UBS Financial Services Incorporated of Puerto Rico et al v. XL Specialty Insurance Company et al

Filing 172

OPINION AND ORDER re 89 Motion for Summary Judgment; re 94 Motion for Summary Judgment; and re 98 Motion for Summary Judgment. The defendants' motions for summary judgment are GRANTED (Docket Nos. 89 and 94) and plaintiffs' action is DISMISSED WITH PREJUDICE. Judgment shall be entered accordingly. Plaintiffs' motion for summary judgment (Docket No. 98) and all other pending motions are moot. Signed by Judge Francisco A. Besosa on 02/01/2018. (brc)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO

UBS
FINANCIAL
SERVICES
INCORPORATED OF PUERTO RICO
and UBS TRUST COMPANY OF
PUERTO RICO,
Plaintiffs,
Civil No. 15-3099 (FAB)

v.
XL SPECIALTY INSURANCE
COMPANY, AXIS REINSURANCE
COMPANY, and HARTFORD FIRE
INSURANCE COMPANY,
Defendants.

OPINION AND ORDER
BESOSA, District Judge.
Before

the

Court

are

defendants

XL

Specialty

Insurance

Company (“XL”), AXIS Reinsurance Company (“AXIS”), and Hartford
Fire Insurance Company (“Hartford”) (collectively, “insurers” or
“defendants”)’s and plaintiffs UBS Financial Services Incorporated
of Puerto Rico (“UBS PR”) and UBS Trust Company of Puerto Rico
(“UBS

Trust”)

(collectively,

“UBS”

or

“plaintiffs”)’s

cross-

motions for summary judgment filed pursuant to Federal Rule of
Civil Procedure 56 (“Rule 56”).

(Docket Nos. 89, 94, 98.)

For

the reasons set forth below, the Court GRANTS defendants’ motions
(Docket Nos. 89 and 94.)
No. 98) is rendered moot.

Accordingly, plaintiffs’ motion (Docket

Civil No. 15-3099 (FAB)
I.

2

Factual Background
In this breach of contract case, the parties dispute whether

certain claims are covered by their insurance policies.

The Court

provides facts underlying the various matters in controversy to
ascertain the scope of the policies.

The following facts are

deemed admitted by both parties pursuant to Local Rule 56.

Loc.

Rule 56(e); P.R. Am. Ins. Co. v. Rivera-Vazquez, 603 F.3d 125,
130-31 (1st Cir. 2010). 1
A.

UBS and the Funds
UBS Trust is a trust company organized pursuant to the

laws of the Commonwealth of Puerto Rico.

(Docket No. 37 at p. 2.)

UBS Asset Managers, a division of UBS Trust, manages fourteen
closed-end funds and co-manages nine additional closed-end funds
with Banco Popular (collectively, “funds”).

(Docket No. 89, Ex. 1

at p. 19.)

UBS Asset Managers is also an investment adviser for

the funds.

Id. at pp. 28-29.

1 Local Rule 56 governs the factual assertions made by both parties in the
context of summary judgment. Loc. Rule 56; Hernandez v. Philip Morris USA,
Inc., 486 F.3d 1, 7 (1st Cir. 2007). The Rule “relieve[s] the district court
of any responsibility to ferret through the record to discern whether any
material fact is genuinely in dispute.” CMI Capital Market Inv. v. GonzalezToro, 520 F.3d 58, 62 (1st Cir. 2008). The movant must submit factual assertions
in “a separate, short, and concise statement of material facts, set forth in
numbered paragraphs.” Loc. Rule 56(b). The nonmovant must “admit, deny, or
qualify the facts supporting the motion for summary judgment by reference to
each numbered paragraph of the moving party’s statement of facts.” Loc. Rule
56(c). The movant may reply and admit, deny, or qualify the opponent’s newlystated facts in a separate statement and by reference to each numbered
paragraph.
Loc. Rule 56(d).
Facts which are properly supported “shall be
deemed admitted unless properly controverted.” Loc. Rule 56(e); P.R. Am. Ins.
Co., 603 F.3d 125, 130 (1st Cir. 2010).

Civil No. 15-3099 (FAB)
UBS

PR

is

3

a

subsidiary

Incorporated (“UBS Parent”).

of

UBS

Financial

Services

(Docket No. 89, Ex. 3 at p. 18.)

UBS PR is a licensed broker-dealer registered with the United
States Securities and Exchange Commission (“SEC”) and was an
underwriter for the funds, as well as for bonds issued by various
Puerto Rico government entities (“PR bonds”).
Ex. 1 at pp. 19-21, 25.)
brokerage customers.
B.

(Docket No. 89,

UBS PR sold shares of the funds to its

Id. at p. 20.

The Prior Matters
From 2009 through 2012, UBS was the subject of several

civil

and

regulatory

proceedings

concerning

the

funds

(collectively, “prior matters”).
1.

2009 SEC Investigation and 2012 SEC Order
In August 2009, the SEC ordered an investigation of

UBS

PR

to

determine

whether

UBS

PR

violated

securities laws (“2009 SEC investigation”).
Ex. 5.)
an

States

(Docket No. 89,

On May 1, 2012, UBS PR settled with the SEC pursuant to

Order

Instituting

Administrative

Proceedings (“2012 SEC order”).
2012

United

SEC

associated

order
with

stated

that

UBS

the

funds

to

consistently-priced

securities.”

and

Cease-and-Desist

(Docket No. 89, Ex. 13.)
PR

misrepresented

customers
Id.

at

p.

the

“seeking
4.

The
risks

stable,

While

“any

secondary market sales [that] investors wanted to make depended

Civil No. 15-3099 (FAB)

4

largely on UBS PR’s ability to solicit additional customers or
willingness to purchase shares into its inventory,” UBS PR failed
to inform investors that it “controlled the secondary market.”
Id. at p. 2.
The 2012 SEC order asserted that UBS PR
knew investor demand [in the funds] was
significantly declining relative to supply.
For much of 2008, UBS PR purchased millions of
dollars of [fund] shares into its own
inventory while promoting the appearance of a
liquid market with stable prices, without
disclosing UBS PR’s actions were propping up
prices and liquidity.
Id.

at

p.

2.

In

sum,

the

order

maintained

that

UBS

PR

misrepresented market forces by unilaterally setting prices at
artificial levels and purchasing fund shares to disguise the lack
of demand.

Id. at pp. 4-6.
The 2012 SEC order also stated that in the spring

of 2009, UBS Parent “directed UBS PR to substantially reduce its
inventory of [fund] shares.”

Id. at p. 2.

“To accomplish the

reduction, UBS PR . . . executed a plan . . . in which UBS PR
routinely

offered

and

sold

its

[fund]

undercut pending customer sell orders.”

shares
Id.

at

prices

that

“During this period,

numerous UBS PR customers were also attempting to sell their
holdings

but

UBS

PR’s

actions

effectively

customers from selling their [fund] shares.”

prevented
Id.

certain

Moreover,

Civil No. 15-3099 (FAB)

5

despite its own concerns about the funds, UBS PR persisted to
“generate customer demand” for fund shares through promotions.
Id. at p. 5.

Pursuant to the 2012 SEC order, UBS PR agreed to pay

a total of $26,609,739.90 to settle the investigation.

(Docket

No. 89, Ex. 13 at p. 12.) 2
2.

