The headline in InvestmentNews read “UBS Hit with $2.5 Million Award in Puerto Rico Case.”  You quickly learn that UBS fears being liable for up to $1 billion in investor claims. Like every story, however, there is a backstory. This one involves the once heavyweight stockbroker Jose Gabriel Ramirez, Jr., also known as “The Whopper.”

Ramirez is the broker behind the most recent $2.5 arbitration loss for UBS. There are literally dozens of other cases pending against UBS, many of them centered on the actions of Ramirez.

Last year the Financial Industry Regulatory Authority (FINRA) revoked Ramirez’ license after he refused to cooperate in a regulatory investigation of his activities. Ramirez allegedly invoked his Fifth Amendment rights under the U.S. Constitution.

How Ramirez survived so many years in the brokerage industry and what may happen to the dozens of pending cases is the focus of this article.

FINRA is the front line of defense against bad stockbrokers. Although the SEC and all 50 states have regulatory and enforcement power over stockbrokers and brokerage firms, FINRA has the largest presence and most comprehensive database.

Under industry regulations, brokers and brokerage firms must disclose certain reportable events. These events include customer complaints, lawsuits, criminal charges, bankruptcies, civil judgments, enforcement actions and actions by other regulatory bodies. Together, these events are known in the industry as “disclosure events.”

Disclosure events are published for every licensed stockbroker and brokerage firm. The SEC maintains a similar database for investment advisors. Called “BrokerCheck,” the data is available to the public online and without cost.

According to FINRA, only 12% of stockbrokers have a disclosure event on their record. We don’t worry about those brokers that have one or two events if the events relate to minor criminal issue like a disorderly conduct arrest that dates back to college years or a customer complaint that might be unfounded. Like the old adage “where there is smoke, there is fire,” however, investors should be very concerned about brokers with multiple disclosures.

What about Jose Ramirez? In an industry where the overwhelming majority professionals never have a single blemish, Ramirez has 65. Based on our experience in the industry, that is a record and that record is likely to haunt UBS in future cases.

The most recent arbitration award involving Ramirez and UBS was brought by a couple living in Puerto Rico, Orlando Gonzalez and Milagros Vila Maldonado. They charged Ramirez with omission of material facts, making unsuitable investment recommendations, breach of fiduciary duty, fraud, breach of contract and violation of the Puerto Rico Uniform Securities Act in the handling of their account.

FINRA arbitration panels typically don’t give reasons for their decisions but did decide to award Mr. Gonzalez and Ms. Maldonado $2,545,000.00.

UBS will pay 100% of that award even though they contested the case. Brokerage firms are typically held responsible for the acts and omissions of their agents and brokers.

This case against Ramirez involved sales of a UBS sponsored Puerto Rico bond fund. Those funds figure into many other pending claims against UBS. The recent default on some Puerto Rico government issues bond will likely accelerate the filing of new claims and increase UBS’ exposure.

Gonzalez and Maldonado claim they were over-concentrated in the UBS bond fund. The fund itself was over-concentrated making it both volatile and risky. According to the couple, however, they instructed Ramirez to only make investments that were safe and stable.

The couple’s claims certainly ring true. Given their age (70’s) and fact that nearly all of their liquid assets were given to Ramirez, stability and safety was a given. Stockbrokers and their employers can be held liable for unsuitable investment recommendations and a concentrated position in a volatile bond fund seems very unsuitable.

Worse, the couple alleged that Ramirez convinced them to leverage their investment and borrow additional monies to invest. That put the couple’s retirement money in grave danger. Unfortunately, the couple lost millions when the Puerto Rico bond market weakened.

As noted above, Ramirez was ultimately expelled from the industry in May of 2014 for failure to cooperate in an investigation. For dozens of investors, his expulsion came too late. (The SEC is still investigating.)

UBS has already had to pay millions to Ramirez’ former customers. In addition to the $2.5 million to Orlando Gonzalez and Milagros Vila Maldonado, there have been other claims payments.

FINRA records reveal that in February of this year UBS paid $6.5 million to another Ramirez customer invested in UBS’ Puerto Rico bond fund. The charges in that case included over-concentration and misrepresentation. 

In May, yet another customer received $2.5 million after claiming Ramirez failed to disclose the risks inherent with UBS bond funds.

2014 saw UBS paying customers $226,000, $350,000 and $682,359. Once again the allegations center on misrepresentations of risks and over-concentration.

All told, FINRA says there have been 12 resolved cases with 50 more still pending.

Ramirez worked for UBS for 17 years and was one of their top performers. Given his status as a high volume broker, the UBS compliance folks should have been more diligent in their review of his activities. In our experience, however, many brokerage firms take the opposite stance and are more hands off.

A review of FINRA records suggests the first formal complaint was made in 2012. Most of the complaints appear to relate to claims of over concentration and misrepresentations. While compliance personnel can’t monitor every telephone call, over concentration claims are easy to spot and prevent.

Simply put, brokers shouldn’t put all their client eggs in one basket. Especially a basket that is quite volatile.

The use of margin accounts and borrowing is even a bigger red flag. Investors in there 70’s shouldn’t be borrowing money to make speculative investments.

FINRA says over 100 arbitration claims have been filed against stockbrokers in Puerto Rico. Many of those claims involve UBS. If recent arbitration decisions continue, brokerage firms exposed to that market have much to fear. The cases are being decided in favor of investors and against brokerage firms.

Investors with claims against stockbrokers for unsuitable investments, misrepresentation, illegal margin borrowing or over concentration generally have 5 years to act. Every situation is different and every situation should be discussed with a competent fraud lawyer.