Roman et al v. UBS Financial Services, Inc. of Puerto Rico et al

Filing 230

STATEMENT OF REASONS ON THE 229 SEPTEMBER 30, 2016 ORDER ADOPTING THE 220 MARCH 1, 2016 REPORT AND RECOMENDATION ON CLASS CERTIFICATION. Signed by Judge Carmen C. Cerezo on 11/22/2016. (mld)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
CARMELO ROMAN, RICARDO
ROMAN-RIVERA and
SDM HOLDINGS, INC., individually
and on behalf of all others similarly
situated
Plaintiffs
vs.
UBS FINANCIAL SERVICES, INC. OF
PUERTO RICO; UBS TRUST
COMPANY OF PUERTO RICO;
PUERTO RICO INVESTORS
TAX-FREE FUND IV, INC.; PUERTO
RICO FIXED INCOME FUND III, INC.;
PUERTO RICO FIXED INCOME
FUND V, INC.; PUERTO RICO
INVESTORS BOND FUND I, INC.;
PUERTO RICO AAA PORTFOLIO
BOND FUND, INC.; PUERTO
RICO AAA PORTFOLIO BOND
FUND II, INC.; MIGUEL A. FERRER;
CARLOS J. ORTIZ
Defendants

CIVIL 12-1663CCC

STATEMENT OF REASONS ON THE SEPTEMBER 30, 2016
ORDER (D.E. 229) ADOPTING THE MARCH 1, 2016
REPORT AND RECOMMENDATION (D.E. 220)
ON CLASS CERTIFICATION
The named plaintiffs in Civil No. 12-1663(CCC), Carmelo Román
(Román), Ricardo Román-Rivera (Román-Rivera) and SDM Holdings, Inc.
(SDM), individually and on behalf of others similarly situated, filed this action
on August 13, 2012. It was typified as a “Class Action Complaint” and included
10 defendants: two corporate defendants, UBS Services Inc. of Puerto Rico,
a broker dealer and a subsidiary of UBS Financial Services, Inc., (UBSFS) and
UBS Trust Company of Puerto Rico, (UBST); individual defendants, Miguel A.
Ferrer and Carlos J. Ortiz, chairman/CEO and managing director of UBSPR,
and six closed-end management investment companies, identified as

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defendants Puerto Rico Investors Tax-Free Fund IV, Inc., Puerto Rico Fixed
Income Fund III, Inc., Puerto Rico Fixed Income Fund V, Inc., Puerto Rico
Investors Bond Fund I, Inc,, Puerto Rico AAA Portfolio Bond, Inc., and Puerto
Rico Portfolio Bond II, Inc. (collectively “the Funds). Plaintiffs Román and
Román-Rivera alleged at paragraphs 12 and 13 of the Complaint that they
purchased UBS’ Puerto Rico Fixed Income Fund III, Inc., Puerto Rico Investors
Tax-Free Fund IV, Inc., and Puerto Rico Investors Bond Fund I, Inc. at
artificially inflated prices and SDM Holdings, Inc. purchased UBS’ Puerto Rico
Fixed Income Fund V, Puerto Rico Fixed Income Fund III, Puerto Rico AAA
Portfolio Bond Fund, and Puerto Rico AAA Portfolio Bond II also at artificially
inflated prices. The claims were brought under the Securities Exchange Act
of 1934, §§ 10(b) and 20(a) and Rule 10(b)-5. All of the allegations of their
Complaint are tied to a scheme to defraud perpetrated by the corporate and
the individual defendants relating to the marketing and sale of closed-end
funds to plaintiffs and other investors similarly situated.
Upon motion for consolidation (d.e. 28), this earlier Civil Action
No. 12-1663 was consolidated by Judge Besosa with Civil No. 12-1849(CCC),
brought by Onnasis Corporation (Onnasis) and Julio Tormes-Rodríguez
(Tormes) which named seven additional closed-end funds as defendants.
This motion for consolidation was decided by an Order (d.e. 34) issued on
October 16, 2012 by Judge Besosa to whom the earlier case had been
assigned.