Union Litigation
In February 2010, investors commenced an action

against UBS in this Court, filing derivatively on behalf of four
funds and directly as a putative class of fund investors. Verified
Shareholder Derivative Action and Class Action Complaint, Union de
Empleados de Muelles de Puerto Rico PRSSA Welfare Plan v. UBS Fin.
Servs. Inc. of Puerto Rico, No. 10-1141 (ADC) (D.P.R. March 31,
2011) (Docket No. 1.)

The investors alleged that UBS “manipulated

the Funds and the bond market to the detriment of the Funds and
its

unsuspecting

investors”

by

holding

conflicting

roles

“as

investment advisor, bond underwriter, and mutual fund manager” in
the transactions.

Id. at p. 3.

The investors claimed that UBS

made “material misstatements and fraudulent omissions concerning
the nature, purpose, and suitability of the purchases of the [PR]
Bonds for the Funds,” saturating the funds with “[o]ver $750
million in purchases of the near-junk [PR] Bonds.”

2

Id. at pp. 4-

Specifically, UBS PR agreed to pay disgorgement of $11,500,000, prejudgment
interest of $1,109,739.94, and a civil money penalty of $14,000,000. (Docket
No. 89, Ex. 13 at p. 12.)

Civil No. 15-3099 (FAB)
5.

Additionally,

the

6
investors

specified

that

UBS

withheld

material facts, including “that demand for the [PR] Bonds was
falsely created by UBS Trust’s massive purchases of the [PR] Bonds
for the Funds” and “that the stated asset values published for the
Funds were overstated, in large part due to the overvaluation of
the [PR] Bonds.”

Id. at p. 22.

According to the investors, UBS “used the Funds as
a

dumping

ground

for

the

toxic

[PR]

bonds”

and

“exacerbated

[losses] for the Funds’ investors as a result of the illiquidity
of the market for the Funds, which is in large part controlled by
[UBS], and by the fact that the Funds are highly leveraged.”
at pp. 5-6, 21.

Id.

The investors claimed that UBS “controlled the

buyers and the sellers (and collected fees from both of them)” and
“deceiv[ed] investors as to how other market participants have
valued a security, thereby sending false signals to the market.”
Id. at pp. 23-24.
C.

The Policies
In 2011, UBS approached the defendants through a broker

after having a coverage dispute with its insurance provider.

Civil No. 15-3099 (FAB)

7

(Docket No. 89, Ex. 22 at p. 34.) 3

XL was generally aware that

UBS was looking for a new provider due to the coverage dispute.
Id. at p. 34.

XL was also aware of the 2009 SEC investigation and

the Union action.

Id. at pp. 85-86, 165-66.

XL responded to UBS

with a price quote conditioned on UBS’s acceptance of an attached
specific litigation exclusion.

(Docket No. 89, Ex. 28.)

The

exclusion was expansive, precluding coverage for
any Claim in connection with any proceeding
set forth below, or in connection with any
Claim based on, arising out of, directly or
indirectly resulting from, in consequence of,
or in any way involving any such proceeding or
any fact, circumstance or situation underlying
or alleged therein:
. . . .
Union de Empleados de Muelles de Puerto
Rico PRSSA Welfare Plan, et al. v. UBS
Financial Services Incorporated of Puerto
Rico, et al., Case No. 10-1141, U.S. District
Court, District of Puerto Rico.
The investigation by the Securities and
Exchange Commission captioned “in the Matter
of UBS (Certain Puerto Rico Bonds and Funds)”
SEC File No F-3491.

3

Before purchasing liability insurance from the defendants, UBS was insured by
ACE Insurance Company of Puerto Rico (“ACE”). (Docket No. 89, Ex. 21 at p. 1.)
ACE provided UBS with a management liability insurance policy to insure claims
against the directors and officers of the funds. Id. In January 2012, UBS
resolved a coverage dispute with ACE for $7 million.
Id. at p. 2; Docket
No. 89, Ex. 20 at p. 37. Through a settlement agreement, UBS relinquished the
coverage otherwise afforded by ACE for the prior matters and any claim related
to the prior matters. (Docket No. 89, Ex. 21 at pp. 2-3.)

Civil No. 15-3099 (FAB)

8

(Docket No. 89, Ex. 23 at p. 30.)
of XL’s insurance offer.

This exclusion was a “core part”

(Docket No. 89, Ex. 22 at p. 89.)

also id. at pp. 72-73, 79-81, 85-97, 123-26, 138-45.

See

While UBS

requested to change the language and narrow the provision, XL
refused.

(Docket No. 89, Ex. 49 at p. 1.)

UBS agreed to proceed.

Id.
UBS ultimately purchased liability coverage from
XL, AXIS, and Hartford for the period of January 15, 2012 through
January 15, 2014 (“policy period”).

(Docket No. 89, Ex. 22 at

pp. 32-33; Docket No. 89, Ex. 23 at p. 2.) 4

XL issued the primary

$10 million policy, AXIS issued a $5 million first excess policy,
and

Hartford

issued

a

(collectively, “policies”).

$5

million

second

excess

policy

(Docket No. 89, Exs. 23-25.)

The

policies generally share the same terms and conditions, including
the specific litigation exclusion.

(Docket No. 89, Ex. 20 at

p. 29; Docket No. 89, Ex. 24 at p. 3; Docket No. 89, Ex. 25 at
p. 6.)
1.

Terms and Conditions
The policies articulate various provisions limiting

the

scope

of

coverage,

including

the

specific

litigation

exclusion. See, e.g., Docket No. 89, Ex. 23 at p. 30. The policies

4

The policy period was comprised of two distinct periods, each for one year:
January 15, 2012 to January 15, 2013 and January 15, 2013 to January 15, 2014.
(Docket No. 89, Ex. 22 at pp. 32-33; Docket No. 89, Ex. 23 at p. 2.)

Civil No. 15-3099 (FAB)

9

also set forth definitions to eliminate ambiguity.
No. 89, Ex. 23.

See Docket

As an overview, the policies provide “claims made

coverage” for “Insureds [sic] Loss resulting from Claims first
made against the Insureds during the Policy Period . . . for
Wrongful Acts.”

(Docket No. 89, Ex. 23 at p. 20.)

A “Claim” is

“(1) any written notice received by an Insured that any person or
entity intends to hold any Insured responsible for a Wrongful Act;
(2)

any

civil

proceeding

in

a

court

of

law

or

equity,

or

arbitration; or (3) any criminal proceeding which is commenced by
the return of an indictment.”
“any

formal,

civil,

Id. at p. 14.

criminal,

A “Claim” is also

administrative,

or

regulatory

investigation of an Insured” or “service of a subpoena upon an
Insured in connection with a regulatory investigation of any
Insured.”

Id. at p. 35.

Additionally, “Wrongful Act” is “any

actual or alleged act, error, omission, misstatement, misleading
statement or breach of fiduciary duty or other duty committed by
any

Insured

in

the

performance

Professional Services.”

of,

Id. at p. 20.

or

failure

to

perform,

“Professional Services”

means, in relevant part, “financial, economic or investment advice
given or investment management services performed for others for
a fee or commission by the Adviser or on behalf of the Adviser by
any person or entity.”

Id.

Civil No. 15-3099 (FAB)
The
endorsement.

