Puerto Rico-based investor group Ocean Capital gained at least a partial victory against nine Puerto Rico-based investment funds holding municipal bonds, in a ruling touching on issues of disclosure, investment fund shareholder voting, and Securities and Exchange Commission regulations.
The United States District Court for the District of Puerto Rico last week granted Ocean Capital’s motions to dismiss the funds’ complaints that Ocean didn’t disclose its holdings to the SEC and that Ocean deceived the funds’ shareholders in its election of directors.
The court has not yet ruled on Ocean Capital’s counterclaims asking the court to order two elected directors to be seated on the boards of two of the funds and three elected directors be seated at a third fund. Ocean also is asking for attorneys fees.
Underlying the dispute has been Ocean Capital’s efforts to elect directors to nine Puerto Rico-based income funds in an attempt to change the funds’ approaches to investment. The current board members have refused to give up their seats, arguing that Ocean’s intentions are to liquidate the funds.
In August, United States Magistrate Judge Giselle López-Soler recommended the dismissal of the funds’ arguments. Last week United States District Judge Gina Méndez Miró dismissed them, but said her court retained jurisdiction on Ocean’s counterclaims.
The closed-ended funds whose claims were dismissed were the Tax-Free Fixed Income Fund for Puerto Rico Residents (I-V), Puerto Rico Residents Tax-Free Fund (VI-VIII), and Tax Free Fund for Puerto Rico Residents. UBS and Banco Popular sponsor them. As of 2022 the funds had a total of $560 million under management.
These funds filed complaints against Ocean Capital LLC, PRCE Management LLC, and 20 individuals claiming they violated rules requiring groups that acquire more than 5% ownership of equity to declare their ownership with the SEC within 10 days and another that bars soliciting shareholder proxies with false information.
López-Soler said there is evidence of a broader stockholders group having formed for only one of the seven investment funds, and any problem with that has been rectified. The investment funds’ complaints about lack of declaration for the other funds made no sense, she said.
The SEC rule requiring stockholder groups holding more than 5% of shares to declare their holding publicly aims to tell investors and the market about possible potential changes in control over investment funds, she said. Since the dispute between the funds and the Ocean group has arisen, the Ocean group has told all shareholders about the controversy, including the funds’ claim it is trying to take the funds over. López-Soler said this has effectively served to fulfill the SEC rule with regard to all the funds.
The funds allege Ocean Capital and one other shareholder should have revealed themselves as a group, but López-Soler said it is unclear they were a group.
The funds said the defendants incorrectly told voters the defendants enjoyed broad support among the shareholders. López-Soler said the defendants just indicated they had a “coalition” and this was a vague claim.
While the plaintiffs said the defendants failed to tell shareholders their intention to liquidate the funds, she said there is no support for the claim that was the defendants’ only goal and the defendants did mention this as a possibility, thereby putting shareholders “on notice.”
The plaintiffs said the defendants failed to disclose Ocean Capital is a beneficiary of tax benefits of Puerto Rico Acts 20 and 22, which exempted those who relocated to the island in the past 10 years from Puerto Rico income tax on, among other things, Puerto Rico-sourced income from capital gains, interest, and dividends.
López-Soler said Ocean was not benefiting from Acts 20 and 22 even if some of its principals were benefiting from them.
While the plaintiffs said the defendants misled by misrepresenting the performance of the funds, López-Soler said the defendants can cite web-based UBS statements to support their points and have since supplemented their descriptions, making these claims moot.
While the plaintiffs said the defendants were inaccurate about the amount of the directors’ compensation, López-Soler said the defendants have since corrected or clarified their statements on that topic.
Ocean Capital nominated the directors to the nine funds because the “board’s mismanagement has led to significant financial losses,” said Ashley Areopagita, a publicist for Ocean Capital. “Ocean Capital’s nominees won the shareholder vote across at least three of these funds, but UBS refuses to seat the activist’s directors — spending upwards of $5 million on frivolous litigation to try to fight its shareholders.”
UBS did not respond to a request for a comment on the decision and Banco Popular said it would not comment.