by UBS Asset Managers of Puerto Rico and sold by UBS Puerto Rico brokers. Many of the UBS Funds lost over 50%. Over the same period, the average US municipal bond fund fell by 2.5%.

The UBS funds were extraordinarily concentrated. Securities of a single issuer accounted for over 25% - and of two issuers over 40% - of the fund’s gross assets for most of the Funds. The use of leverage in the UBS funds magnified price fluctuations in the portfolio securities. Together, the leverage and concentration meant that declines in the securities of just one or two issuers had catastrophic effects on investors.

The risks UBS magnified with concentration and leverage were not just investment market risks. UBS retail brokers recommended to retail investors funds which UBS managed and that bought almost exclusively bonds UBS underwrote from issuers UBS advised. This removed important market discipline and heightened the likelihood of self-dealing.

UBS earned substantial underwriting fees from the two issuers in which it concentrated the mutual funds’ portfolios. Concentrating the fund portfolios increased UBS’s capacity to underwrite bonds while simultaneously minimizing sales effort. UBS also benefited from its use of leverage since it received a significant portion of the interest costs of leverage and charged fund management fees on total assets of the funds, including assets financed with leverage.

Wednesday, February 11, 2015

Lo que Sabemos hasta Ahora de la Debacle de los Fondos de Bonos UBS Puerto Rico

Por Craig J. McCann, PhD, CFA y Edward O’Neal, PhD, CVA English Version

Durante el último año, hemos posteado alrededor de una docena de artículos cortos en nuestro blog (aquí). Pensamos que sería útil resumir lo que sabemos hasta la fecha. Este resumen está disponible en inglés presionando “In English” en la parte superior de esta página. También tenemos las entradas anteriores relacionadas a UBS Puerto Rico en inglés. Todas estas entradas pueden ser halladas aquí.

Nuestro artículo Peligro en la Isla del Encanto: Inversionistas de UBS Puerto Rico Sufren Cuantiosas Pérdidas, publicado en octubre de 2013 introduce el tema de las pérdidas de UBS Puerto Rico. Las pérdidas sólo empeoraron a partir de ese punto. En el año 2013, una serie de Fondos cerrados de bonos municipales administrados por UBS Asset Managers de Puerto Rico y vendidos por corredores de UBS Puerto Rico vieron su precio caer hasta un 60%.

La Tabla 1 muestra el Valor de Activos Netos (VAN) y las Pérdidas de Capital categorizadas por Fondo. Durante el 2013, el retorno del VAN de los fondos presentó un rango entre -22.2% y -58.7%. Las pérdidas en dólares de los 19 fundos fueron de aproximadamente $2.1 billones basados en el VAN y de $2.85 billones basados en el precio de oferta.1

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1Este cálculo utiliza un valor constante para las acciones pendientes obtenidas de cada uno de los Reportes Anuales de cada fondo cercanos al 31 de diciembre de 2012. Dado que los Fondos tienen diferentes años fiscales, el cálculo es una aproximación.

Tabla 1. VAN y Pérdidas de Capital desde el 31 de diciembre de 2012 hasta el 31 de diciembre de 2013.


En promedio, durante el año 2013, los fondos de bonos municipales estadounidense sólo cayeron un 2.5%. El Gráfico 1 muestra el valor de seis grandes Fondos de UBS Puerto Rico, el Índice de Bonos Municipales de Puerto Rico S&P, el Fondo de Índice Vangard 500 y el Fondo de Índice del Mercado de Bonos Vanguard, todos estandarizados a $10 al 31 de diciembre de 2012. Mientras los bonos municipales puertorriqueños perdieron un 20% de su valor, los Fondos UBS perdieron entre un 50% a un 60%.

Gráfico 1. Los Fondos UBS Puerto Rico Perdieron de Tres a Cuatro Veces las Pérdidas de los Bonos PR
En “Diversificación y Pérdidas de los Fondos de Bonos de UBS Puerto Rico,” mostramos que en el 2013, los fondos UBS estaban concentrados en bonos de dos emisores. En la mayoría de los Fondos, más del 25% de los activos brutos en cartera eran bonos de uno de dos emisores: la Administración de los Sistemas de Retiro (ASR) o la Corporación del Fondo de Interés Apremiante (COFINA). Los bonos de estos dos emisores representaban al menos un 40% de los activos brutos de los fondos También mostramos que los $1.7 billones en pérdidas sufridas por los inversionistas de Fondos UBS Puerto Rico entre el 31 de diciembre de 2012 y el 30 de septiembre de 2013, están directamente relacionados con la concentración de bonos de los dos emisores citados anteriormente.

La Tabla 2 muestra la concentración de activos de estos dos emisores en los 19 Fondos UBS PR que no estaban en fase de distribución a diciembre de 2013. La tabla también presenta las pérdidas sufridas por cada uno de los Fondos. Los Fondos con mayores concentraciones de Bonos de la ASR y de la COFINA presentaron mayores pérdidas.

Tabla 2. Retornos Totales de 2013 Cálculados por VAN y Precio de Oferta. Porcentaje Invertido en la COFINA y en Bonos del Sistema de Retiro de los Empleados de PR al 30 de Junio de 2013.