10

policies

also

contain

a

notice

(Docket No. 89, Ex. 23 at p. 41.)

of

claim

Pursuant to the

notice endorsement, “[a]s a condition precedent to any right to
payment under this Policy, the Insured shall give written notice
to the Insurer of any Claim as soon as practicable after it is
first made and the Risk Manager or General Counsel of the Insured
first becomes aware of such Claim, but in no event later than
ninety (90) days after the expiration of the Policy Period.”
at p. 41.

Id.

Moreover, the policies include an interrelated claims

provision that stipulates, “All Claims arising from Interrelated
Wrongful Acts shall be deemed to constitute a single Claim and
shall be deemed to have been made at the same time at which the
earliest such Claim is made.”

Id. at p. 17.

“Interrelated

Wrongful Acts” are “Wrongful Acts which are based on, arising out
of, directly or indirectly resulting from, in consequence of, or
in any way involving any of the same or related series of related
facts, circumstances, situations, transactions or events.”

Id. at

p. 14.
D.

The Disputed Matters
Since the beginning of the policy period on January 15,

2012,

UBS

has

litigated

two

civil

actions,

two

regulatory

investigations, and hundreds of Financial Institutions Regulatory

Civil No. 15-3099 (FAB)
Association

(“FINRA”)

11
arbitrations

(collectively,

“disputed

matters”).
1.

Casasnovas Litigation
In February 2014, shareholders in certain funds

filed a derivative lawsuit against UBS in the Puerto Rico Court of
First

Instance,

San

Juan

Superior

Division.

Complaint,

Casasnovas-Balado v. UBS Fin. Servs., Inc., No. 2014-0072, 2015 WL
5179147 (P.R. Cir. Feb. 5, 2014) (Docket No. 1.)

The shareholders

claimed

and

that

UBS

“mismanaged

the

UBS

Funds”

“for

years

concealed from Plaintiffs and the general public their gross
conflicts

of

interests.”

Id.

at

p.

6.

According

to

the

shareholders, UBS
used the UBS Funds as a dumping ground for the
PR Bonds they underwrote, thus creating a
ready-made, captive market for that debt. In
so doing, they improperly concentrated the
assets of the Funds in PR Bonds that they
themselves issued, rather than diversifying
the Funds’ assets across other debt and equity
instruments.
Id. at p. 3.
The shareholders claimed that UBS also “engaged in
a massive ultra vires scheme to manipulate the price for shares of
the UBS Funds by discouraging investors from selling out of the
UBS

Funds,

steering

investors

instead

to

borrow

money

which

investors then used to purchase shares in the UBS Funds with loans

Civil No. 15-3099 (FAB)

12

collateralized by shares of those very same Funds.”

Id. at p. 4.

This “Illicit Loan Scheme: (i) artificially increased the demand,
alleged market value, and liquidity of shares of the UBS Funds”
and “(ii) increased investors’ market and credit risks associated
with investors’ leveraged investments in shares of UBS Funds.”
Id. at p. 23.

The shareholders asserted that investors are now

“trapped due to the illiquidity of the market created by the UBS
Defendants and the illegal margin loans they were encouraged to
take out by the UBS Defendants.”
2.

Id. at p. 5.

Fernandez Litigation
In May 2014, fund investors filed a putative class

action lawsuit against UBS in the United States District Court for
the Southern District of New York.

Complaint, Fernandez v. UBS

AG, No. 14-3252 (S.D.N.Y. May 5, 2014) (Docket No. 2.)

In May

2015, the investors filed their first amended complaint.

Amended

Class Action Complaint, Fernandez, 222 F. Supp. 3d 358 (S.D.N.Y.
May 8, 2015) (Docket No. 68.)

The investors alleged that UBS

“steered Class members, many of whom are older individuals focused
on generating income for retirement, to invest in the Funds, which
were

high-risk,

volatile

investments

that

losing Class members vast sums of money.”
claimed that

while

UBS

depicted

the

funds

ultimately

crashed,

Id. at p. 1.
as

“safe,

They

secure”

securities, the “Funds were investments that posed serious risks”

Civil No. 15-3099 (FAB)

13

because they were “highly leveraged” and “invested in hundreds of
millions of dollars of debt securities issued by the Puerto Rico
government, which . . . were especially risky.”

Id. at p. 2.

The investors asserted that UBS “acknowledged the
riskiness of the Funds by secretly unloading a substantial portion
of its own inventory of shares in the Funds on UBS’s own clients.”
Id. at p. 26.

They maintained that UBS Parent ordered UBS PR “to

reduce the inventory of Fund shares that UBS owned,” and UBS PR
“sold 75% of its Fund share inventory to UBS clients” as a result.
Id.
The investors continued that UBS engaged in “selfdealing

transactions”

by

assuming

“conflicting

roles”

and

simultaneously “underwriting various municipal and other Puerto
Rico bond offerings;” “selling the securities . . . into the
Funds;” and “act[ing] as advisors to, and managers of, the Funds.”
Id. at pp. 27-29.

The investors also claimed that UBS “adopted

policies to incentivize and pressure [its] employees to push Class
members to invest in the high-risk Funds,” and “[e]ven when clients
were already invested in the Funds, [UBS] pursued strategies to
capture additional lucrative commissions on Fund shares.”
pp. 30 & 38.

Id. at

For example, UBS employed an “improper loan scheme

by extending ‘non-purpose’ loans and lines of credit to Class
members in order to increase investments in the Funds on margin—

Civil No. 15-3099 (FAB)

14

thereby reaping even more inflated commissions on both the Funds
and the loans while increasing Class members’ exposure to risk.”
Id. at p. 5.
In June 2015, UBS moved to dismiss the Fernandez
amended complaint.

Memorandum of Law of the UBS Defendants in

Support of Their Motion to Dismiss, Fernandez, 222 F. Supp. 3d 358
(S.D.N.Y. June 18, 2015) (Docket No. 91.)

In support of their

motion, UBS characterized the 2012 SEC order and the Union lawsuit
as, respectively, “regarding the same alleged misconduct” and
“making similar allegations” to the Fernandez amended complaint.
Id. at pp. 15-17.

UBS asserted that “notably, the Complaint here

mimics allegations in [the Union] suit . . . sometimes word for
word.”

Id. at p. 17 (internal citations omitted).
In December 2016, the district court granted in

part and denied in part UBS’s motion to dismiss.
F. Supp. 3d 358, 364 (S.D.N.Y. Dec. 7, 2016).

Fernandez, 222
The court found

that “[t]he publicized lawsuits and administrative proceedings .
. . [were] sufficient . . . to find that UBS investors had
constructive notice and knowledge of their tort claims against
UBS.”

Id. at 383.

While the court acknowledged that sufficiently

publicized lawsuits need only bring “allegations that are similar
to some of the key allegations in the instant complaint” to trigger
inquiry notice, the court ruled that “[h]ere, published reports of

Civil No. 15-3099 (FAB)

15

legal proceedings and the proceedings themselves put plaintiffs on
notice of their exact allegations against the UBS Defendants.”
Id. (emphasis added) (internal quotation marks omitted).
3.

2013 SEC Investigation and 2015 SEC Order
In October 2013, the SEC issued an order directing

the private investigation of UBS PR (“2013 SEC investigation”).
(Docket No. 89, Ex. 36.)

