Puerto Rico Municipal Bonds: Investor Risk or Compensable Broker Malfeasance?

As widely reported for the Puerto Rico municipal bond crisis, the Island of Puerto Rico has indicated that it will file for bankruptcy protection.

The initial attraction of municipal bonds to investors is the tax-free income. States that issue bonds also exempt their bonds from state income tax for residents of their state (unless otherwise stated). While these bonds are an excellent source for tax-free income (they generally have provided reliable returns) along with the fact that many bonds may be insured, they nevertheless do come with risk.

Concerning the recommendation of various Puerto Rico municipal bonds, a broker may have seriously misguided an investor, inter alia, by recommending and purchasing a block of bonds concentrated within a sole country.

Given that most clients generally do not seek specific bond purchases, especially bond purchases in a specific country, it is usually the broker who makes the recommendation of a particular bond purchase.  A recommendation of this type may violate certain duties a broker owes to their client, including a broker’s primary duty to diversify bonds within a client's account. Further, such an investment strategy may suggest an unwarranted exposure to risk.

Insofar as the municipal bond market does not guarantee that it will compensate investors for this higher risk with higher returns, one must seriously question why a broker would recommend a concentration of Puerto Rico municipal bonds to the detriment of, and without consideration to any other bond offerings that may have been available contemporaneous with the purchase of the Puerto Rico municipal bonds.

Therefore, based on the most recent developments from Puerto Rico if you have suffered or incurred losses in your account resulting from investments made purchasing Puerto Rico Municipal Bonds, you should consider consulting competent legal counsel regarding whether your broker may be liable for the loss.

Feel free to contact Timothy Lyons, Esq. of the firm of Davison, Eastman, Muñoz, Lederman & Paone, P.A. (tlyons@demlplaw.com; (732) 462-7170), or John Marinan, Esq., (jmarinan@aol.com; (732) 291-2421) for a consultation.