The consolidated action would be referred to as the “In

Re UBS Financial Services, Inc. of Puerto Rico Securities Litigation.” A master
docket and master file were ordered to be created by the Clerk of the
consolidated actions

under the number of the older

case,

Civil

No. 12-1663(FAB). Judge Besosa entered an Order of Recusal (d.e. 42) on

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3

October 22, 2012 (d.e. 42). The consolidated cases were then transferred to
the undersigned’s docket under master file and master docket 12-1663(CCC).
On November 10, 2014, the plaintiffs in the consolidated action originally
filed as Civil No. 12-1848(CCC), Onnasis and Tormes, filed a motion for
voluntary dismissal, without prejudice (d.e. 116). Judgment was entered on
November 26, 2014 ordering its dismissal, without prejudice. The Court then
entered the following Order (d.e. 138) on February 3, 2015 in Civil
No. 12-1663(CCC), the sole remaining action, filed by Román, Román-Rivera
and SDM:
Since this action is no longer consolidated with 12-1849(CCC) as
the latter was voluntarily dismissed (see docket entries 116
and 122), the following filings are ORDERED STRICKEN as
unnecessary and to avoid confusion: Consolidated Amended
Complaint (docket entry 45) and Second Consolidated
Amended Complaint (docket entry 60). Plaintiffs’ claims are
governed by the original complaint filed on August 13, 2012
(docket entry 1). Given that the answers on file addressed the
consolidated complaints (as to consolidation of this action
with 12-1849(CCC)), all defendants in this case are ORDERED to
file their answers to the complaint filed on August 13, 2012 (docket
entry 1), which is the one that now governs this case, by no later
than FEBRUARY 20, 2015.
(Emphasis ours).
Román, Román-Rivera and SDM, who filed the earlier action, sought
reconsideration of this Order which request was denied (d.e. 142). They now
argue that U.S. Magistrate-Judge McGiverin used the wrong complaint on the
class certification issue and that he had to use the stricken Second
Consolidated Amended Complaint (SCAC) instead of the original complaint
that governed plaintiffs’ claims. Plaintiffs are in effect imputing error to the
Court for having denied their motion for reconsideration before the case
reached the U.S. Magistrate-Judge by way of this referral. The Court has
reexamined its denial of the Motion for Reconsideration. It finds no justification

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4

to modify its February 3, 2015 denial. After the voluntary dismissal by plaintiffs
Onnasis and Tormes of their Civil No. 12-1849(CCC), there was no reason to
continue to manage Civil No. 12-1663 as a consolidated action.
In any event, the final disposition of the issues referred to the
U.S. Magistrate-Judge on the class certification request remains unaltered
whether the analysis is made utilizing the original complaint filed by plaintiffs
in Civil No. 12-1663(CCC) or the Second Consolidated Amended Complaint
later filed in the two consolidated actions. The final outcome of the analysis,
whether undertaken with the original or the second consolidated amended
complaint as reference, is the same.

The undersigned shares

U.S. Magistrate-Judge McGiverin’s views that “[r]egardless of whether the
Court permits the amendment, individual issues of reliance predominate over
common ones, and so the Court should deny class certification.” R&R (docket
entry 220), at p. 6. What follows is a comparison of the essential factual
allegations of both the original and the SCAC.
Throughout their original class action complaint, the one that governs
proceedings pursuant to the February 3, 2015 Order, and also in the Second
Consolidated Amended Complaint, submitted by way of footnote number 3 in
their class certification motion (d.e. 168-1, p. 7, n. 3), plaintiffs have repeated
a particular pattern of conduct incurred by UBSPR and UBSFS to defraud them
as investors by manipulative tactics. In addition to the acts listed above, taken
from paragraphs 3, 4 and 5 which mirror each other in both complaints, the
following affirmative fraudulent actions are found in both pleadings:
(1) inventory reduction: aware that investor demand was significantly declining
and/or insufficient to support the volume of inventory (allegation 5 of original
complaint and 6 of SCAC) to avoid or offset potential losses, UBSPR’s parent

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company in the spring of 2009 ordered it to substantially reduce its inventory
of CEF shares by launching a plan known as “Objective Soft Landing” whereby
UBSPR routinely offered and sold its CEF shares at prices that undercut
pending customer sell orders (allegation 6 of the original complaint and 7 of
the SCAC) resulting in the sale by UBSPR, between March and
September 2009, of its inventory to investors at the expense of its supposed
efforts to sell its clients’ holdings (paragraph 6 of the original complaint and 7
of the SCAC); (2) market manipulation: as part of their scheme, defendants
concealed how they were setting secondary market prices and artificially
manipulated demand to create the appearance of liquidity of the market while
simultaneously withdrawing market support, selling to the detriment of their
clients who were also attempting to sell. Allegation 6 of the Complaint and 8
of the SCAC.
The fraud, as concretely charged in the allegations of both complaints,
developed in the manner described above, whether as set forth in the original
or in the amended complaint. The fraud consisted in manipulating the
inventory, manipulating demand, controlling the secondary market, competing
against their own clients, and deliberately reducing CEF inventory while touting
the CEFs as safe.