The 2013 SEC investigation explicitly

mentioned the 2012 SEC order and asserted that UBS PR
may have been or may be, among other things,
making false statements of material fact or
failing
to
disclose
material
facts
to
customers concerning, among other things, the
risks or suitability of investing in mutual
funds or [PR bonds] using margin, loans,
provided by [a] UBS [affiliate], repurchase
agreements or other means of credit.
Id. at pp. 1-2.

On September 29, 2015, UBS PR resolved the

investigation by consenting to an Order Instituting Administrative
Proceedings, in which UBS PR agreed to pay a total of $15,000,000
to the SEC (“2015 SEC order”).

(Docket No. 89, Ex. 37.) 5

According to the 2015 SEC order, from 2011 through
2013, a UBS PR representative “effected a scheme that resulted in
an increase to his compensation by soliciting certain customers to
use

proceeds

from

[non-purpose

lines

of

credit]

to

purchase

5 Specifically, UBS agreed to pay disgorgement of $1,188,149.41, prejudgment
interest of $174,196.97, and a civil money penalty of $13,637,653.62. (Docket
No. 89, Ex. 37.)

Civil No. 15-3099 (FAB)
additional

shares

in

16
UBS

PR

[funds].”

Id.

at

p.

2.

The

representative “offered and sold millions of dollars of [funds] to
certain customers while soliciting them to use [non-purpose lines
of

credit]

to

purchase

such

securities

and

misrepresenting the risks of this strategy to them.”

fraudulently
Id. at p. 3.

The representative also “made material misrepresentations to these
customers regarding the safety of this strategy” and “exposed
customers—some of whom were listed . . . as being ‘conservative’
with regard to risk tolerance—to a greater risk than they otherwise
would have been exposed.”

Id. at pp. 2 & 4.

Although UBS PR “was

responsible for supervising” the representative, UBS PR failed to
supervise the representative reasonably and establish or implement
reasonable procedures to prevent the representative’s conduct,
misstatements, and omissions.
4.

Id. at pp. 2 & 6.

2015 FINRA Settlement
In February 2014, FINRA’s Enforcement Department

notified UBS PR that it was under investigation (“2014 FINRA
investigation”).

(Docket No. 89, Ex. 38.)

On September 15, 2015,

UBS PR submitted a Letter of Acceptance, Waiver and Consent to
settle with FINRA (“2015 FINRA settlement letter”).
No. 89, Ex. 40 at p. 6.)
that

(Docket

The 2015 FINRA settlement letter stated

Civil No. 15-3099 (FAB)

17

from January 1, 2009 through July 31, 2013 .
. . [UBS PR] failed to establish and maintain
a supervisory system and procedures reasonably
designed
to
ensure
the
suitability
of
transactions
in
[funds]
in
certain
circumstances. Specifically, [UBS PR] failed
to monitor the combination of leverage and
concentration levels in customer accounts to
ensure that certain customers’ transactions
were suitable in light of the customers’ risk
objectives and profile.
Id. at p. 2.

As “relevant disciplinary history,” the settlement

letter discussed the misconduct set forth in the 2012 SEC order.
Id.
According

to

the

settlement

letter,

“UBS

PR

customer accounts were typically highly concentrated in [fund]
shares.

Highly concentrated customers bore increased risk,” which

“was exacerbated by the fact that the [funds] were internally
leveraged.”
to

open

Id. at p. 3.

lines

of

UBS PR also “solicited certain customers

credit

[]

offered

by

a

UBS

affiliate

collateralized by the customers’ securities accounts.”
p. 3.

and

Id. at

The settlement letter asserted that “many customers who

needed to liquidate securities . . . . sold their [funds] into an
illiquid market at significant losses.”

Id. at p. 6.

Pursuant to

the settlement letter, UBS agreed to pay a total of $18,478,402.
(Docket No. 89, Ex. 40 at p. 6.) 6

6

UBS agreed to pay a fine in the amount of $7,500,000 and restitution in the
amount of $10,978,402. (Docket No. 89, Ex. 40 at p. 6.)

Civil No. 15-3099 (FAB)
5.

18

FINRA Arbitrations
UBS

notified

XL

of

55

FINRA

arbitrations

(collectively, “noticed FINRA arbitrations”) and was served with
approximately

1,150

additional

“additional FINRA proceedings”). 7

proceedings

(collectively,

(Docket No. 37 at pp. 4-5.)

In

the noticed FINRA arbitrations, fund investors alleged that the
funds were unsuitable investments.

See Docket No. 90, Exs. 13,

15-17, 22, 37-40, 49; Docket No. 91, Exs. 12-14, 24.

Namely, the

investors claimed that their investments were overconcentrated in
highly leveraged, illiquid fund shares of high-risk PR bonds.
id.

See

They asserted that UBS exposed investors to undue risk by

controlling the secondary market for the funds and misled investors
by artificially increasing demand and creating the appearance of
liquidity.

See id.

Many of the claimants referred to the 2012

SEC order.

See Docket No. 90, Exs. 13, 15-16, 22, 40, 49; Docket

No. 91, Exs. 12-14, 24.
additional

FINRA

According to UBS, the claimants in the

proceedings

“asserted

claims

substantively

similar or identical to those asserted in the [noticed FINRA
arbitrations].”

7

(Docket No. 37 at p. 5.)

The parties use 84 FINRA arbitrations as a sample set for this litigation.
Docket No. 87 at p. 1; see also Docket No. 90, Exs. 2-51; Docket No. 91, Exs.
1-34. The Court’s discussion of the noticed FINRA arbitrations and additional
FINRA proceedings is limited to the arbitrations provided in the sample set.
The sample set contains 14 noticed FINRA arbitrations and 70 additional FINRA
proceedings. See Docket No. 89, Ex. 1 at pp. 41-42; Docket No. 90, Exs. 13,
15-17, 22, 37-40, 49; Docket No. 91, Exs. 12-14, 24.

Civil No. 15-3099 (FAB)
E.

19

Coverage Communications
In October 2013, UBS Parent notified XL that it expected

UBS PR to be the subject of litigation and FINRA arbitrations
involving

allegations

overconcentrated
Advisors

made

in

[the

unsuitable

that

“customers

funds];

that

were

UBS

recommendations

and
that

its

unsuitably
Financial

customers

use

leverage to purchase [the funds] or use [the funds] as collateral
for credit lines; and that UBS and its Financial Advisors made
misrepresentations regarding the risks associated with investing
in [the funds].”

(Docket No. 89, Ex. 42 at p. 11.)

On December 2, 2013, XL denied coverage to UBS PR for
the anticipated litigation and arbitrations.
Ex. 23 at p. 3.)

(Docket No. 98,

Citing the specific litigation exclusion, XL

maintained that “it appears that this Claim is based on, arises
out of, directly or indirectly results from, is in consequence of,
or otherwise involves the SEC and/or FINRA proceedings listed [in
the Specific Litigation Exclusion], or the facts, circumstances or
situations underlying or alleged therein.”

Id.

XL concluded that

“no coverage is available under this Policy at this time.”

Id. at

p. 4.
On December 13, 2013, UBS Parent informed XL that UBS
had been served with 23 FINRA arbitrations, noting that it had
previously provided XL with proper notice in October and that it

Civil No. 15-3099 (FAB)

20

anticipated more arbitrations with similar allegations, as well as
a subpoena from the SEC.

(Docket No. 89, Ex. 42 at pp. 1-3.)

