Roy Jones Jr. walks to a neutral corner after knocking Felix Trinidad to the canvas during their 2008 bout at Madison Square Garden. Getty Images
The last fight in Felix Trinidad's Hall of Fame career ended in a loss to Roy Jones Jr. at Madison Square Garden in 2008. The boxer known as Tito is looking for a different result against some of Puerto Rico's biggest brokerage firms.
Mr. Trinidad has retired but he is still punching, trying to recover losses he says exceed $63 million from investing in Puerto Rican municipal-bond funds.
In an April complaint filed with Wall Street's self-regulator, the Financial Industry Regulatory Authority, Mr. Trinidad accuses his former close friend and ex-financial adviser, Jose "Pepe" Ramos, as well as investment firms that employed him—including units of UBS AG, Wells Fargo WFC +1.18% & Co. and Popular Inc. BPOP +1.19% —of squandering much of Mr. Trinidad's $86 million in career winnings betting on Puerto Rico closed-end municipal-bond funds without warning of the risks.
Mr. Trinidad, 41 years old, declined to comment on the specifics in the complaint or a related lawsuit. In a statement, he said he was "in a very difficult situation" and thanked the people of Puerto Rico for the "great support and love."
UBS UBS 0.00% said Mr. Trinidad hasn't been a client since 2007. "For more than 20 years, investors in Puerto Rico municipal bonds and closed end funds received excellent returns that frequently exceeded the returns available through investments in other bonds or bond funds," the company said in a statement, adding that investors in the funds also got great tax benefits. UBS wouldn't comment further about Mr. Trinidad.
Mr. Ramos called the accusations false.
Wells Fargo declined to comment on Mr. Trinidad's complaint. A lawyer for Popular said it still is attempting to work out an amicable solution to his debts and is "very proud of Mr. Trinidad's many accomplishments."
Mr. Trinidad's complaint is one of about 400 filed with Finra in the past several months against Puerto Rico brokerages. Many of the complaints are against UBS, the island's biggest broker-dealer, which underwrote or co-underwrote the funds.
The financial troubles of Mr. Trinidad and other island investors underscore the plight of the commonwealth of Puerto Rico, which has spent about a decade on a borrowing binge fueled by investors' demand for the debt's tax-free status. It also highlights the challenges for the administration of Gov. Alejandro Garcia Padilla, as it tries to spark a flagging economy and avoid a default.
The filings have a common refrain: UBS and others reaped millions of dollars in fees managing and selling closed-end funds that invested in Puerto Rico municipal bonds without representing the risks properly or disclosing how much the bank controlled the market for those funds.
UBS said that for each closed-end fund, the prospectus and quarterly report noted the concentration of the fund in Puerto Rico securities, as well as the leverage rates for each fund. The bank declined to comment further about the cases.
The claims also allege that brokers on the island sold the funds mainly to mom-and-pop investors—even encouraging them to borrow to buy more—leaving them with large losses when the island's bond prices collapsed. They also say the funds themselves borrowed money to buy more bonds, making them more risky and exacerbating losses.
The UBS brokers kept selling the funds even as the bank's own analysts in New York wrote negative and cautionary reports about Puerto Rico bonds in 2012 and 2013, sounding warnings about the commonwealth's finances, according to published research reports.
"We had a client who sold a cow farm and now she doesn't have enough money to pay the electric bills," said Eric Quetglas, Mr. Trinidad's lawyer. "People who sold a business. People with retirement funds. They wanted to buy something that was secure. Brokers would tell them `you're investing in bonds. There's no risk.'"
Throughout the 2000s, the closed-end funds that invested primarily in Puerto Rico bonds appeared like a win-win bet. The island's investors liked the funds because they were exempt from most taxes. And UBS's brokerage unit, UBS Financial Services Inc. of Puerto Rico, found them a steady and growing source of revenue.
Between 2004 and 2008, the funds accounted for about half of the unit's annual revenue, according to public documents from the Securities and Exchange Commission. By 2008, revenue from the funds was $94.5 million, the documents say.
The complaint says that by the time Mr. Trinidad's friend and then-financial adviser Mr. Ramos arrived at UBS in 2000 and began to recommend the funds to Mr. Trinidad, UBS had co-sponsored seven funds with the island's biggest bank, Banco Popular. UBS would go on to sponsor 16 more through 2008, some of which as recently as 2012 earned annual returns that exceeded 20%—much higher than many bond funds that were struggling amid low interest rates.
The UBS closed-end funds work by issuing a fixed number of shares to raise capital they use to invest. They then trade in a secondary market without being listed on an exchange, meaning that UBS must act as the middleman, lining up buyers and sellers or trading directly with its clients.
By 2012, UBS's bond analysts were starting to get worried about Puerto Rico's finances as the island continued to struggle with a multiyear recession. A report in January of that year found "more downside than upside for Puerto Rico bonds." The situation continued to deteriorate through 2013, when another UBS research report said the island's bonds could suffer from rating-agency cuts.
According to one legal filing against UBS, an analysis by another UBS unit concluded that the funds were "incredibly risky and should only be sold in small concentrations," but that the advice ultimately was ignored.
In 2013, brokers for UBS's Puerto Rico unit were "very optimistic about Puerto Rico and our new governor and the things he started doing with the economy," according to a person familiar with the group. Around that time, George Vaida, a 90-year-old World War II veteran who had begun buying the funds around 2009, said UBS sold him an additional $150,000 of fund shares.
When clients wanted to sell out of the closed-end funds, investors depended on UBS buying the shares or finding another buyer. But when UBS's inventory filled up to its limits, investors no longer were able to sell and were forced to hold on to them for months, taking losses, according to the complaints.
In May 2013, the value of Puerto Rico's bonds began falling as part of a broad selloff in the municipal-bond market, taking brokers "completely by surprise," the person familiar said. Mr. Vaida said his adviser blamed Detroit's bankruptcy for scaring investors.
The results were devastating for many investors. In 19 of the closed-end funds, losses totaled $1.66 billion in the first nine months of last year, with some falling more than 40%, according to an analysis by Securities Litigation & Consulting Group, which is working with some plaintiffs' law firms. The S&P Municipal Bond Puerto Rico Index, which tracks the commonwealth's debt, was down by 17% in the same period.
Mr. Trinidad was inducted into boxing's Hall of Fame in June, while awaiting a hearing on his Finra complaint and fighting a complaint by Popular in a San Juan court over his loan agreement. Mr. Trinidad has an interim agreement with the bank that will allow him to continue to pay for living expenses and loan payments, according to people familiar with the matter.
Mr. Quetglas, the lawyer for Mr. Trinidad, said Puerto Rico's banks failed in their duty to prevent the losses.
"He needed this money for the rest of his life," Mr. Quetglas said.
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