En “El Uso de Apalancamiento en Los Fondos Cerrados UBS Puerto Rico Magnifica Las Pérdidas” mostramos que las pérdidas de valor de los bonos puertorriqueños en el 2013 fueron magnificadas en los Fondos UBS Puerto Rico por el alto apalancamiento utilizado por UBS.

Los fondos cerrados estadounidense están usualmente limitados a pedir prestado no más del 33% de sus activos brutos al menos que emitan acciones preferenciales en cuyo caso pueden pedir prestado hasta un 50% de sus activos brutos. Los fondos cerrados pueden apalancar una mayor cantidad de dinero al emitir acciones preferenciales porque al emitir acciones preferenciales en vez de deuda a corto plazo, disminuyen la exposición de riesgo de los inversionistas del fondo. Los Fondos UBS Puerto Rico podían – y lo hicieron – tomar prestado 50% de sus activos brutos sin tener que emitir acciones preferenciales, por lo tanto, los inversionistas que compraron acciones de Fondos UBS Puerto Rico tenían una exposición al apalancamiento de 2-1 sobre los valores de los fondos.

La Tabla 3 presenta las deudas de los Fondos UBS como porcentaje de sus activos brutos al 30 de junio de 2013. Las deudas presentaron un rango de entre 44.01% y 50.74% de sus activos brutos –justo en el 50% máximo permitido por las regulaciones de valores de Puerto Rico. El Gráfico 2 demuestra que los Fondos UBS Puerto Rico utilizaron el apalancamiento de manera mucho más agresiva que otros fondos cerrados de bonos municipales.

Tabla 3. Endeudamiento de los Fondos UBS como Porcentaje de Activos Brutos al 30 de Junio de 2013.



Gráfico 2. Endeudamiento como Porcentaje de Activos Netos de los Fondos Cerrados de Bonos Municipales al 30 de Septiembre de 2013.



Además, algunos reportajes han señalado que los inversionistas pudieron haber sido motivados a tomar dinero prestado para invertir en los Fondos UBS. Este apalancamiento, externo a los fondos, habría aumentado las pérdidas de los inversionistas.

Los Fondos Presentaban una Concentración en Bonos Suscritos por UBS

Los fondos de UBS habían invertido una gran parte de su cartera en bonos suscritos por UBS y comprados por UBS para sus Fondos. Las compras que UBS hacía de bonos suscritos por ellos para sus Fondos crearon un importante conflicto de intereses entre UBS como suscritor y UBS como administrador de los Fondos con una obligación fiduciaria a sus inversionistas de fondos. Como suscritor, UBS, recibió pagos de suscripción que en parte compensaba a UBS por su trabajo de vendedor, UBS minimizó este trabajo al vender directamente los bonos a sus fondos. La Gerencia de UBS y el mercadeo de los Fondos permitieron que UBS suscribiera más emisiones de bonos que las que hubiese podido hacer de no tener los fondos como repositorio para las grandes cantidades de bonos suscritos por UBS. UBS también minimizó sus esfuerzos gerenciales de los fondos al colocar toda su confianza en bonos suscritos por ellos mismos en vez de investigar y comprar bonos mejores en el mercado secundario o de otros suscritores.2

En el artículo titulado Durante 2007 y 2008 UBS Rellenó Sus Fondos de Puerto Rico con $2.5 Billones de Bonos de ASR y COFINA Suscritos por Ellos Mismos ilustramos cómo a finales del 2007 y principios del 2008 UBS cambió drásticamente los Fondos UBS Puerto Rico usando como ejemplo los fondos Tax Free Puerto Rico Fund II y Puerto Rico Fixed Income Fund II. UBS vendió $350 millones de otros bonos que tenía en sus carteras para comprar $530 millones de bonos que ellos suscribieron de la ASR y la COFINA.

La Tabla 4 resume el valor de mercado de los valores de cartera del fondo Tax Free Puerto Rico Fund II categorizados por emisor al 30 de junio de 2007 (desde el segundo trimestre de 2007 disponible aquí), al 30 de noviembre de 2007 (extraído del reporte anual disponible aquí) y al 30 de noviembre de 2008 (del reporte anual disponible aquí).

El Fondo Tax Free Puerto Rico Fund II no poseía bonos de la COFINA al 30 de junio de 2007. El 13 de julio de 2007, UBS participó como suscritor en bonos de la COFINA (Circular de Oferta de COFINA Serie 2007A disponible aquí) al igual que el 18 de julio de 2007 (Circular de Oferta de COFINA Serie 2007B disponible aquí). Al 30 de noviembre de 2007, el Fondo Tax Free Puerto Rico Fund II poseía $20.3 millones en bonos de la COFINA. UBS fue el único suscritor (Circular de Oferta COFINA Serie 2008A disponible aquí.)

El Fondo Tax Free Puerto Rico Fund II no poseía bonos de la ASR al 30 de noviembre de 2007. UBS participó en la suscrición de tres series de bonos de la ASR en el 2008. La Circular de Oferta de la Serie 2008A está disponible aquí, la Circular de Oferta de la Serie 2008B está disponible aquí y la Circular de Oferta de la Serie 2008A está disponible aquí.

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2En general, las carteras concentradas (independientemente si están concentrados en valores suscritos por la misma institución) requieren menor esfuerzo administrativo porque los administradores tienen que investigar y seguir una menor cantidad de emisores.

