UBS Stuffed $2.5 Billion of ERS and COFINA Bonds it Underwrote in Its Puerto Rican Funds in 2007 and 2008

We've written extensively about the UBS Puerto Rican Municipal Bond Funds. You can find our earlier blog posts about Puerto Rican Funds on our blog. In a January 2014 blog post titled "Diversification and UBS Puerto Rico Bond Fund Losses", we pointed out that the losses suffered by investors in the UBS PR Funds were caused by the portfolios' high leverage and concentration in Employee Retirement System and Sales Tax Authority (COFINA) bonds. In a December 2013 post titled "Merry Christmas from UBS Asset Managers of Puerto Rico" we wrote of the conflicts of interest first identified by David Evans of Bloomberg (David Evans, UBS in Puerto Rico Pension Gets Fee Bonanza Seen as Conflicted, February 27, 2009, Bloomberg) which led UBS to stuff the Retirement System Bonds into UBS's Funds.

In a series of blog posts this week and next week we'll document UBS's conversion of its Funds' portfolios in 2008. As we'll explain Wednesday, UBS underwrote unmarketable Employee Retirement System bonds and bought these conflicted bonds into the UBS Funds in 2008. On Friday, we'll show the same conflicts led UBS to underwrite unmarketable 2008 COFINA bonds and then stuff them into the UBS Funds. Next week we'll further develop the harm to investors UBS caused by stuffing the conflicted ERS and COFINA bonds into its Funds.

Figure 1 and Figure 2 illustrate how UBS dramatically changed the UBS Puerto Rico Funds in late 2007 and early 2008 using the Tax Free Puerto Rico Fund II and Puerto Rico Fixed Income Fund II as examples. UBS sold off $350 million other bonds and bought $530 million of ERS and COFINA bonds it underwrote in these two funds alone.

Figure 1 summarizes the market value of Tax Free Puerto Rico Fund II holdings by issuer on June 30, 2007 (from 2^nd Quarter 2007 Quarterly Review), November 30, 2007 (from the Annual Report) and on November 30, 2008 (from the Annual Report).




The Tax Free Puerto Rico Fund II held no COFINA bonds on June 30, 2007. UBS participated in COFINA underwritings on July 13, 2007 (COFINA Series 2007A Offering Circular) and on July 18, 2007 (COFINA Series 2007B Offering Circular). We don't currently have the 3^rd Quarter 2007 Quarterly Review but the November 30, 2007 Annual Report shows the Tax Free Puerto Rico Fund II Fund then owned $93.4 million of COFINA bonds. UBS was the sole underwriter of the (COFINA Series 2008A Offering Circular.)

The Tax Free Puerto Rico Fund II held no ERS bonds on November 30, 2007. UBS participated in underwriting three series of ERS bonds in 2008. The Series 2008A Offering Circular, the Series 2008B Offering Circular and the Series 2008C Offering Circular are alla available to view on our website.

Between June 30, 2007 and November 30, 2008 UBS caused the Tax Free Puerto Rico Fund II to pay $188,943,300 for the ERS and COFINA bonds and these two issuers' bonds went from 0% of the Tax Free Puerto Rico Fund II portfolio to 50% of the gross assets and 98% of the net assets of the Fund. UBS sold roughly $190 million of other issuers' bonds out of the Tax Free Puerto Rico Fund II to make room for the ERS and COFINA bonds it was underwriting.

Figure 2 presents holdings by issuer for the Puerto Rico Fixed Income Fund II on June 30, 2007 (from Quarterly Review), November 30, 2007 (from the Annual Report) and on November 30, 2008 (from the Annual Report).




The Puerto Rico Fixed Income Fund II held no COFINA or ERS bonds on June 30, 2007. Between June 30, 2007 and November 30, 2008 UBS caused the Puerto Rico Fixed Income Fund II to pay $340,357,374 for the ERS and COFINA bonds and these two issuers' bonds the ERS and COFINA bonds went from 0% of the Puerto Rico Fixed Income Fund II portfolio to 44% of the gross assets and 88% of the net assets of the Fund. UBS sold roughly $335 million of other issuers' bonds out of the Puerto Rico Fixed Income Fund II to make room for the ERS and COFINA bonds it was underwriting.