UBS

Parent notified XL of another 32 FINRA arbitrations, in addition
to the SEC subpoena, on January 24, 2014.
at pp. 2-5.)

(Docket No. 89, Ex. 43

UBS Parent again indicated its anticipation of

additional subpoenas and similar arbitrations, id. at p. 5, and on
February

14,

2014,

UBS

Parent

notified

lawsuit.

XL

of

the

Casasnovas

(Docket No. 89, Ex. 44.)
In March 2014, XL denied coverage to UBS PR for the FINRA

arbitrations, 2013 SEC investigation, and Casasnovas litigation.
(Docket No. 98, Ex. 24.) XL explained that the specific litigation
exclusion precluded UBS from coverage for these claims.
p. 5.

Id. at

AXIS sent UBS a similar denial of coverage for the FINRA

arbitrations, 2013 SEC investigation, and Casasnovas action in May
2014.

(Docket No. 98, Ex. 27.)
On May 14, 2014, UBS Parent informed XL of the Fernandez

action.

(Docket No. 89, Ex. 45.)

Later that month, XL and AXIS

each denied UBS’s request for coverage pursuant to the specific
litigation exclusion.

(Docket No. 98, Ex. 25 at p. 4; Docket

No. 98, Ex. 26; Docket No. 98, Ex. 28.)
the

2014

FINRA

investigation

before filing this case.

or

UBS did not notify XL of

additional

FINRA

proceedings

(Docket No. 89, Ex. 1 at p. 46.)

Civil No. 15-3099 (FAB)
II.

21

Procedural History
UBS filed this breach of contract suit against the insurers

on December 18, 2015.

(Docket No. 1.)

summary judgment on July 28, 2017.

Both parties moved for

(Docket Nos. 89 & 98.)

III. Jurisdiction
The Court has jurisdiction over this civil action pursuant to
28

U.S.C.

section

1332(a)(1)

because

the

dispute

is

between

citizens of different states and the matter in controversy exceeds
$75,000, exclusive of interest and costs. See 28 U.S.C. § 1332(a).
IV.

Discussion
A.

Standard of Review
A court will grant summary judgment if “there is no

genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.”

Fed. R. Civ. P. 56(a).

“A

dispute is genuine if the evidence about the fact is such that a
reasonable jury could resolve the point in the favor of the nonmoving party.

A fact is material if it has the potential of

determining the outcome of the litigation.”

Dunn v. Trs. of Bos.

Univ., 761 F.3d 63, 68 (1st Cir. 2014) (internal citation omitted).
The

role

of

summary

judgment

is

to

“pierce

the

boilerplate of the pleadings and assay the parties’ proof in order
to determine whether trial is actually required.”

Tobin v. Fed.

Exp. Corp., 775 F.3d 448, 450 (1st Cir. 2014) (internal citation

Civil No. 15-3099 (FAB)
omitted).

22

The party moving for summary judgment has the initial

burden of “demonstrat[ing] the absence of a genuine issue of
material fact” with definite and competent evidence. Celotex Corp.
v. Catrett, 477 U.S. 317, 323 (1986); Maldonado-Denis v. CastilloRodriguez, 23 F.3d 576, 581 (1st Cir. 1994).

The movant must

identify “portions of ‘the pleadings, depositions, answers to
interrogatories,

and

admissions

on

file,

affidavits, if any’” which support its motion.

together

with

the

Celotex, 477 U.S.

at 323 (citing Fed. R. Civ. P. 56(c)).
Once a properly supported motion has been presented, the
burden shifts to the nonmovant “to demonstrate that a trier of
fact reasonably could find in [its] favor.”

Santiago-Ramos v.

Centennial P.R. Wireless Corp., 217 F.3d 46, 52 (1st Cir. 2000)
(internal citation omitted).

“When the nonmovant bears the burden

of proof on a particular issue, [he or] she [or it] can thwart
summary judgment only by identifying competent evidence in the
record sufficient to create a jury question.”
450-51.

Tobin, 775 F.3d at

A court draws all reasonable inferences from the record

in the light most favorable to the nonmovant, but it disregards
unsupported and conclusory allegations.

McGrath v. Tavares, 757

F.3d 20, 25 (1st Cir. 2014).
When parties file cross-motions for summary judgment, a
court

must

“consider

each

motion

separately,

drawing

all

Civil No. 15-3099 (FAB)

23

inferences in favor of each non-moving party in turn.”

AJC Int’l,

Inc. v. Triple-S Propiedad, 790 F.3d 1, 3 (1st Cir. 2015) (quoting
D & H Therapy Assocs., LLC v. Bos. Mut. Life Ins. Co., 640 F.3d
27, 34 (1st Cir. 2011).
not

alter

the

summary

“Cross-motions for summary judgment do
judgment

standard,

but

instead

simply

‘require [the Court] to determine whether either of the parties
deserves judgment as a matter of law on the facts that are not
disputed.’”

Wells Real Estate Inv. Tr. II, Inc. v. Chardon/Hato

Rey P’ship, 615 F.3d 45, 51 (1st Cir. 2010) (quoting Adria Int’l
Grp., Inc. v. Ferré Dev., Inc., 241 F.3d 103, 107 (1st Cir. 2001)).
B.

Applicable Law
The Court applies Puerto Rico insurance law to this

diversity suit.

See AJC Int’l, 790 F.3d at 3-4.

The Puerto Rico

Insurance Code requires that “[e]very insurance contract [] be
construed according to the entirety of its terms and conditions as
set forth in the policy, and as amplified, extended, or modified
by any lawful rider, endorsement, or application attached to and
made a part of the policy.”

Id. at 4 (alteration in original)

(citing P.R. Laws Ann., tit 26, § 101).

Insurance contracts

“should be generally understood within their most common and usual
meaning,” and “[t]he insured who acquires a policy is entitled to
rely on the coverage offered to him when reading its clauses in
the light of the popular words used therein.”

AJC Int’l, 790 F.3d

Civil No. 15-3099 (FAB)

24

at 4 (quoting Pagán-Caraballo v. Silva-Delgado, 22 P.R. Offic.
Trans. 96, 101 (1998)).

Additionally, “exclusionary clauses are

not favored, [and] should be strictly construed and in such a way
that the policy’s purpose of protecting the insured is met.”

Id.

(alteration in original) (quoting Pagán-Caraballo, 22 P.R. Offic.
Trans. at 101) (alterations in original).
Puerto Rico law does not, however, “compel constructions
in favor of the insured when a clause favors the insurer, and its
meaning and scope is [sic] clear and unambiguous.”

AJC Int’l, 790

F.3d at 4 (alteration in original) (quoting Quiñones-López v.
Manzano-Pozas, 141 P.R. Dec. 139, 155 (1996)).

“In such cases, it

[i.e., the unambiguous clause] should be held as binding on the
insured.”

Id. (alteration in original) (quoting Quiñones-López,

141 P.R. Dec. at 155).

“If the wording of the contract is explicit

and its language is clear, its terms and conditions are binding on
the parties.”