Tabla 4. Valores Categorizados por Emisor del Fondo Tax Free Puerto Rico Fund II



Entre el 30 de junio de 2007 y el 30 de noviembre de 2008, UBS hizo que el fondo Tax Free Puerto Rico Fund II pagara $188,943,300 por bonos de la COFINA y de la ASR; estos dos emisores pasaron de representar 0% de la cartera del fondo Tax Free Puerto Rico Fund II a 50% de los activos brutos o 98% de los activos netos del Fondo. UBS vendió alrededor de $190 millones de otros emisores de bonos de la cartera del Fondo Tax Free Puerto Rico Fund II para darle cabida a los bonos de la COFINA y de la ASR que estaba suscribiendo.

La Tabla 5 presenta los valores por emisor del Fondo Puerto Rico Fixed Income Fund II al 30 de junio de 2007 (disponible aquí), al 30 de noviembre de 2007 (disponible aquí) y al 30 de noviembre de 2008 (disponible aquí).

El Fondo Puerto Rico Fixed Income Fund II no poseía bonos de la COFINA o de la ASR al 30 de junio de 2007. Entre el 30 de junio de 2007 y el 30 de noviembre de 2008 UBS hizo que el fondo Puerto Rico Fixed Income Fund II pagara $340,357,374 por bonos de la ASR y de la COFINA; estos dos emisores pasaron a representar de un 0% de la cartera del fondo a un 44% de los activos brutos y un 88% de los activos netos del fondo. UBS vendió casi $335 millones de bonos otros emisores que el fondo Puerto Rico Fixed Income Fund II poseía para darle cabida a los bonos de la ASR y de la COFINA que estaba suscribiendo.

Tabla 5. Activos por Categoría de Emisor del Fondo Puerto Rico Fixed Income Fund II



UBS Puso en Riesgo a sus Inversionistas al Suscribir y Comprar Bonos Inmercadeables.

En “En el 2008, UBS Sucumbe Ante Conflictos y Compra $1.7 Billones en Bonos de la Administración de los Sistemas de Retiro para Colocarlos en sus Fondos de Bonos Municipales de Puerto Rico” enseñamos que el drástico cambio en los Fondos UBS ocurrió porque UBS suscribió bonos inmercadeables de la ASR en el 2008 y de no comprarlos hubiese perdido decenas de millones de dólares en pagos de suscrición. Estos bonos de la ASR resultaron ser la fuente de las pérdidas de los Fondos UBS en el 2013.

El sistema de retiro de empleados de Puerto Rico estaba grave y crónicamente sin recursos suficientes para mantener el pago de sus obligaciones. El Gráfico 3 muestra la tasa de cobertura actuarial (activos netos sobre obligaciones de pensión) de los fondos de retiro de Puerto Rico y la mediana de la tasa para los 50 estados de los Estados Unidos. Entre los años 1993 y 2013 la mediana de la cobertura actuarial para los 50 estados fluctuó entre 80% y 100%, mientras que para Puerto Rico la tasa fue aproximadamente 20% hasta el 2008 y luego continuó cayendo. Para poner esta situación en contexto, en promedio y entre los años 2007 y 2011 los tres estados con la peor tasa de cobertura en los sistemas de pensiones fueron: Illinois con 51%, Connecticut con 58% y Kentucky con 59%.

Gráfico 3. Tasa de Cobertura Actuarial del Sistema de Retiro de Empleados de Puerto Rico. 1990-2012



En el 2007, Merrill Lynch trató de vender $7 billones en Bonos de la Administración de los Sistemas de Retiro (ASR), pero falló. Un Análisis contemporáneo acerca del intento fallido de Merrill Lynch en suscribir bonos de la ASR y el daño causado por UBS a la ASR puede ser encontrado en el artículo de Conway MacKenzie, Inc. de octubre de 2010, Review of the Events and Decisions That Have Led to the Current Financial Crisis of the Employees Retirement System of the Government of Puerto Rico disponible aquí.

UBS reemplazó a Merrill Lynch como asesor de la ARS y fue el suscriptor principal de los bonos Serie A del 2008 por un total de $1,588,810,800. La circular de oferta de los Bonos Serie 2008A está disponible aquí. No tenemos información sobre el compromiso de venta que UBS tomó sobre los bonos de la ASR Serie 2008A, pero sí sabemos que UBS compró 41% de la emisión y los colocó en sus fondos. También sabemos que UBS compró una porción de los bonos Serie 2008A para clientes individuales puertorriqueños.

Tabla 6. UBS Adquirió 41% de los Bonos de la ASR 2008A para sus Propios Fondos



La primera página de la Circular de Oferta de los Bonos de la ASR Serie 2008A dice:

“Actualmente, la ASR contempla ofrecer bonos adicionales a paridad (los "Bonos Serie B") en otras jurisdicciones. Los bonos serie B serían ofrecidos por medio de una o más declaraciones oficiales y no podrán en ningún caso ser adquiridos por los residentes de Puerto Rico.”

El lenguaje de la Circular de Oferta de la Serie 2008A estaba diseñado para proteger a los inversionistas puertorriqueños de bonos Serie 2008A dado que los bonos Serie B, que se venderían a la par con los Bonos Serie A, serían emitidos si y solo si los bonos Serie B pasaban la prueba del mercado.

