As with the approximately $1.5 million in claims previously filed, the latest claim filed by Vernon Litigation Group against RBC Capital Markets LLC (“RBC”) relates to the sale of Puerto Rican bonds by the West Palm Beach office of RBC. RBC brokerage unit is referred to RBC Wealth Management.
As with the others, this claim relates to the sale of Puerto Rican bonds by RBC financial advisor, Samuel Koltun, who has a record of six customer disputes and a regulatory event according to his FINRA report known as a CRD. Three of these events were initiated while Koltun was registered with J .B. Hanauer & Company and the last four events were initiated after Koltun transferred his registration to RBC, which bought out Hanauer in 2007.
CLAIM STATES THERE WAS A HEAVY CONCENTRATION OF TROUBLED ISSUER
The clients in the latest filing were looking to supplement their income from a pension and social security. The solution provided was tax-free municipal bonds. According to the claim however, the portfolio evolved into a heavy concentration in their account in bonds of one troubled issuer – Puerto Rico – without adequate disclosure of the risks.
It is particularly troubling that RBC was one of the underwriters for the largest Puerto Rican bond purchased in the client’s account. A bond underwriter is a company (such as RBC) that administers the issuance and distribution of bonds from issuers such as Puerto Rico. Specifically, the underwriter gets paid to make sure the public buys the bond when it is initially offered. In fact, in a March 2014 Bloomberg article, it was reported that Puerto Rico “[g]rappling with a shrinking economy, paid banks led by Barclays Plc., Morgan Stanley and RBC Capital Markets $28.1 million in underwriting fees when it sold $3.5 billion of bonds on March 11….” In addition, according to a Wall Street Journal article in October of 2013, in 87 bond deals since 2006, Puerto Rico sold $61 billion of bonds, which resulted in fees to Wall Street firms, like RBC, and their cohorts of $1.4 billion. Clearly RBC, in underwriting even more Puerto Rican bonds, did not want to advise clients like the Claimants that they should sell their bonds. Moreover, RBC held the bonds in the claimants' account, racking up additional underwriting fees for itself.
Disconcerting Knowledge of Puerto Rican Economy
Equally disconcerting, according to the claim, is RBC’s knowledge – as a major underwriter – that the Puerto Rican economy had been in a recession since 2006 when generous tax breaks granted to manufacturers by the U.S. Congress expired. With the expiration of the tax incentives, corporations began leaving Puerto Rico, rising unemployment levels and causing many to move away from the island. The decline in the overall working population in turn lowered the tax revenue base. Puerto Rico and its agencies made up the lost revenue by more than doubling their borrowing since 2004. Consequently, Puerto Rico’s government has run large operating deficits for at least the last ten fiscal years. So much so in fact that Peter Hayes, chair of BlackRock’s Municipal Bond Market Committee, on May 9, 2012, stated in an interview with Learn Bonds that he would avoid bonds issued by Puerto Rico because “the credit risk…outweighed the benefits of extra yield.”
This latest claim against RBC alleges, inter alia, breach of fiduciary duty, fraud, and breach of contract, negligence, and violations of state securities laws.
Chris Vernon, of Vernon Litigation Group, has experience with the J.B. Hanauer culture through prior FINRA arbitration against J.B. Hanauer before it was folded into RBC. Mr. Vernon pursued claims on behalf of an investor who was seeking steady, safe fixed income but who was improperly sold a concentrated portfolio of high-risk bonds. In the J.B. Hanauer arbitration, Vernon obtained an award for his client that included not only compensatory damages but also significant punitive damages as well as arbitral authority to pursue attorney’s fees in a post-arbitration court proceeding. An example of this concern regarding J.B. Hanauer sales practices being carried over to RBC can be seen in the now pending claims filed by Vernon Litigation Group against RBC.
Bonds More Problematic than Finacial Industry Suggests
Vernon Litigation warns investors that bonds can be much more problematic than suggested by the financial industry. For example, conflicts of interest are often greater than stocks due to the way they are sold to clients – often out of a firm’s inventory. In other words, your financial advisor’s firm may have recently bought the bond and then sold it to you – after significantly marking up the price. Moreover, high-risk bonds can be especially dangerous for retail investors because of the perception created by the brokerage industry that bonds are usually purchased as a stable vehicle that provides a stable income, rather than a riskier investment in stock in hopes that it will rise in value. This is because high-risk bonds are usually not adequately distinguished from bonds backed by financially strong governments or by large, well-run corporations.
Vernon Litigation Group represents clients in courtroom litigation, mediations, and arbitrations throughout the United States. Our lawyers have collectively represented thousands of investors in FINRA and other securities arbitration and litigation claims nationwide and recovered millions of dollars from financial institutions, both large and small. Please contact us to discuss your rights if you have suffered significant losses in your RBC fixed income accounts as a result of investments in Puerto Rico bonds or similar investments. For more information, visit our website at vernonlitigation.com or contact Vernon Litigation Group by phone at (239) 319-4434 or by e-mail at info@vernonlitigation.com to speak with an attorney at Vernon Litigation Group.