Nieves v. Intercontinental Life Ins. Co. of P.R.,

964 F.2d 60, 63 (1st Cir. 1992).
C.

Defendants’ Motion for Summary Judgment
The insurers argue that UBS presents no genuine issue of

material fact because the policies’ interrelated claims provision
and

specific

litigation

disputed matters.

exclusion

preclude

(Docket No. 89 at p. 14.)

coverage

for

the

Namely, the insurers

contend that the disputed matters “‘directly or indirectly result

Civil No. 15-3099 (FAB)

25

from’ or ‘in any way involve’ ‘any fact, circumstance or situation’
alleged in or underlying the Prior Matters” and “‘directly or
indirectly result from’ or ‘in any way involve’ ‘the same or
related or series of related facts, circumstances, situations,
transactions or events’ as the Prior Matters.”
policies).

Id. (quoting the

According to the insurers, the disputed matters “need

only in any way involve any fact, circumstance or situation” of
the prior matters to be barred from coverage.

Id. at p. 15

(alteration in original).
The insurers state that the disputed matters involve
identical
matters.

facts,

circumstances,

See id. at p. 14.

and

situations

as

the

prior

They assert that the disputed matters

“are rooted in, among other things, alleged conflicts of interest
because UBS . . . . allegedly manipulated the market for the Funds
for its own benefit and the detriment of Puerto Rico investors,
propping up the market for the Funds by convincing its unwitting
customers to purchase shares of the Funds.”

Id. at p. 17.

The insurers emphasize that the connection between the
prior and disputed matters “goes well beyond what the Policies
require because they share specific factual commonalities and
allegations.”

Id.

include claims that:

Such

“directly

overlapping

allegations”

“UBS suffered from conflicts of interest;”

“UBS PR used the Funds as a ‘dumping ground’ for risky PR bonds to

Civil No. 15-3099 (FAB)

26

generate fees;” “[t]he Funds lacked liquidity;” “UBS controlled
the secondary market for Fund shares;” “[t]he Funds were overconcentrated in PR bonds;” “UBS PR allowed overconcentration in
customer accounts and did not have systems for monitoring customer
concentration in particular assets, including the Funds;” “[t]he
Funds’ use of leverage exacerbated investor losses;” and “UBS PR
ordered financial advisors to market and sell Fund shares.”
at pp. 18-19.

Id.

The insurers also contend that the disputed matters

directly address the 2012 SEC order and, significantly, that UBS
articulated the shared factual bases between the prior and disputed
matters before the court in Fernandez.

Id. at pp. 19-20.

The Court agrees with the insurers that the disputed
matters all involve facts, circumstances, or situations underlying
the

prior

matters.

Consequently,

the

specific

litigation

exclusion precludes coverage of the disputed matters.
1.

The
Specific
Litigation
Exclusion
Coverage of the Disputed Matters

Precludes

Because the policies are clear, the Court considers
the plain language of the provisions as written.
790 F.3d at 4.

See AJC Int’l,

UBS maintains that Puerto Rico law requires

insurance policies to be interpreted narrowly and “liberally in
favor of the insured.”

See Docket No. 123 at p. 3 (quoting López

& Medina Corp. v. Marsh USA, Inc., 667 F.3d 58, 65 (1st Cir.

Civil No. 15-3099 (FAB)
2012)).

27

A court should only apply such narrow construction,

however, when policy provisions are ambiguous.

AJC Int’l, 790

F.3d at 4. Neither party contends that the policies are ambiguous.
See Docket No. 123 at p. 12 (“UBS does not dispute[] that the
Specific Litigation [Exclusion] is ‘unambiguous.’”).

Accordingly,

“the parties are bound by [the policies’] clearly stated terms and
conditions, with no room for further debate.”

López & Medina

Corp., 667 F.3d at 64.
The

plain

language

of

the

specific

exclusion bars coverage for the disputed matters.

litigation

The exclusion

employs expansive language, denying coverage for “any Claim . . .
based on, arising out of, directly or indirectly resulting from,
in consequence of, or in any way involving [the prior matters] or
any

fact,

therein.”

circumstance

or

situation

underlying

(Docket No. 89, Ex. 23 at p. 30.)

or

alleged

The disputed matters

all involve facts, circumstances, or situations alleged within the
2012 SEC order or Union proceeding, and many of the disputed
matters directly name or indirectly result from the 2012 SEC order.
That the disputed matters may also involve other allegations
unrelated to the prior matters is inapposite.

Cf. Fed. Ins. Co.

v. Raytheon Co., 426 F.3d 491, 497 (1st Cir. 2005) (applying
Massachusetts law to an insurance exclusion and finding that
“substantial areas of non-overlap does not defeat the fact here

Civil No. 15-3099 (FAB)

28

that there is substantial overlap between the two complaints”).
The broad language of the bargained-for exclusion is also no reason
to deny enforcement of the unambiguous provision.

Cf. Clark Sch.

for Creative Learning, Inc. v. Phila. Indem. Ins. Co., 734 F.3d
51, 55-57 (1st Cir. 2013) (applying Massachusetts law and holding
that a clear policy exclusion must be given its “plain literal
definition” even if the provision is broad). 8
i.

Casasnovas Overlap
The Casasnovas allegations involve many of the

exact facts, circumstances, and situations underlying the prior
matters.
2012

SEC

Both the Casasnovas and Union plaintiffs, as well as the
order,

assert

that

UBS

held

conflicting

roles

concealed its conflicts of interest from the plaintiffs.

and
See

Complaint, Casasnovas, No. 2014-0072, 2015 WL 5179147 (Docket
No. 1 at p. 6); Complaint, Union, No. 10-1141 (Docket No. 1 at
p. 3); Docket No. 89, Ex. 13 at p. 9.

8

The Casasnovas and Union

In Clark, the First Circuit Court of Appeals enforced an insurance exclusion
similar to the exclusion in this case. Clark, 734 F.3d at 55-57. The Clark
court applied Massachusetts law to evaluate a policy exclusion that barred
losses “based upon, arising out of, directly or indirectly resulting from or in
consequence of, or in any way involving any matter, fact, or circumstances
disclosed in connection with Note 8 of the Financial Statement.” Id. at 55.
Massachusetts law, like Puerto Rico law, requires insurance policy ambiguities
to be resolved in favor of the insured. See id. at 55 (citing Allmerica Fin.
Corp. v. Certain Underwriters at Lloyd’s, London, 449 Mass. 621, 628 (2007)
(“To the extent the policy language is ambiguous, any ambiguities must be
construed in favor of the insured.”)). The court, nonetheless, enforced the
contract, holding that the exclusion was “both clear and broad in its language”
and that the court “must apply” the “plain literal definition” of the catchall
phrase, “or in any way involving.” Id. at 55 & 57.

Civil No. 15-3099 (FAB)

29

plaintiffs both claim that UBS used the funds as a “dumping ground”
for PR bonds.

See Complaint, Casasnovas, No. 2014-0072, 2015 WL

5179147 (Docket No. 1 at p. 3); Complaint, Union, No. 10-1141
(Docket No. 1 at p. 21).

Like the Union plaintiffs, the Casasnovas

plaintiffs allege that UBS improperly concentrated the funds with
PR bonds.

See Complaint, Casasnovas, No. 2014-0072, 2015 WL

5179147 (Docket No. 1 at p. 3); Complaint, Union, No. 10-1141
(Docket No. 1 at p. 4).

