By David Lyons
While politicians in Washington grapple for ways to solve Puerto Rico’s money troubles, investor arbitration cases are spilling over from the island to Florida, which has become a preferred destination for investor-residents who are fleeing the commonwealth’s financial collapse.
The rising number of arbitration cases being brought by investors in the Puerto Rican bond crisis is testing the ability of the Financial Industry Regulatory Authority (FINRA) to find enough arbitrators to handle the complaints, according to two securities lawyers for the Miami law firm of Genovese, Joblove & Battista.
Coupled with the migration of Puerto Ricans to Florida – many of whom invested in commonwealth agency bonds and bond funds – the situation is now ripe for hearing many of the cases in Boca Raton, where FINRA operates an arbitration venue. A shortage of arbitrators in Puerto Rico has opened the door to hear cases in Florida, according to W. Barry Blum, a law firm partner, and Melanie Cherdack, who is of counsel for the firm. Both are veteran securities lawyers who were
among the first from U.S.-based law firms to represent investor clients in Puerto Rico.
The defendants are brokerages that are accused of misleading investors about the safety of the bonds and the stability of the island’s now-teetering economy. Many claimants are elderly or infirm. Plaintiff lawyers assert brokers improperly persuaded many to sink 90 to 100 percent of their assets into debt sold by Puerto Rican agencies.
Overall, individual arbitration cases are trending in the favor of investors, Blum says. In early 2015, a FINRA arbitration panel in San Juan ruled that UBS AG must buy back one investor’s bond fund portfolio for $1 million. In August, a San Juan couple received a $2.5 million award.
“You see a lot of awards coming out,” Blum says of more recent cases. “A lot of cases are going to hearing. There have been some negotiated settlements, too, just because there are so many [cases] that are out there. We understand over 1,100 cases have been filed.”
If the claimant has property here, or connections here or a business here, attorneys can ask for venue in South Florida, he says. “We’ve tried to be aggressive in that.”
Puerto Rico’s debt securities market collapsed amid a depressed economy, high unemployment and $70 billion in unfunded pension liabilities. FINRA has sanctioned firms over the alleged failure of brokers to fully advise clients about the risks.
Last September, FINRA censured and fined UBS Puerto Rico $18.5 million for supervisory failures regarding the sales of Puerto Rican closed-end funds and related loans. In October, FINRA fined a unit of Spain’s Banco Santander $2 million for its actions in the sale of Puerto Rican municipal bonds, including the failure to supervise employee trading. Santander agreed to pay around $4.3 million in restitution to customers, according to the agency’s website. Neither firm admitted any wrongdoing. ¿
David Lyons is a past editor-in-chief of the Daily Business Review. He is principal of Lyons Strategic Communications of Fort Lauderdale.