Thanks to OppenheimerFunds, Puerto Rico Municipal Bond Funds Continue to Cause Serious Investor Losses

            Recently, this blog reported on investigations into UBS’ sales practices concerning $10 billion worth of bond funds concentrated on Puerto Rico municipal debt.  Puerto Rico has been hit hard by serious economic problems, including slow economic growth as well as the unsustainable growth in its public pension obligations.  Any bond fund with sizeable holdings in the Puerto Rico municipal bonds can expect significant losses, as the S&O Municipal Bond Puerto Rico Index was down 21% year-to-date through October 10, 2013.

           OppenheimerFunds are the most recent example of municipal bond funds suffering large declines in NAV because of large bets on the same Puerto Rico municipal bonds that have afflicted UBS investors.  As reported by InvestmentNews, the Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX) held 33% of its assets in Puerto Rican debt as of the end of August 2013, which resulted in a decline in the fund’s value of 15% this year, nearly three times the average single-state municipal bond fund decline over the same time period. 

           While the Oppenheimer Virginia Fund had the largest holdings of Puerto Rico debt, several other Oppenheimer single-state municipal bond funds, including Oppenheimer Rochester North Carolina, Arizona, Massachusetts and Maryland funds, all hold more than one quarter of their assets in Puerto Rico bonds.  As a result, each of these bond funds is down more than 11%.

A Morningstar analyst quoted by InvestmentNews described Puerto Rico as “a risky credit. . .Taking on a lot of Puerto Rican bonds essentially turns a fund into a high-yield state municipal bond fund.  Investors need to be aware of that.” 

The problems with the various OppenheimerFunds harken back to 2008, when Oppenheimer Core Bond Fund plummeted 35% due to its concentration in mortgage-backed debt and which led to charges filed by the Securities and Exchange Commission. 

Block & Landsman Investigating Claims Regarding UBS Puerto Rico Municipal Bond Funds

            The law firm of Block & Landsman is investigating claims on behalf of investors in closed-end Puerto Rico municipal bond funds that were created by the brokerage giant UBS Financial Services.

            The closed-end funds, which are heavily invested in the Puerto Rico municipal debt, have seen rapid declines in value over the past several weeks.  The losses were compounded for unsuspecting investors who purchased the municipal bonds in margin accounts and who had highly concentrated positions in these bond funds.  As a result, these investors had to meet large margin calls as the value of the bonds decreased.

            UBS came under scrutiny of the SEC last year for the sale of these bond funds.  On May 1, 2012, the SEC accepted an Offer of Settlement from the firm that resulted in a cease-and-desist order and remedial sanctions.  According to the SEC Order, UBS personnel made misrepresentations and omissions of material facts to retail customers regarding the market liquidity and pricing of the closed-end funds.  For example, while investor demand was significantly declining relative to supply, UBS did not disclose that was purchasing millions of dollars worth of the shares for its own inventory while promoting the appearance of a liquid market with stable prices.  Subsequently, the firm determined that its growing inventory of the funds presented a financial risk, and it executed a plan to offer the funds for sale at prices that undercut pending customer sell orders. 

            Recent articles report the struggles affecting the bonds, including a weak Puerto Rican economy, rising interest rates and unsustainable debt including huge pension obligations.  The ongoing declines in the funds means that UBS customers who were encouraged to use margin to purchase concentrated amounts of the highly leveraged closed-end funds should consider pursuing arbitration claims before the Financial Industry Regulatory Authority to recoup their losses.

            Investigations are ongoing in several of the bonds, including:  Tax-Free Puerto Rico Fund, Tax-Free Puerto Rico Fund II, Tax-Free Puerto Rico Target Maturity Fund, Puerto Rico AAA Portfolio Target Maturity Fund, Inc., Puerto Rico AAA Portfolio Bond Fund, Puerto Rico AAA Portfolio Bond Fund II, Puerto Rico GNMA & U.S. Government Target Maturity Fund, Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Puerto Rico Fixed Income Fund, Puerto Rico Fixed Income Fund II, Puerto Rico Fixed Income Fund III, Puerto Rico Fixed Income Fund IV, Puerto Rico Fixed Income Fund V, Puerto Rico Fixed Income Fund VI, Puerto Rico Short Term Investment Fund, Multi-Select Securities Puerto Rico Fund, UBS IRA Select Growth & Income Puerto Rico Fund, Puerto Rico Investors Family of Funds, Puerto Rico Investors Tax-Free Fund, Puerto Rico Investors Tax-Free Fund II, Puerto Rico Investors Tax-Free Fund III, Puerto Rico Investors Tax-Free Fund IV, Puerto Rico Investors Tax-Free Fund V, Puerto Rico Investors Tax-Free Fund VI, Puerto Rico Tax-Free Target Maturity Fund, Puerto Rico Tax-Free Target Maturity Fund II, Inc., Puerto Rico Investors Bond Fund I.

            Investors who have suffered losses due to investments in Puerto Rico municipal bond funds should contact the securities attorneys at Block & Landsman for a confidential and free consultation.