The Casasnovas plaintiffs also maintain

that investors were “trapped due to the illiquidity of the market
created by the UBS Defendants,” as revealed in the 2012 SEC order.
See Casasnovas, No. 2014-0072, 2015 WL 5179147 (Docket No. 1 at
p. 5); Docket No. 89, Ex. 13 at p. 2.
complaint

maintains

that

UBS

engaged

Finally, the Casasnovas
in

a

scheme

to

promote

customer demand for the funds, just as asserted in the 2012 SEC
order.

See Casasnovas, No. 2014-0072, 2015 WL 5179147 (Docket

No. 1 at p. 4); Docket No. 89, Ex. 13 at p. 5.
ii.

Fernandez Overlap
The overlap between the factual allegations in

Fernández and the prior matters has been recognized by UBS and the
Fernández court.

See Amended Class Action Complaint, Fernández,

222 F. Supp. 3d 358 (Docket No. 68); Memorandum of Law of the UBS
Defendants,

Fernández,

222

F.

Supp.

Fernández, 222 F. Supp. 3d at 383.

3d

358

(Docket

No.

91);

In support of their motion to

Civil No. 15-3099 (FAB)
dismiss

in

30

Fernández,

UBS

argued

that

the

2012

SEC

order

“regard[ed] the same alleged misconduct” as the Fernández amended
complaint and that the Union lawsuit “ma[de] similar allegations”
to the Fernández action.

Memorandum of Law of the UBS Defendants,

Fernández, 222 F. Supp. 3d 358 (Docket No. 91 at pp. 15-17).

UBS

stated that “notably, the Complaint here mimics allegations in
[the Union] suit . . . sometimes word for word.”
(emphasis added) (internal citations omitted).

Id. at p. 17

The district court

agreed with UBS’s characterizations, finding that “the proceedings
themselves put plaintiffs on notice of their exact allegations
against the UBS Defendants.”
quotation marks omitted).

Id. (emphasis added) (internal

Upon review of the factual allegations

underlying Fernández, this Court agrees with UBS and the Fernández
court that extensive factual similarities exist between Fernández
and the prior matters.
iii. 2013 SEC Investigation Overlap

The 2013 SEC investigation involves facts,
circumstances, and situations underlying the 2012 SEC order.

See

Docket No. 89, Ex. 36. The 2013 SEC investigation expressly refers
to the 2012 SEC order.

Id. at p. 1.

The investigation asserts

that from at least 2010, UBS PR may have materially misrepresented
to its customers “the risks or suitability of investing in mutual
funds or [PR bonds].”

Id. at p. 2.

These allegations involve the

Civil No. 15-3099 (FAB)
circumstances

31

articulated

in

the

2012

SEC

order:

that

UBS

misrepresented the riskiness of the funds and PR bonds and failed
to disclose material information to customers pertaining to the
suitability of the funds and PR bonds as investments.

See Docket

No. 89, Ex. 13 at pp. 2 & 4.
The subsequent 2015 SEC order also involves
facts,

circumstances,

order.

and

situations

underlying

the

2012

SEC

The 2015 SEC order addresses the solicitation of UBS PR

customers to purchase additional fund shares through non-purpose
lines of credit, accompanied by the fraudulent misrepresentation
of the risks of the investment strategy.
at pp. 2-3.)
material

(Docket No. 89, Ex. 37

The promotion of fund shares coupled with the

misrepresentation

regarding

the

riskiness

of

the

investment were circumstances discussed in the 2012 SEC order.
See Docket No. 89, Ex. 13 at pp. 4-5.

Additionally, both the 2012

and 2015 SEC orders state that UBS PR customers with low risk
tolerance were subjected to a larger risk than that to which they
would have otherwise been exposed.

See Docket No. 89, Ex. 13 at

p. 4; Docket No. 89, Ex. 37 at p. 4.
iv.

2015 FINRA Settlement Overlap
The

2015

FINRA

settlement

letter

involves

facts, circumstances, and situations underlying the prior matters.
See Docket No. 89, Ex. 40.

The FINRA settlement letter alludes to

Civil No. 15-3099 (FAB)

32

the 2012 SEC order and UBS’s misconduct alleged in the order as
“relevant disciplinary history.”

Id. at p. 2.

Like the Union

allegations, the settlement letter states that UBS PR failed to
ensure the suitability of customers’ transactions in the funds.
See id. at p. 2; Complaint, Union, No. 10-1141 (Docket No. 1 at
p. 5).

Both the settlement letter and the 2012 SEC order identify

that UBS did not respect customers’ risk objectives.
No.

89,

Ex.

13

at

p.

4;

Docket

No.

89,

Ex.

See Docket

40

at

p.

2.

Additionally, the settlement letter and the Union complaint assert
that

the

funds

were

internally

customers’ vulnerability.

leveraged,

which

exacerbated

See Docket No. 89, Ex. 40 at p. 3;

Complaint, Union, No. 10-1141 (Docket No. 1 at p. 6).

Finally,

like the Union complaint, the settlement letter laments that UBS
customers needing to liquidate their investments were forced to
sell fund shares into an illiquid market at significant losses.
See Docket No. 89, Ex. 40 at pp. 5-6; Complaint, Union, No. 101141 (Docket No. 1 at pp. 5-6).
v.

FINRA Arbitrations Overlap

The

FINRA

arbitrations

involve

facts,

circumstances, and situations that overlap with the prior matters.
The investors in the noticed FINRA arbitrations, like the Union
plaintiffs, allege that the funds were unsuitable investments.
See Docket No. 90, Exs. 13, 15-17, 22, 37-40, 49; Docket No. 91,

Civil No. 15-3099 (FAB)

33

Exs. 12-14, 24; Complaint, Union, No. 10-1141 (Docket No. 1 at
p. 5).

The claimants in the Union action and noticed FINRA

arbitrations claim that their investments were overconcentrated in
highly leveraged, illiquid fund shares of high-risk PR bonds.

See

Docket No. 90, Exs. 13, 15-17, 22, 37-40, 49; Docket No. 91,
Exs. 12-14, 24; Complaint, Union, No. 10-1141 (Docket No. 1 at
pp. 4, 6, 21).

The noticed FINRA arbitrations, Union complaint,

and 2012 SEC order all assert that UBS controlled the secondary
market

for

increasing

the

funds

demand

and

and

misled

creating

investors

the

by

appearance

thereby amplifying the investors’ risk.

artificially
of

liquidity,

See Docket No. 89, Ex. 13

at pp. 2, 4-6; Docket No. 90, Exs. 13, 15-17, 22, 37-40, 49; Docket
No. 91, Exs. 12-14, 24; Complaint, Union, No. 10-1141 (Docket No. 1
at pp. 3, 23-25).

Many of the noticed FINRA arbitrations also

directly discuss the 2012 SEC order.

See Docket No. 90, Exs. 13,

15-16, 22, 40, 49; Docket No. 91, Exs. 12-14, 24.
the

additional

claimants

in

FINRA

those

proceedings,

proceedings

it

is

“assert[]

With respect to

undisputed
claims

that

the

substantively

similar or identical to those asserted in the [noticed FINRA
arbitrations].”

(Docket No. 37 at p. 5.) 9

9
The Court need not evaluate the facts underlying the additional FINRA
proceedings because UBS stipulates that the allegations are “substantively
similar or identical” to those asserted in the noticed FINRA arbitrations.
(Docket No. 37 at p. 5.)

Civil No. 15-3099 (FAB)
2.

34

UBS’s Counterarguments
Because UBS fails to identify competent evidence in

the record sufficient to create a genuine issue of material fact,
its counterarguments are unavailing.

