Less than a month after UBS Puerto Rico was ordered to pay $34 million in order to settle charges of fraud in connection with the sale of Puerto Rico municipal bonds, another giant financial institution has been fined by the Financial Institution Regulatory Authority (FINRA) over nearly identical allegations. Like those at UBS, financial advisers at Banco Santander’s Puerto Rico division steered their clients into investments concentrated in high-risk Puerto Rican securities at the same time that said bonds were falling precipitously in value. Santander went one step further by liquidating its own holdings, while failing to notify investors of what was happening.
“Santander Securities drastically reduced its own exposure to Puerto Rican securities while leaving its own investors to bear the brunt of its anticipated decline,” says securities lawyer Peter Mougey, who heads litigation at Levin Papantonio against Banco Santander.
That decline was a long time in the making – and not unexpected. Puerto Rico bonds were long popular with investors, both on the island and the mainland. There were two primary reasons for this: (1) PR municipal bonds offered certain tax advantages, and (2) historically, they offered higher yields that those issued by municipal and state governments in the U.S. A large part of this was due to a number of U.S. government programs and policies put into place after the Second World War in order to assist Puerto Rico in becoming self-sufficient. Some of it consisted of tax advantages extended to major corporations, creating incentives to build facilities on the island, thereby creating jobs. This was largely undone by “free trade” agreements such as NAFTA and CAFTA, resulting in the wholesale export of industries to low-wage countries. Another contributing factor to the decline in Puerto Rico’s economy has been the volatility of the petroleum market. Puerto Rico’s energy infrastructure is highly dependent on oil-fired generators.
As Puerto Rico’s tax base eroded, the island’s government began borrowing heavily. Today, Puerto Rico owes over $70 billion. Nearly 60% of Puerto Rico’s debt is held by U.S. investors. The island’s government has been issuing bonds simply to keep everything running. It is similar to the consumer who uses a credit card in order to pay for everyday necessities such as food and shelter – a practice that is clearly not sustainable.
It is also a state of affairs of which UBS and Santander have been aware of since at least 2012. The fact that Santander liquidated its own holdings indicates that the company had indication of what was coming. Santander began selling off its Puerto Rico bonds in November, 2012. One month later, the U.S. credit rating agency Moody’s downgraded those bonds to one level above “junk” status. As a result, Santander accelerated its efforts to unload its Puerto Rico securities over the next ten months.
But nothing was said to investors. Instead, as was the case at UBS, Santander’s financial advisers continued to steer investors into these high-risk investments. There was little or nothing in the way of controls or supervision over these advisers, who were more concerned with their own commissions and fees than their clients’ best interests. As a result, many people have lost their entire life’s savings.