These manipulations, misrepresentations and

misinformation were aimed at creating the false illusion of a safe market, all of
which eventually collapsed. The fact that plaintiffs were not made privy to
the misrepresentation and falsity of defendants’ actions, while the
scheme was ongoing, begs the question for the whole fraudulent scheme
was built on a false appearance. This was not the type of situation where
defendants failed to disclose information or material facts which they had a
duty to disclose to their clients but, rather, it constituted an intricate scheme by

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a brokerage firm which preyed on investors by providing false information for
an extended period purportedly leading them to make investments with the
eventual outcome of their economic downfall. This conclusion is based on the
allegations of named plaintiffs themselves in both the original and amended
complaints and their exhibits, and on the report of their own expert Edward S.
O’Neal. Plaintiffs cannot have it both ways. They cannot base their theory of
liability on the affirmative fraudulent manipulations and actions perpetrated by
defendants and simultaneously characterize them as simple “omissions.”
It is also noted that the parties were granted a period to conduct class
certification discovery by June 10, 2015 (d.e. 159), before referral of the class
certification motion to the U.S. Magistrate-Judge. The Magistrate-Judge made
findings of fact “based on the allegations in the complaint and the evidence
obtained during discovery.” R&R, at p. 3. Discovery included, among other
things, the depositions of the parties’ experts Edward S. O’Neal and Doel
García utilized by the Magistrate-Judge in his analysis and conclusions
(d.e. 185-5 and d.e. 185-7) on discussions between individual investors and
financial advisors (FAs) on the investors’ situations, needs and objectives.
See also references to deposition “[t]estimony from plaintiffs.”

R&R,

pp. 3-4, 15. The Court has considered the report of plaintiffs’ expert and there
is nothing in that report nor do plaintiffs point to any specific data or opinion by
their expert that alters the findings of fact and conclusions of law reached by
the U.S. Magistrate-Judge in his Report and Recommendation.
The R&R sets forth the following basic findings of fact relevant to
plaintiffs’ request for class certification under Fed. R. Civ. P. 23(b)(3),
highlighting that Rule 23(b)(3) has two additional prerequisites not included in
Fed. R. Civ. P. 23(a): “that [1] the questions of law or fact common to class

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members predominate over any questions affecting only individual members,
and [2] that a class action is superior to other available methods for fairly and
efficiently adjudicating the controversy.” R&R, at p. 6.
(1)

The Funds were not traded on a public exchange and did not
trade on an efficient market. See Compl. ¶ 1; Docket
Nos. 73 at 22 n. 8; 168-1 at 11; 185-7 at 58.

(2)

UBS-PR sold the Funds through approximately 145 Financial
Advisors (“FAs”), who functioned as brokers for 23 different
Funds. Docket Nos. 185-5 at 191, 272–73.

(3)

The FAs’ discussions with customers were individualized to
meet the specific needs of each customer, and those
discussions were interactive and varied based on each
customer’s situation, needs, objectives, and questions
asked. Docket No. 185-5 at 272–73.

(4)

This being the case, plaintiffs acknowledged that “most, if not
all, of investors’ information regarding the [Funds] came from
their FAs.” Docket No. 168-1 at 13.

(5)

Plaintiffs’ expert, Dr. Edward S. O’Neal, testified that whether
“an individual investor decided to purchase or sell a [F]und
could depend” on what the FA told the investor. Docket
No. 185-7 at 206.

(6)

Testimony from the plaintiffs representing the putative class
confirmed that the information each of them had available
when purchasing the Funds varied.

R&R, p. 3.
These findings are followed by the Magistrate-Judge’s legal analysis.
U.S. Magistrate-Judge McGiverin’s analysis is essentially based on the reliance
element of a securities fraud action brought under section 10(b) of the
Securities Exchange Act and Rule 10b-5 promulgated thereunder.

