A Recent Flood of Cases Has Caused FINRA to Freeze New Arbitrations in Puerto Rico

By Myles Burstein

On March 18, 2014, FINRA announced that due to the recent flood of cases in Puerto Rico, claims would be delayed until FINRA could find additional arbitrators.  In particular, there have been a lot of claims by bondholders who have lost money as a result of misrepresentations as to the risks involved.

Since the city of Detroit filed bankruptcy last summer, Puerto Rico’s municipal bond market has been struggling.  This has provoked investor fears for Puerto Rico’s $70 billion in municipal debt and has set off a wave of claims against the broker-dealers that have sold the bonds.

According to Irvin Jackson, author of the article “Puerto Rico Bond Arbitration Claims Overwhelming FINRA,” “[a]t least 165 Puerto Rico bond fund cases have been filed by investors against UBS and other brokerage firms, claiming that false and misleading information was provided about the safety and security of the investments.  However, some estimates suggest that more than 500 arbitration claims are likely to be filed in the coming months.”  UBS continues to face lawsuits coming from Puerto Rico stemming from the Puerto Rico bond funds.  These types of claims involve the misrepresentation of the risks associated with investing in these bonds.  Generally, these investments were being pitched to elderly investors as safe and secure ways to save for their retirement.

Typically, FINRA arbitration panels have three arbitrators, and a single arbitrator can only hear small claims of $20,000 or less.  According to Linda Feinberg, President of FINRA dispute resolution, FINRA has two ways to handle the shortage of arbitrators in Puerto Rico: it can either recruit locally or send arbitrators to Puerto Rico from nearby locales like Florida.  In the past, this strategy has worked.