La circular de oferta de los bonos de la ASR Serie 2008B por $1,058,634,613 fue publicada el 28 de mayo de 2008 y está disponible aquí). Algo dramático ocurrió entre el 29 de enero de 2008 y el 28 de mayo de 2008. En vez de ofertar los bonos Serie 2008B sólamente no residentes de Puerto Rico como había sido prometido cuatro meses antes, ahora serían vendidos a residentes puertorriqueños. Véase el Gráfico 4.

Gráfico 4. Extracto de la página 7 de la Circular de Oferta de la Serie B de 2008.



No sólo no hubo mercado fuera de Puerto Rico para los bonos de la ASR Serie B de 2008 a los términos ofrecidos, sino que tampoco hubo mercado para la venta de estos bonos en la isla. UBS compró el 89% de la Serie B 2008 para colocarlos en sus fondos. Véase el Gráfico 7.

Tabla 7. UBS adquirió 89% de los Bonos de la ASR 2008B para sus Fondos.



Hubo una tercera y última emisión de bonos de la ASR en el 2008 – La Serie C de los bonos. UBS fue el principal suscriptor de la oferta de $300 millones hecha en junio de 2008. La Circular de Oferta de la ASR 2008C está disponible aquí. Al igual que los bonos de la ASR Serie A y Serie B, los bonos Serie C solo podrían ser comprados por residentes puertorriqueños, UBS compró el 38% de la emisión Serie C para colocarlos en sus propios fondos de bonos.

La parte más interesante en la saga de los Fondos UBS de Bonos Municipales de Puerto Rico serán los documentos no-públicos tales como los memorandos, correos electrónicos y las comunicaciones entre UBS y la ASR cuando se dieron cuenta de que no había mercado para los bonos de la ASR de la Serie B 2008 y la promesa hecha en los bonos en la Serie A 2008 que tuvieron que romper de que los bonos de la ASR de la Serie B 2008 no serían vendidos en la isla.

Pero se pone más interesante… En El Costo de 15 Días para los Clientes de UBS en Puerto Rico fue por Encima de $1 Billón señalamos que a principios de 2008, UBS sabía que su jueguito se acababa. El 4 de enero de 2008 en un reporte de ratings de Moody’s disponible aquí y en el reportaje de rating de Standard & Poor’s fechado 14 de enero de 2008 disponible aquí demuestra que al menos al 14 de enero de 2008 la ASR y UBS tenían la intención de emitir $4 billones en bonos de obligaciones de pensión en las dos semanas restantes de enero de 2008 y otros $3 billones más tarde durante el año.

Lo que pasó en los quince días entre el 14 de enero de 2008 y el 29 de enero de 2008 fue dramático. La ASR y UBS se dieron cuenta que sólo podrían vender $1 billón –en vez de $4 billones- de bonos de la ASR a los términos ofertados en enero de 2008. De los $1.6 billones en bonos Serie A, $650 millones fueron comprados por Fondos UBS, dígase que sólo había mercado para casi $1 billón. Debió haber quedado claro que nadie más compraría los bonos y que UBS estaba a punto de perder lucrativas tarifas de suscripción.

COFINA Series 2007A y 2007B

En el artículo “En el 2007 y 2008, Los Fondos UBS PR También Compraron $1.35 Billones en Bonos de la COFINA Suscritos por UBS” mostramos como conflictos similares llevaron a UBS a suscribir bonos inmercadeables de la Corporación del Fondo de Interés Apremiante (COFINA) para colocarlos en sus Fondos. La COFINA emitió dos series de bonos en el 2007 y una serie en el 2008.

El banco de inversión UBS fue 1 de los 19 co-suscritores de los $2.7 billones de bonos Serie A dirigidos a inversionistas estadounidenses. La Circular de Oferta de los bonos de la COFINA serie 2007A está disponible aquí. UBS Financial Services de Puerto Rico fue el suscritor principal (junto a otros 11 co-suscritores) de los bonos serie 2007B por $1.33 billiones a ser vendidos únicamente a inversionistas puertorriqueños. La Circular de Oferta de los bonos de la COFINA serie 2007B están disponibles aquí.

No sabemos cuál fue el compromiso de ventas de los bonos COFINA 2007 Serie B por parte de UBS, pero sí sabemos que UBS compró $614 millones o 46% de los $1.330 billones en bonos Serie 2007B de la COFINA para sus fondos mutuos. Véase la Tabla 8.

Tabla 8. UBS compró $614 millones de Bonos COFINA 2007 Serie B para sus Fondos Mutuos.



COFINA 2008 Serie A

En el 2008, UBS Financial Services de Puerto Rico fue el único suscritor de los $737 millones en bonos Serie B vendidos únicamente a inversionistas puertorriqueños. Ninguno de los otros 18 suscritores de la Serie 2007 A o de los demás 11 suscritores de los Bonos COFINA Serie 2007 B participaron en los Bonos COFINA Serie 2008 B. La Circular de Oferta de los Bonos COFINA Serie 2008A está disponible aquí. UBS compró 100% de los $737 millones de bonos COFINA Serie 2008A para sus fondos. Véase la Tabla 9.

Tabla 9. UBS compró $735 millones en Bonos de la COFINA Serie 2008A para sus fondos.



