Securities Regulation Daily Wrap Up, ENFORCEMENT—D. P.R..: UBS broker directed clients to use lines of credit in order to purchase securities, (May 1, 2018)

By Gregory Kane, J.D., M.B.A.

The SEC was granted summary judgement against a former broker at UBS Financial Services Incorporated of Puerto Rico (UBSPR) for violating Sections 17(a)(1)-(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by improperly using proceeds from certain lines of credit and misleading customers about the impropriety of his use of their funds (SEC v. Ramirez, April 30, 2018, Delgado-Hernandez, P.).

Alleged scheme. Defendant Jose Ramirez, Jr. worked from 1997 to 2014 as a registered representative of UBSPR, which is a broker-dealer and a subsidiary of UBS Financial Services, Inc. He was the registered representative of record for approximately 350 customer accounts. UBSPR policy and lines-of-credit (LOCs) agreements with UBSPR’s banking affiliate, UBS Bank USA (BUSA) prohibited customers from using LOC proceeds to purchase securities. The SEC claimed that Ramirez concocted a scheme to circumvent this prohibition, which increased his compensation in the process.

Ramirez allegedly instructed customers to transfer their money from their BUSA LOC accounts to a bank account that was not affiliated with UBSPR. Customers were then instructed to deposit the money from the unaffiliated account to the customer’s UBSPR brokerage account a few days later. The customers would then use the funds in the brokerage account to purchase certain UBSPR affiliated, non-exchange-traded closed-end mutual funds (CEFs), which primarily invested in Puerto Rico municipal bonds. These CEFs offered brokers a 3 percent commission at the initial offering, but carried risks such as lack of liquidity and of off-island diversification that Ramirez did not explain to his clients.

The SEC alleged that Ramirez misrepresented to customers that this method of transferring and re-depositing their funds did not violate UBSPR’s policies or the LOC agreements. The SEC also alleged that Ramirez failed to disclose the risks of maintenance calls BUSA could make in the event the value of the customer’s account decreased below specified levels of collateralization, which was what occurred when the Puerto Rican bond market declined in 2013, resulting in $37 million in maintenance calls. Customers were required to increase their collateral, pay down the loan by a certain amount, or risk their collateral being liquidated.

According to the SEC, Ramirez was a top performer at UBSPR withregard to the LOC business. His compensation was based, in part, on his LOC production and the amount of funds his customers drew upon their LOCs. In addition, Ramirez received over $12.9 million in total compensation for his commissions on the CEFs purchased by his customers, over $5.5 million of which was attributable to his customer LOCs.

In August of 2013, with the Puerto Rico bond market collapsing, Ramirez was out on disability leave, becoming unreachable by his team and customers. When customers met with UBSPR representatives to discuss outstanding maintenance calls, they informed those representative that Ramirez solicited them to use their LOC proceeds to reinvest in additional CEF shares, without informing them of the risks associated with doing so. By the end of September 2013, 37 of Ramirez’s customers whose loans were recycled had maintenance calls over $37 million. UBSPR subsequently reviewed Ramirez’s clients’ accounts, immediately finding potential loan recycling. UBSPR then hired National Economic Associates, Inc. to identify the scope of the misuse of LOCs; a review which identified 414 instances where it appeared CEFs were purchased with proceeds of LOCs.

UBSPR terminated Ramirez for his use of LOCs to purchase CEFs on behalf of clients. The SEC filed the present charges against Ramirez and has already settled administrative proceedings with UBSPR and a former branch manager over charges of failing to supervise the broker. The SEC moved for partial summary judgement on the issue of liability and accompanying memorandum of law. Ramirez opposed that motion and filed a motion to strike certain documents, evidence, and testimony presented by the SEC.

Fifth Amendment. Ramirez disputes 35 out of 37 of the SEC’s statements of fact on Fifth Amendment grounds, arguing that he has invoked his Fifth Amendment rights, that no adverse influence may be derived from his doing so, and that the SEC has not produced independent admissible evidence of wrongdoing. In civil cases, adverse inferences are permitted against parties when they refuse to testify in response to probative evidence offered against them. Ramirez failed to offer any evidence to controvert any of the SEC’s statements of facts and, thus, his reliance on the Fifth Amendment has failed to create a genuine issue of material fact.

Motion to Strike. Ramirez was unable to explain why any of the documents he wanted stricken from the record would not be admissible at trial. He was unsuccessful in arguing that prior sworn testimony from other proceedings was unreliable and, therefore, must be excluded. He was also unsuccessful in having newspaper articles filed as exhibits stricken for lack of proper authentication and as inadmissible hearsay. Lastly, Ramirez sought to have an exhibit excluded as an unsworn expert witness report when the court found it to be a summary statistical report permissible under Rule 1006. Ramirez’s motion to strike was denied in whole.

SEC claims. Ramirez’s sole defense is that without the records he moved to strike and with his having invoked the Fifth Amendment, there was no basis for the SEC’s claims because the factual assertions were not supported by the record. As the motion to strike was denied and Ramirez offered no evidence to contradict the SEC’s assertions, there remained only an assessment of the merits of the claims. Ramirez employed a fraudulent scheme to have customers invest in CEFs with money drawn from their LOCs, concealing that the practice was against UBSPR policy and prohibited by the LOC agreements. His misrepresentations and omissions to his clients, including the risks inherent in CEFs, were material. The facts as presented show not mere negligence, but recklessness sufficient to allow the unusual grant of summary judgment on scienter. As such, the SEC’s motion for partial summary judgement was granted. As per the SEC’s request, they have 90 days to resolve the remaining issues of injunctive relief, disgorgement plus prejudgment interest, and civil penalty with Ramirez before filing additional motions as may be needed.

The case is No. 15-cv-2365 (PAD).

Attorneys: Sean Michael O'Neill for the SEC. Guillermo J. Ramos-Luina (Guillermo J. Ramos-Luina, Attorney at Law) for Jose G. Ramirez, Jr.

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