The

element of reliance is widely discussed in Erica P. John Fund, Inc. v.
Halliburton Co., 131 S.Ct. 2179, 2185 (2011) (Halliburton I) and Halliburton v.
Erica P. John Fund, Inc., 134 S.Ct. 2398 (2014) (Halliburton II). Although
Halliburton I and II are securities fraud class actions seeking to recover from
defendants on a “fraud-on-the-market theory”, not plaintiffs’ theory in this case,

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both cases establish that whether common questions of law or fact
predominate in a securities fraud action turns on the element of reliance.
See Halliburton II, p. 2416. The fraud-on-the-market presumption of reliance
was discarded in the analysis of our case since the U.S. Magistrate-Judge
observed that: “Although the complaint alleged the fraud-on-the-market
doctrine applied here (referring to In Re Polimedica Corp.), Compl,
paragraph 92, plaintiffs’ expert conceded the market for the Funds was not
efficient and plaintiffs now concede that doctrine does not apply in this case.
Docket Nos. 168-1, at 11; 185-7 at 58.” R&R, p. 8. The Magistrate-Judge also
found inapplicable the “Affiliated Ute presumption of reliance” which arises in
circumstances primarily involving a failure to disclose. Affiliated Ute Citizens
of the State of Utah et. al. v. United States et. al., 406 U.S. 128, 92 S.Ct.
1456 (1972). Affiliated Ute held that the Bank and its two employees who
failed to disclose to plaintiffs, holders of Ute Distribution Company stocks,
material facts that reasonably could have been expected to influence the
plaintiffs’ decisions to sell, such as that their shares were selling for a higher
price, justified a presumption of reliance. The defendants in Affiliated Ute had
an obligation to disclose material facts that plaintiffs, as investors, could have
considered important in their decision to sell their stock. I McLaughin on Class
Actions, pp. 1304-05, explains the reach and application of the Affiliated Ute
presumption of reliance, stating:
The Supreme Court thus mitigated the difficulty of proving reliance
on an alleged non-disclosure in the face of a duty to disclose by
holding that for a Rule 10b-5 claim “involving primarily a failure to
disclose,” rather than misrepresentations, the reliance element
may be satisfied with allegations “that the facts withheld [are]
material.”
Most courts enforce clear-cut limitations on the Affiliated Ute
presumption of reliance– it applies only where there is no
affirmative statement alleged to have been misleading. Of course,

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“[a]ll misrepresentations are also non-disclosures, at least to the
extent that there is a failure to disclose which facts in the
representation are not true.” Courts have consistently held,
however, that the Affiliated Ute presumption of reliance does not
arise where securities fraud plaintiffs challenge an affirmative
statement, even if the affirmative statements are alleged to be
misleading because additional material information was omitted.
This is precisely what the U.S. Magistrate-Judge concluded in our case.
At page 13 of the R&R, U.S. Magistrate-Judge McGiverin states the reasons
underlying his primary determination that “plaintiffs cannot rely on the Affiliated
Ute presumption of reliance:”
Although plaintiffs claim they are entitled to the Affiliated Ute
presumption because the defendants concealed the manipulative
conduct, courts have held the presumption inapplicable in such
circumstances because any “fraudulent scheme requires some
degree of concealment, both of the truth and of the scheme itself.”
Joseph, 223 F.3d at 1163; accord Desai, 573 F.3d at 941. And
though plaintiffs contend their complaint primarily alleged the
nondisclosure of the underlying assets of the Funds, that
contention is belied by the well-pleaded allegations in the
complaint. Indeed, the complaint makes only one cursory reference
to the Funds’ underlying assets––“municipal bonds”––and does not
refer to the risky pension obligation bonds. See Compl. ¶ 2. After
reviewing the complaint, I find the allegations therein primarily
allege affirmative misrepresentations and market manipulation.
Accordingly, plaintiffs cannot rely on the Affiliated Ute presumption
of reliance. See, e.g., Desai, 573 F.3d at 941 (“manipulative
conduct has always been distinct from actionable omissions”).
The corollary to this fundamental determination is immediately thereafter
explained by the U.S. Magistrate-Judge in the following observation: “Because
the Affiliated Ute presumption and the fraud-on-the-market presumptions do
not apply in this case, individual issues of reliance will overwhelm the common
issues [and t]he court should deny class certification.” R&R, at pp. 13-14. The
individualized proof of reliance as to each putative class member would include
issues touched upon by the U.S. Magistrate-Judge, such as the individual
investors’ knowledge of and experience in the market, needs and advise
he/she received relevant to an investment. Making reference to the deposition

