UBS Puerto Rico fund shareholder asks advisors for help in proxy fight

With most client claims involving Puerto Rican bonds resolved after several billions of dollars worth of awards and settlements, a shareholder campaign targeting funds managed by UBS affiliates is seeking support from financial advisors.

The securities tied to debt issued by Puerto Rico’s government tumbled in value when the U.S. commonwealth missed bond payments in 2016 and filed for bankruptcy protection a year later. UBS settled cases filed by three different regulators and an onslaught of claims in FINRA arbitration relating to Puerto Rican bonds and closed-end funds managed by its subsidiaries in Puerto Rico. The shareholder, Ocean Capital, is trying to gain control of the funds.

For the fourth straight time, including the latest attempt last month, the Puerto Rico Family of Funds postponed an annual meeting for a lack of quorum, according to W. Heath Hawk, one of the largest shareholders in two of the closed-end funds. The meeting would have included a proxy vote on Ocean Capital’s bid to replace five board members. As Puerto Rico’s fiscal restructuring plan awaits court approval, Hawk is trying to drum up the votes from clients he says are needed to avert more “massive shareholder devaluation,” he said in an interview.

“The advisors need to reach out to them and let them know; shareholders have been beaten up for so long,” Hawk said. “They need to be made aware that they've got an opportunity to vote and effectuate change that is long needed.”

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In addition to no longer “paying directors six figures who don't even own one share,” Hawk proposes to liquidate some of the 21 funds that no longer hold very many assets and reinstate share repurchases in others. In addition to leading Ocean Capital’s shareholder action, Hawk is the CEO of First Southern, an Atlanta- and San Juan-based investment bank and brokerage with a specialty in fixed-income products from the secondary market.

Representatives for UBS declined to comment on Ocean Capital’s campaign or Hawk’s comments about the board members.

In addition to paying settlements in 2014 and 2015 with the SEC, FINRA and Puerto Rico’s financial regulators, UBS has paid damages of $2.8 billion out of claims for $3.4 billion in the wake of the debt crisis and the Puerto Rico Oversight and Management Economic Stability Act of 2016, according to the firm’s most recent annual report. Four U.S. insurers have also filed lawsuits seeking a combined $955 million in damages. Clients have filed an estimated 4,000 arbitration claims against UBS, Merrill Lynch, Santander Bank, Banco Popular and Oriental Bank, according to a May 2019 report by the Securities Litigation & Consulting Group.

UBS drew more claims than any other firm from clients who invested in the bonds and closed-end funds tied to them, including many who added additional leverage and concentration through margin loans. About 100 individuals or entities filed arbitration claims over the last roughly eight years through attorney Robert Pearce, he said in an interview. Nearly all of the cases ended in settlements, with clients receiving “favorable awards” in the only five cases to reach the hearing stage, according to Pearce.

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As whistleblowers have made clear in their own accounts, UBS paid high commissions and “a lot of incentives to the financial advisors to sell these products,” Pearce said, noting his actions have largely targeted the firm rather than the brokers.

“There was a lot of pressure from management at the different firms to generate the revenues from these funds. There was a lot of information that was withheld from the financial advisors,” he said. “There are some culpable financial advisors, but I would say the majority of them drank the Kool-Aid.”

Hawk estimates that as many as 150 advisors had clients with shares in the funds at their peak. With the S&P Municipal Bond Index yielding a 10-year return of 3.96% and the S&P Municipal Bond Puerto Rico Index at 2.58% as of Nov. 8, each of the UBS funds are negative over the past decade and since inception, according to Ocean Capital’s campaign website. The value of some of the funds has fallen as low as $1.15 a share from $10, Hawk said. At the past attempted meetings, very few eligible shareholders have shown up virtually to cast a ballot, he noted. Ocean Capital, an investment vehicle formed in Puerto Rico, began buying shares a year ago and now owns at least 6% stakes in three funds.

“There's such voter apathy,” Hawk said. “Shareholders and advisors have an opportunity now for change.”