Al igual que con los bonos de la ASR, UBS compró los bonos de la COFINA que suscribió en el 2007 y el 2008, haciendo espacio para estos bonos al vender otros valores en sus carteras. O no había otro mercado para los bonos de la COFINA Serie A o UBS usó el control de sus fondos para maximizar sus beneficios como suscritor y vendedor de los bonos Serie 2008A de la COFINA.

UBS Cobró Márgenes Excesivos a sus Fondos de Puerto Rico

En el artículo ¿Acaso UBS Cobró Márgenes Excesivos a sus Fondos de Puerto Rico? Identificamos evidencia preliminar señalando que UBS pudo haber cobrado márgenes excesivos a sus Fondos UBS Puerto Rico.

En octubre de 201l el Fondo Oppenheimer Rochester VA (ORVAX) compró $1,645,000 en bonos municipales de Puerto Rico (CUSIP 74527EFA1) a margen completo de $0.404 o a medio margen de $0.202 por cada $100 de bono. Este márgen era consistente con la literatura existente y con nuestra propia investigación sobre altos márgenes en transacciones menores.

El margen total de la compra de bonos municipales de Puerto Rico cobrados a Oppenheimer fue de $6,645.80 y el medio margen fue de $3,322.90. La literatura financiera demuestra que los márgenes en bonos municipales se reducen drásticamente en términos porcentuales cuando el tamaño de la venta incrementa porque el margen medio tiende a estabilizarse alrededor de los $6,000.

A diferencia de los fondos de bonos estadounidenses, los Fondos UBS Puerto Rico no reportan sus valores de manera trimestral pero podemos ver que el fondo UBS Puerto Rico Fixed Income Fund IV compró $7,500,000 a valor par de los bonos ASR CUSIP 29216MBA7 entre el 31 de marzo de 2010 y el 31 de marzo de 2011. La data de MSRB EMMA refleja algunas de las transacciones mayores a márgenes muy bajos pero las transacciones reportadas que probablemente reflejaban las compras hechas por el Fixed Income Fund IV en este CUSIP tenían un margen de $1.25.

El margen total de la compra de $7,500,000 hecha por UBS Fixed Income Fund IV parece ser de $93,750 y el medio margen de $46,875. Sólo en esta transacción parece ser que UBS cobró márgenes excesivos de $40,000 a $80,000 a los inversionistas de sus fondos.

A UBS Asset Managers of Puerto Rico (UBS-AM) no le agradó que presentaramos evidencia de que UBS estaba cobrando márgenes excesivos a sus inversionistas de Fondos UBS Puerto Rico. UBS argumentaba que como no podíamos identificar cuáes transacciones en la base de datos EMMA eran de los fondos de bonos UBS y como UBS no estaba entregando la información, nosotros no debíamos especular sobre si UBS estaba cobrando márgenes excesivos o no. Recibimos una amenazante carta de los abogados de UBS-AM el 24 de diciembre de 2013 que publicamos en Feliz Navidad de parte de UBS Asset Managers de Puerto Rico.

Resulta que, como mostramos en el artículo ¿Acaso UBS Cobró Márgenes Excesivos a Sus Propios Fondos de Bonos de Puerto Rico? Segunda Parte sí podemos identificar algunas de las compras de bonos municipales de UBS para los Fondos UBS, y estas compras cuentan una interesante historia.

La Tabla 10 muestra los $86.95 millones en valor nominal con cupón de 6.45% en los Fondos de Puerto Rico de UBS, este es el bono municipal Puertorriqueño a largo plazo (CUSIP: 29216MAN0) emitido en enero de 2008 por el Sistema de Pensiones de Empleados.

Tabla 10. Los Fondos UBS Poseían Todos los Bonos de la ASR 2008A 29216MAN0 por un Total de $86,950,000



La Tabla 11 incluye la actividad comercial en este bono y enseña que los fondos de UBS fueron los únicos compradores de la emisión de bonos por $87 millones y que estos fondos pagaron el precio de oferta de $100.

Tabla 11. UBS Compró Todos los Bonos Ofertados de la ASR 2008A 29216MAN0



Hay muchos otros ejemplos demostrando que los fondos de UBS compraron todos, o casi todos, los bonos suscritos por UBS de un emisor de bonos (ASR) que serían despreciados en los Estados Unidos. Esto plantea una serie de dilemas que abordarnos en futuras entradas de nuestro blog. Por ahora, sólo traeremos a colación el tema de sobreprecio.

Nuestro ejemplo del bono fue parte de un acuerdo con el Sistema de Pensiones de Empleados. La declaración oficial se puede encontrar aquí. Los suscriptores pagaron en promedio $98,95 por los bonos. UBS revendió estos bonos a sus propios fondos mutuos por $86,950,000, pagando al Sistema de Pensiones de Empleados aproximadamente $86.033.050. UBS cobró una comisión a sus inversionistas de $916,950 sobre el precio que UBS pagó al emisor, lo que parecería desde un punto de vista económico un negocio sin riesgo alguno. Esta comisión equivale a un 1.05% sobre el valor de la compra institucional de $86 millones.