See Tobin, 775 F.3d at 450-

51.
i.

Interpretation of “Claim”
The Court rejects UBS’s argument that “even

one covered claim in a complaint obligates Insurers to pay for its
defense.”

(Docket No. 123 at p. 1.)

UBS argues that the insurers

“have the burden of proving that every claim in every one of the
1,600-plus complaints comprising the Disputed Matters is subject
to one or more of those exclusions” to succeed on summary judgment.
Id. at p. 3.

UBS manipulates the word “claim,” however, to suit

its position.

The policies provide coverage for “claims,” defined

as “any civil proceeding[s] in a court of law or equity, or
arbitration[s]” or “any formal, civil, criminal, administrative,
or regulatory investigation[s] of an Insured.”
Ex. 23 at pp. 14 & 35.)
specific

issues,

(Docket No. 89,

The policies do not afford coverage for

allegations,

or

causes

of

action

within

a

complaint.
Puerto Rico law requires the Court to construe
the contract according to the terms “as set forth in the policy.”
See AJC Int’l, 790 F.3d at 4 (citing P.R. Laws Ann., tit 26,

Civil No. 15-3099 (FAB)

35

§ 101). The Court therefore interprets the word “claim” as defined
by

the

policies.

comparable

Cf.

Massachusetts

Raytheon,
legal

426

F.3d

standards

to

at
a

497

(applying

similar

policy

definition of “claim” and finding that “[a] claim for present
purposes is equivalent to a complaint”).

Indeed, UBS concedes

that the insurers’ interpretation of the policies’ definition of
“claim” is correct.

See Docket No. 123 at p. 4 (“This is true for

purposes of defining a ‘Claim’ under the Policy.”).
UBS nevertheless contends that it is entitled
to coverage for independent issues within an otherwise precluded
complaint because of the district court decision in W Holding Co.
v. AIG Ins. Co., No. 11-2271, 2014 WL 3378691 (D.P.R. July 9, 2014)
(Gelpi, J.) (hereinafter, “W Holding II”). In W Holding II, unlike
here, the parties debated the ambiguity of an insurance policy
exclusion and the court was required to “resolve any doubts in the
insured’s favor.”

Id. at *2 (citing W Holding Co. v. AIG Ins.,

748 F.3d 377, 385-86 (1st Cir. 2014) (hereinafter, “W Holding I”)).
The W Holding II policy was also narrower than the policies in
this case.

The policy in W Holding II contained a notice provision

that “require[d] the claims to be linked by ‘facts alleged.’”
at *4.

Id.

The court thus evaluated the facts alleged in the prior

matter to determine whether there was “substantial overlap” with
the “specific factual allegations” in the subsequent matters,

Civil No. 15-3099 (FAB)
finding

that

overlapped.
argument.
matters

in

only

36

certain

Id. at *5.

subsequent

matters

sufficiently

The Court is unpersuaded by UBS’s

The factual overlap between the prior and disputed
this

case

differs

from

the

insufficient

overlap

discussed in W Holding II, and the exclusion in this case is far
broader than the notice clause in W Holding II.
UBS’s efforts to disaggregate the disputed
matters belies its argument that the disputed matters are covered
within the policy period.

Only the 2013 SEC investigation and

approximately 14 of the FINRA arbitrations in the sample set were
made during the policy period. 10

The rest of the disputed matters,

including Casasnovas, Fernández, the 2014 FINRA investigation, and
approximately 70 of the 84 FINRA arbitrations provided in the
sample set, were initiated after the policy period expired. 11

The

latter disputed matters can only be considered within the policy
period if they are interrelated wrongful acts pursuant to the
interrelated claims provision.

(Docket No. 89, Ex. 23 at p. 17.)

10

The policy period concluded on January 15, 2014. (Docket No. 89, Ex. 23 at
p. 2.)
The 2013 SEC investigation began in October 2013.
(Docket No. 89,
Ex. 36.) Approximately 14 FINRA arbitrations in the sample set were initiated
before January 15, 2014. (Docket No. 90, Exs. 13-17, 22, 24, 40, 46, 49-50;
Docket No. 91, Exs. 12-14.)

11

The Casanovas lawsuit and the 2014 FINRA investigation began in February
2014. Complaint, Casasnovas, No. 2014-0072, 2015 WL 5179147 (Docket No. 1);
Docket No. 89, Ex. 38. Fernández was filed in May 2014. Complaint, Fernández,
No. 14-3252 (Docket No. 2). Approximately 70 FINRA arbitrations of the sample
set were initiated after January 15, 2014. See Docket No. 89, Ex. 1 at pp. 2629.

Civil No. 15-3099 (FAB)

37

The policies’ interrelated claims provision provides, “All Claims
arising

from

Interrelated

Wrongful

Acts

shall

be

deemed

to

constitute a single Claim and shall be deemed to have been made at
the same time at which the earliest such Claim is made.”
(emphasis added).

Id.

As the insurers note, “UBS cannot have it both

ways: the Interrelated Claims provision cannot both aggregate the
Disputed Matters to bring them into the 2013-14 Policy Period and
simultaneously

disaggregate

the

same

Disputed

Matters

into

thousands of claims to disconnect them from the Prior Matters” to
avoid exclusion.

(Docket No. 131 at p. 1.)

The same broad

construction of the policies necessary to bring the disputed
matters within coverage also requires the Court to find that the
disputed matters sufficiently overlap with the prior matters as to
be barred by the exclusion.
ii.

Duty to Defend Cases
The Court rejects UBS’s arguments based on

cases concerning “duty to defend” insurance policies because the
“duty to defend” is not at issue in this case.
Puerto

Rico

law

requires

“insurers

to

UBS argues that

establish

that

the

allegations of a complaint, read liberally and with all doubts
resolved in the insured’s favor, do not create even a ‘remote
possibility’ of coverage.”

Docket No. 123 at p. 3 (quoting W

Holding I, 748 F.3d at 384). UBS conflates the applicable standard

Civil No. 15-3099 (FAB)

38

for insurers’ duty to defend, however, with the law governing the
duty to indemnify.

See In re San Juan Dupont Plaza Hotel Fire

Litig., 45 F.3d 564, 569 (1st Cir. 1995) (remanding the case
because the court failed to “discuss the asserted distinctions
between the duty to indemnify and a duty to defend”); Travelers
Ins. Co. v. Waltham Indus. Labs. Corp., 883 F.2d 1092, 1100 (1st
Cir. 1989) (faulting a party for failing to distinguish between
the duty to defend and the duty to indemnify).

Because the

insurers do not assume UBS’s defense under any circumstances,
Docket No. 89, Ex. 23 at pp. 15-16, the Court need not consider
UBS’s “duty to defend” arguments.
V.

Conclusion
For the reasons set forth above, the defendants’ motions for

summary

judgment

are

GRANTED

(Docket

Nos.

plaintiffs’ action is DISMISSED WITH PREJUDICE.
entered accordingly.

89

and

94)

and

Judgment shall be

Plaintiffs’ motion for summary judgment

(Docket No. 98) and all other pending motions are moot.
IT IS SO ORDERED.
San Juan, Puerto Rico, February 1, 2018.

s/ Francisco A. Besosa
FRANCISCO A. BESOSA
UNITED STATES DISTRICT JUDGE