Pension Plans’ Shareholder Derivative Claims Against UBS is Reinstated by 1st Circuit Appeals Court

The U.S. Court of Appeals for the First Circuit has reinstated the shareholder derivative claims filed by two Puerto Rican pension funds against UBS Financial Services Inc. (UBS) Judge Kermit Lepez said that following de novo review—a district court had dismissed the case on the grounds that a failure to properly plead demand futility was subject to such an examination—it seemed to him that the plaintiffs’ allegations sufficiently show reasonable doubt about six fund directors’ ability to assess the former’s demand to bring this action with the independence and disinterest mandated by Puerto Rican law.

The two pension funds are the owners of shares in closed-end funds that made investments, which were not successful, through UBS entities. Their investment adviser and fund administrator is UBS Trust, which is a UBS Financial affiliate.

According to the court, UBS Financial, which has been Puerto Rico’s Employee Retirement System (ERS) financial adviser for more than five years, underwrote $2.9B of ERS-issued bonds. Meantime, the UBS Trust bought approximately $1.5B of the ERS bonds and then sold them to funds. At issue is about $757M in bonds that the two Puerto Rican funds purchased.

Unfortunately, within a year of when they were issued, the bonds value dropped 10%, lowering the funds’ value. They then went on to file their lawsuit against UBS Trust, UBS Financial, and the director of the funds claiming that the defendants took part in a manipulative trading scam to make it look as if there was market interest when the point was to raise prices so that other investors would buy.

The defendants sought to have the case dismissed, claiming that the directors of the funds did not get a presuit demand first while the plaintiffs neglected to note why there was no point to submitting this type of demand. The lower court granted their motion. Now, however, the appeals court says that the securities case can proceed.

Union de Empleados De Muelles De Puerto Rico PRSSA Welfare Plan v. UBS Financial Services Inc.,

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