En un publicación académica por Breen, Hollifield, y Schurhoff (2006) encontraron que en promedio, la comisión de los suscriptores de bonos municipales tiende a ser alrededor de un 0.8 % y que más de la mitad de este dinero va a la casa de corretaje como un crédito de ventas o comisión para motivar las ventas. También, los autores concluyen que una porción significativa de las transacciones de mayor tamaño son hechas por debajo del precio de re-oferta al momento de la oferta inicial. No había corredores que compensar por la venta de este bono, sin embargo, UBS cobró a sus inversionistas de fondo $616,950 por encima del promedio de $300,000. Por ende, UBS pagó a la Administración de Sistemas de Retiro de los Empleados de Puerto Rico cientos de miles de dólares menos de lo que tendría que haber pagado o UBS hizo que sus inversionistas de fondos mutuos pagaran cientos de miles de dólares de más – o ambas.

UBS Sucumbió a sus Propios Intereses y los Inversionistas de Fondo Pagaron las Consecuencias

En El Infierno Forjado por UBS Puerto Rico demostramos que las desastrosas pérdidas sufridas por los inversionistas de Fondos UBS PR en el 2013 están directamente relacionadas a UBS poniendo sus propios intereses por encima de los intereses de sus clientes y comprando bonos de la ASR y de la COFINA en el 2008. Consideren estos tres ejemplos.

Fondo Fixed Income Fund II

La Tabla 12 categoriza los valores de la ASR, COFINA y otros emisores al 30 de noviembre de 2012 del fondo Fixed Income Fund II. Los bonos de la ARS representan 27.5% de la cartera, los bonos de la COFINA 21.3 % de la cartera y otras inversiones son el 51.1 % de la cartera. Los bonos de la ASR perdieron un 50.3 % de su valor entre el 30 de noviembre de 2012 y el 13 de diciembre de 2013. Los bonos de la COFINA perdieron el 29.7 % desde el 30 de noviembre de 2012 al 13 de diciembre de 2013. Las otras inversiones en el fondo perdieron entre un 4.8 % y el 15.8 % de su valor entre el 30 de noviembre de 2012 y el 31 de diciembre de 2013. Si los bonos de la ASR y los bonos de la COFINA sólo hubiesen sufrido pérdidas similares al resto de la cartera del fondo Fixed Income Fund II, el Fondo sólo hubiese perdido $140.2 millones en vez de los $201 a $251 millones perdidos.

Tabla 12. Asignación de Activos y Pérdidas del Fondo Fixed Income Fund II



Fondo Fixed Income Fund III

El mismo patrón encontrado en el fondo Fixed Income Fund III puede ser observado en otros fondos UBS PR. La Tabla 13 presenta un análisis similar para el fondo Fixed Income Fund III. Los bonos de la ASR representaban un 28.1 % de la cartera, los bonos de la COFINA un 15.1% de la cartera y otras inversiones son un 56.8% de la cartera.

Los bonos de la ASR perdieron 45.4 % entre el 30 de junio de 2013 y el 13 de diciembre de 2013. Los bonos de la COFINA perdieron el 26.2 % entre el 30 de junio de 2013 y el 13 de diciembre de 2013. El resto de las inversiones en el fondo perdieron entre un 2.6 % y 12.5 % de su valor entre el 30 de junio de 2013 y el 31 de diciembre de 2013.

Si los bonos de la ASR y de la COFINA sólo hubiesen sufrido pérdidas similares al resto de la cartera del Fondo, el Fondo sólo hubiese tenido pérdidas de $103.6 millones en lugar de los $151 millones a los $197 millones.

Tabla 13. Asignación de Activos y Pérdidas del Fondo Fixed Income Fund III



Fondo Fixed Income Fund IV

La Tabla 14 presenta un análisis similar para el Fondo Fixed Income Fund IV. Los bonos de la ASR representan un 25.2% de la cartera, los bonos de la COFINA un 19.4% de la cartera y los de otras inversiones eran el 55.4% de la cartera.

Entre el 31 de marzo de 2013 y el 31 de diciembre de 2013, los bonos de la ASR perdieron 44.8% de su valor. Durante el mismo período los bonos de la COFINA perdieron el 27.7% de su valor. El resto de las inversiones del fondo perdieron entre un 8.0% y un 12.2% de su valor entre el 31 de marzo de 2013 y el 31 de diciembre de 2013.

Si los bonos de la ASR y de la COFINA sólo hubiesen sufrido pérdidas similares al resto de la cartera del Fondo, el Fondo sólo hubiese tenido pérdidas de $107 millones en lugar de un valor entre $185 millones y $206 millones.

Tabla 14. Asignación de Activos y Pérdidas del Fondo Fixed Income Fund IV



Estimamos que estos tres fondos perdieron entre $537 millones y $654 millones. De estas pérdidas, los bonos suscritos por UBS de la ASR y de la COFINA representaron pérdidas de $464 millones. Esto significa que entre el 71% y el 86% de los billones de dólares perdidos en los Fondos UBS PR, fue el resultado directo de los bonos suscritos por UBS de la ASR y de la COFINA que además no tenían mercado.

Impuestos

En Impuestos, Bonos Municipales de Puerto Rico y los Fondos UBS enseñamos que el tratamiento preferencial impositivo que reciben las inversiones puertorriqueñas no pueden justificar la inapropiada concentración de bonos municipales de Puerto Rico en las carteras de los inversionistas.

Los residentes de Puerto Rico no pagan impuestos sobre el ingreso al gobierno federal pero pagan altos impuestos sobre el ingreso. Los puertorriqueños pagan una tasa impositiva marginal máxima de 33% sobre los $50,000 del ingreso anual gravable.