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testimonies of Doel García (d.e. 185-5, pp. 191, 272-73) and Edward S. O’Neal
(d.e. 185-7, p. 206), he made the following factual determinations:1 (1) the
145 financial advisors (FAs) functioned as brokers in the sale of the Funds,
(2) the discussions that FAs had with customers were interactive and varied
based on each customer’s situations, needs, objectives and questions asked,
(3) plaintiffs acknowledged that “most, if not all of investors’ information
regarding the Funds, came from their FAs, (4) plaintiffs’ expert testified that
whether “an individual investor decided to purchase or sell a Fund could
depend” on what the FAs told the investors, (5) the evidence indicates that
the FAs were not required to make uniform representations to investors, and
(6) the information provided depended on the investor’s portfolio and the
dialogue between the FA and the investor, as confirmed by the deposition
testimony of the named class plaintiffs.
The following cases cited by the Magistrate-Judge, all of which are
securities fraud actions, fully support his primary determination on the
inapplicability to this case of the Affiliated Ute presumption of reliance.
Any fraudulent scheme requires some degree of concealment, both
of the truth and of the scheme itself. We cannot allow the mere
fact of this concealment to transform the alleged malfeasance into
an omission rather than an affirmative act. To do otherwise would
permit the Affiliated Ute presumption to swallow the reliance
requirement almost completely. Moreover, it would fail to serve the
Affiliated Ute presumption’s purpose since this is not a case where
reliance would be difficult to prove because it was based on a
negative. We therefore hold the Affiliated Ute presumption of
reliance inapplicable here. See Abell v. Potomac Ins. Co.,
858 F.2d 1104, 1119 (5th Cir. 1988) (applying the presumption in
non-disclosure cases, but not in falsehood or distortion cases),
judgment vacated on other grounds, 492 U.S. 914, 109 S.Ct. 3236,
106 L.Ed. 2d 584 (1989).
Joseph v. Wiles, 223 F3d 1155, 1163 (10th Cir. 2000).
1

Findings 1, 2, 3 and 4 are set forth at page 3 of the Report and Recommendation.
Findings 5 and 6 are at page 15 of the Report and Recommendation.

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Omissions are generally actionable under Rule 10b-5(b). As we
explained above, they stem from the failure to disclose accurate
information relating to the value of a security where one has a duty
to disclose it.
...
Manipulative conduct, by contrast, is actionable under
Rule 10b-5(a) or (c) and includes activities designed to affect the
price of a security artificially by simulating market activity that does
not reflect genuine investor demand. See Santa Fe, 430 U.S.
at 476-77, 97 S.Ct. 1292; Ernst and Ernst v. Hochfelder,
425 U.S. 185, 199, 96 S.Ct. 1375, 47 L.Ed. 2d 668 (1976)
(“[Manipulation] connotes intentional or willful conduct designed to
deceive or defraud investors by controlling or artificially affecting
the price of securities.”) In order to succeed, manipulative schemes
must usually remain undisclosed to the general public. See Santa
Fe, 430 U.S. at 477, 97 S.Ct. 1292. If such nondisclosure of a
defendant’s fraud was an actionable omission, then every
manipulative conduct case would become an omissions case. If
that were so, then all of the Supreme Court’s discussion of what
constitutes manipulative activity would be redundant. We decline
to read the Supreme Court’s case law on manipulative conduct as
little more than an entertaining, but completely superfluous,
intellectual exercise. See Stoneridge, 128 S.Ct. at 769, (listing the
three types of section 10(b) actions); Cent. Bank, 511 U.S. at 177,
114 S.Ct. 1439 (same).
Desai v. Deutsche Bank Securities LTD, 573 F3d 931, 940-41 (9th Cir. 2009)
The above constitutes the statement of reasons in support of the Court’s
prior

September

30,

2016

Order

(d.e.

229)

adopting

the

U.S. Magistrate-Judge’s Report and Recommendation (d.e. 220).
SO ORDERED.
At San Juan, Puerto Rico, on November 22, 2016.

S/CARMEN CONSUELO CEREZO
United States District Judge