UBS had a good thing going in Puerto Rico. The Swiss bank served as an advisor to the commonwealth’s Employees Retirement System, led the underwriting of a $2.9 billion bond issue for the pension agency in 2008, and then stuffed half of those bonds into a family of closed-end mutual funds it sold exclusively to customers on the island. It collected fees at every step.

Now, with the U.S. territory in the downward spiral of a government debt crisis, it’s all coming apart for UBS, long the biggest retail brokerage on the island. After UBS helped the government dig itself into a deeper hole and put island customers on the hook for the losses that followed, its Puerto Rico saga has become a cautionary tale of how risks can multiply.

Angry customers have filed hundreds of arbitration claims with the Financial Industry Regulatory Authority. They’re seeking more than $1.1 billion in damages from UBS after huge losses in the tax-free bond funds, sold as high-income investments that would preserve their capital, and in the bonds themselves. Three of UBS Puerto 
Rico’s five offices have closed since 2010, and nearly 60 of the unit’s 140 financial advisers have departed. The bank’s retail brokerage market share on the island has dropped to 33 percent from 48 percent over that period.

Retiree Juan Burgos Rosado was 66 in December 2011, when he opened an account with UBS. A month earlier, he had taken a fall from a tall ladder, ending his career rehabbing real estate. Rosado was “the quintessential conservative investor,” according to the arbitration panel that heard his case. UBS advised him to move $325,000 from a maturing certificate of deposit into its high-income funds. Rosado invested a further $200,000 in 2012, when he sold a house, and $600,000 more in January 2013, when another CD matured. He tried to sell the funds later that year as they plunged in value. His statements showed they were still worth $450,000, but UBS offered him just $90,000. While most closed-end funds are listed on an exchange, these were not, so clients depended on bids and offers from UBS Puerto Rico to get in or out.

Rosado didn’t sell; he went to arbitration and won. In May, the arbitrators wrote in their decision that Rosado was “grossly over-concentrated” in the bond funds, which were unsuitable for a senior with no investing experience. UBS was ordered to pay Rosado $1 million, including $602,000 in damages. With six other arbitration cases decided on the merits so far this year, one of which went in favor of the bank, UBS has been ordered to pay out a total of more than $7 million.

The bank was disappointed in the outcome of Rosado’s case, says UBS spokesman Gregg Rosenberg. The claims arbitrated so far are not indicative of how other claims might be decided, says Rosenberg, who’s based in New York. “For more than 20 years, investors in UBS’s Puerto Rico municipal bonds and closed-end funds received excellent returns.” Losses beginning in mid-2013 occurred amid general weakness in municipal bond markets and Puerto Rican debt, the bank says. The funds, which have declined as much as 75 percent from their initial prices, have continued to pay dividends.