How the Puerto Rico Municipal Bonds law suit affects you

If you purchased, through a broker, any mutual fund containing municipal bonds of the Commonwealth of Puerto Rico, or you directly purchased any municipal bonds of the Commonwealth of Puerto Rico, and have suffered losses, you may have legal claims and should contact an attorney to discuss your rights.

The Commonwealth of Puerto Rico is an unincorporated territory of the United States. Residents pay no federal income tax. The U.S. Securities and Exchange Commission (“SEC”) regulates the sale of securities in Puerto Rico.

Puerto Rican municipal bonds are subject to a generous tax exemption. Unlike most other state-issued bonds, which are subject to U.S. taxes, Puerto Rican bonds are triple-tax exempt from federal, state or local taxes. The exemption applies regardless of whether the bonds are purchased by residents of Puerto Rico or by any resident of any of the fifty states.

The SEC allows mutual funds to market bond funds as single-state products even though their portfolios may contain 5% to 10% in Puerto Rican bonds. This has historically allowed fund managers to pepper their portfolios with risky Puerto Rican bonds, in an effort to increase yields.

Recent news reports and investigations indicate that in some cases, brokers selling municipal bond funds encouraged clients to take out margin loans or take out credit lines for the purpose of buying funds heavily leveraged with Puerto Rican bonds.

Amid Puerto Rico’s shrinking economy, debt crisis, and other factors described below, such bonds have recently been subject to an enormous sell-off and heavy losses.

Affected Funds of the Puerto Rico Municipal Bonds Lawsuit

Approximately 77% of mutual funds hold Puerto Rico bonds, according to Morningstar. Many investment companies such as Oppenheimer, Franklin Templeton, Nuveen, Eaton Vance, Wells Fargo, UBS, Western Asset, and Highmark, among others, run funds containing these bonds.

Whether you own a fund run by one of the companies listed above, or by any other mutual fund manager, you should check your mutual fund portfolio to see if you have purchased any fund containing Puerto Rican municipal bonds. If you are unsure as to whether a fund you own contains Puerto Rican bonds, please contact Grant & Eisenhofer P.A. and Gardy & Notis, LLP by submitting the form at right, or by calling us at 800-256-8511. Our firms can assist you in determining your fund’s portfolio holdings.

Puerto-Rican Municipal Bonds—One Notch Above Junk

From December 2012 through March 2013, each of the Big Three credit rating agencies—Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings—lowered their ratings on Puerto Rico’s general obligation bonds to their lowest investment grade ratings, just above junk-bond status. Standard & Poor’s 1-year annual returns for its Puerto Rico Municipal Bond index have fallen over 19%.

Over August and September 2013 alone, the island’s bonds have lost about 40% of their value, with yields now higher than the yields on Greek debt. Mutual funds in the United States that hold Puerto Rican bonds—many marketed as single-state funds—have suffered serious losses.

As business news columnist Steven Goldberg explained, “Falling prices and investor redemptions have created a vicious cycle: The more prices fall, the more fund investors sell. That puts more pressure on Puerto Rican bond prices, so fund investors sell more. Where this ends is anybody’s guess.” Beware Puerto Rican Bonds Hiding in Your Portfolio, KIPLINGER, Sept. 17, 2013.

History: Puerto Rico’s Financial Crisis

In 2006, Puerto Rico’s economy fell into a deep recession. Despite a brief recovery in 2012, 2013 has seen the island nation’s economy shrinking again, and forecasts for 2014 suggest further weakening.

Concerns about the country’s worsening economy have severely shaken the market for the island’s bonds. Puerto Rico’s debt is now over $70 billion, nearly tripling since 2000. As of August 2013, Puerto Rico’s unemployment rate was 13.9%, as compared to a nationwide unemployment rate of 7.3% for the same period. The nation’s population has been in decline for over a decade, according to U.S. Census Bureau data.

In May 2013, Federal Reserve Chairman Ben Bernanke remarked that the Fed might taper its purchases of bonds, sparking a meltdown in the municipal bonds market. Then in July, the City of Detroit filed the largest municipal bankruptcy in U.S. history. Both incidents sparked prompt and sharp sell-offs in municipal bonds nationwide, including those issued by the government of Puerto Rico. Outstanding government-issued municipal bonds of Puerto Rico now exceed over $50 billion, behind only California and New York.

Want to know if you have legal options regarding your Puerto Rico Municipal Bonds?

If you purchased, through a broker, any mutual fund containing municipal bonds of the Commonwealth of Puerto Rico, or you directly purchased any municipal bonds of the Commonwealth of Puerto Rico, and have suffered losses, please contact Grant & Eisenhofer P.A. and Gardy & Notis, LLP to discuss your potential claim by submitting the contact form, or by calling us at 800-256-8511.