El ingreso proveniente de los bonos de Puerto Rico está exento de impuesto sobre la renta estatal que sería pagado por inversionistas puertorriqueños que compraron bonos municipales emitidos en otros estados. La diferencia en el régimen impositivo es una de las razones ofrecidas para explicar la alarmante concentración de bonos emitidos por el Sistema de Retiro de Empleados y suscritos por UBS.

Dar esta justificación para concentrar bonos municipales de Puerto Rico a los inversionistas puertorriqueños tiene el mismo sentido económico que decir que los inversionistas deberían de concentrar sus carteras en el valor cuyo retorno esperado sea el más alto. Esto sería como decir que un inversionista debería de colocar 100% de sus inversiones (o tomando el enfoque de UBS, sustancialmente más del 100% de sus inversiones) en la compañía Zoom dado que sus valores tienen los betas más altos y por lo tanto el mayor retorno esperado. No ha pasado tanto tiempo como para olvidar la debacle de la industria tecnológica de los 90s y saber que hacer una inversión como ésta sería una mala idea porque ignora el alto riesgo asociado con la concentración de activos y el apalancamiento de la inversión en Zoom inc.

En el gráfico 5 mostramos el retorno anualizado y el riesgo de los índices de bonos municipales de Standard and Poor’s desde el año 2003 al 2012. Los puntos rojos representan la combinación de riesgo y retorno de los índices de bonos especificados por estados, los puntos azules representan carteras nacionales y el punto verde representa el bono de Puerto Rico. Noten que los bonos municipales de Puerto Rico tienen menor retorno y mayor riesgo que las carteras nacionales o los bonos municipales especificados por estados incluso antes de las pérdidas sufridas en el 2013.

Gráfico 5. Retornos Totales Pre Impuestos y Desviación Estándar para Puerto Rico, 26 Estados y 9 Carteras de Bonos Municipales de los Estados Unidos



La pendiente de la línea que va desde el punto de origen hasta el punto denominado Puerto Rico es el ratio entre los retornos realizados y el riesgo realizado. Esto es a veces llamado el ratio de Sharpe. Las carteras con mayor retorno por unidad de riesgo (pendientes más pronunciadas) son preferidas por los inversionistas.

Si ignoramos los impuestos, los bonos municipales de Puerto Rico experimentaron menor retorno ajustado por riesgo que los demás 26 bonos estatales con 10 años de información. Contrario a las partes que defienden la concentración de bonos puertorriqueños, nuestra declaración se mantiene invariable aun incorporando los impuestos.

Hemos graficado los retornos y riesgo del gráfico 5 luego de reducir el máximo impuesto al ingreso en el gráfico 6. La nube de puntos rojos y morados se ha convertido en triángulos y se ha movido hacia el punto de origen, sin embargo, la nube de puntos se ha mantenido por encima de la línea entre el punto de origen y el retorno y riesgo de los bonos de Puerto Rico.

Gráfico 6. Retornos Promedio Post Impuestos y Desviación Estándar para Puerto Rico, 26 Estados y 9 Carteras de Bonos Municipales de los Estados Unidos



Podríamos complicar este análisis aún más separando los intereses del cupón y las ganancias y pérdidas de capital, pero el resultado sería el mismo. El beneficio impositivo recibido por los inversionistas puertorriqueños aumenta el retorno post impuestos y el riesgo de invertir en bonos municipales de Puerto Rico en relación a invertir en bonos municipales de otros estados – y los bonos municipales puertorriqueños eran de por sí inversiones mucho más riesgosas que los bonos de otros estados.

Las diferentes tasas de impuestos estatales tampoco pueden explicar la concentración observada en las cuentas de inversionistas puertorriqueños. Las exenciones de impuestos estatales disponibles a inversionistas puertorriqueños pueden ser utilizadas en otros activos –no sólo en bonos municipales y fondos que invierten en estos bonos- y por ende no justifica tal concentración en los fondos UBS o en los bonos suscritos por UBS.

1. Las exenciones de impuestos estatales disponible a inversionistas puertorriqueños pueden ser utilizas en otros activos –no sólo en bonos municipales y fondos que invierten en estos bonos- y por ende no justifica tal concentración en los fondos UBS o en los bonos suscritos por UBS.

2. Otras técnicas de planificación de riquezas en Puerto Rico permiten pasar bienes de una generación a la otra cuando las carteras son diversificadas.

3. Las carteras fueron concentradas en Fondos UBS y bonos suscritos por UBS sin consideración alguna del tamaño de las riquezas.

4. Las carteras fueron concentradas en Fondos UBS y bonos suscritos por UBS sin consideración alguna a la edad del titular de las cuentas.

En resumen, los impuestos pueden ser dolorosos al bolsillo, pero no justifican la concentración de fondos UBS y bonos municipales de Puerto Rico en las carteras de inversionistas puertorriqueños, al igual que mayores betas no justifican la concentración de cartera en valores tecnológicos.

En nuestro artículo titulado Los Inversionistas Puertorriqueños No Debieron Invertir en los Fondos Puertorriqueños de UBS demostramos que los inversionistas puertorriqueños no debieron tener sus carteras de inversión concentradas en Fondos UBS.

La Frontera de Eficiencia Pre-Impuestos

En el Gráfico 7, mostramos los retornos totales anualizados de carteras diversificadas de acciones y bonos en un rango que comienza con 100% de la cartera invertida en bonos hasta una cartera invertida 100% en acciones. Los retornos totales son calculados usando retornos mensuales comenzando en enero de 2003 hasta diciembre de 2012. Hemos usado el fondo Vanguard S&P 500 Index (VFINX) y el fondo Vanguard Total Bond Market (VBMFX) para reflejar los retornos pre-impuestos que los inversionistas recibieron durante este período de 10 años.

Gráfico 7. Retorno y Riesgo Pre-Impuestos 2003-2012


También hemos graficado el retorno y riesgo del índice de bonos municipales puertorriqueños S&P libre de apalancamiento y el retorno y riesgo del prototipo de fondo cerrado UBS Puerto Rico. No podemos estimar el riesgo verdadero de los Fondos UBS Puerto Rico dado que no hay suficientes transacciones de estos fondos y dado que los precios fijados por UBS a veces no cambiaban durante varias semanas. Los fondos cerrados UBS estaban apalancados 2:1. Por ende, si las carteras de los fondos eran igual al índice Puertorriqueño S&P, estos fondos serían dos veces más riesgosos que el índice S&P PR. De hecho, los fondos UBS Puerto Rico tenían perfil de riesgo en forma de pesas (esquinas fuertemente pronunciadas y un centro con poca variación) donde 1/3 de las carteras estaban en bonos de agencias de bajo riesgo y más de 1/3 de la cartera en bonos de la ASR de mucho mayor riesgo. Dado que en el año 2013 los Fondos UBS PR cayeron más del doble que el Índice S&P Puerto Rico, parece ser que nuestro estimado del riesgo verdadero de los Fondos de Bonos UBS Puerto Rico es bastante preciso.

En el Gráfico 7 podemos ver que pre-impuestos, los Fondos UBS Puerto Rico están muy por debajo de la “frontera de eficiencia”. Si los bonos municipales puertorriqueños recibieran el mismo trato impositivo que reciben las acciones y bonos imponibles presentados en el Gráfico 10, ningún inversionista racional o informado compraría los Fondos UBS porque los inversionistas podrían recibir los mismos beneficios con menor riesgo o mayores beneficios con menor riesgo.

Hemos estimado que, pre-impuestos, los Fondos de Bonos UBS Puerto Rico presentan un riesgo similar al de una cartera invertida 85% en acciones y 15% en bonos.

La Frontera de Eficiencia Post-Impuestos

Los residentes puertorriqueños no pagaron impuestos sobre el ingreso recibido en bonos municipales de Puerto Rico pero hubiesen pagado impuestos en los intereses y ganancias de capital en las carteras de bonos y acciones presentadas en el Gráfico 10. Hemos ajustado el gráfico para presentar la diferencia en el trato impositivo. Hemos reducido en un 33% las distribuciones de intereses y en un 10% las ganancias de capital pagadas por las carteras de bonos y acciones. El gráfico 8 muestra los retornos y riesgo post-impuestos.

Gráfico 8. Retorno y Riesgo Post-Impuestos 2003-2012



El Gráfico 8 muestra que aún después de ajustar por impuestos, los Fondos UBS Puerto Rico se encuentran por debajo de la frontera de eficiencia. También muestra que post-impuestos, el nivel de riesgo de los Fondos UBS Puerto Rico es similar al de una cartera invertida 95% en acciones y 5% en bonos. Este último punto es especialmente dramático dado que UBS describe estos fondos como adecuados para inversionistas interesados en ingreso consistente con la preservación de capital. Claramente, carteras de inversión con el riesgo y retorno de 95% en acciones y 5% en bonos no son consistentes con el objetivo de inversión de “ingreso consistente con la preservación de capital.”

I. Resumen

En el 2013, los inversionistas de fondos cerrados de bonos municipales administrados por UBS Asset Managers de Puerto Rico y vendidos por los corredores de UBS Puerto Rico perdieron cerca de $3 billones. Muchos de los Fondos UBS perdieron más del 50% de su valor. En el mismo período de tiempo, el fondo estadounidense promedio de bonos municipales cayó un 2.5%.

Los fondos UBS estaban extraordinariamente concentrados. Los valores de un solo emisor representaban más de un 25% - y de dos emisores más del 40% - de los activos brutos de la mayoría de los fondos. El uso de apalancamiento en los fondos UBS magnificó las fluctuaciones de precio de los valores de las carteras. La combinación de apalancamiento y concentración significó que pérdidas en los valores de uno o dos emisores tenían efectos catastróficos para los inversionistas.

Los corredores de UBS recomendaron a los inversionistas la compra de fondos administrados por UBS que compraban casi exclusivamente bonos suscritos por UBS de emisores aconsejados por UBS. Estas acciones iban en contra de importantes disciplinas de mercado.

UBS ganó honorarios substanciales como suscritor de los dos emisores en los que concentró las carteras de los fondos mutuos. La concentración de la cartera de los fondos aumentó la capacidad de UBS de suscribir bonos mientras simultáneamente reducía sus esfuerzos de venta. UBS también se benefició del uso de apalancamiento dado que recibió una porción significativa de los costos de intereses del apalancamiento y cobró a los fondos honorarios de administración sobre los activos totales, incluyendo los activos financiados por deuda.