UBS tax deal uncertain ahead of U.S. court case

By Lisa Jucca and Kim Dixon

ZURICH/WASHINGTON (Reuters) - Swiss bank UBS braced on Friday for a high-stakes trial in the United States next week that could force it to reveal secret client data, as a last-minute deal remained elusive.

It was unclear whether wealth management giant UBS could settle the damaging tax row before a court hearing starts in Miami on Monday, weighing on its shares.

Washington is demanding that UBS disclose the identity of 52,000 American holders of Swiss accounts suspected of not paying taxes, something UBS Chief Executive Oswald Gruebel cannot comply with as it would be in breach of Swiss criminal law.

But a settlement would most likely have to include a partial disclosure of client data, possibly in an indirect way, and a non-punitive financial penalty, a second source said.

A deal could involve Switzerland agreeing to disclose some UBS client information, possibly by helping the IRS cross-check U.S. banks' data about transfers from Switzerland and UBS.

Lawyers for both sides did not return phone calls seeking comment.

Switzerland has vowed to seize UBS data to stop the bank from handing it over to U.S. authorities, in an attempt to defend its crumbling bank secrecy. It said the tax case targeting its best-known bank is souring diplomatic ties and that hitting UBS hard could destabilize the global financial system.

The bank has admitted aiding U.S. clients in their efforts to hide data, as part of its criminal settlement with the Justice Department earlier this year. Many U.S. observers say the U.S. has a solid case and it is now down to diplomacy.

"The IRS has never been in such a great position," said Joann Weiner, a former economist in the U.S. Treasury Department.

"UBS has deliberately for years made efforts to get around the U.S. law; they admitted to a lot of this in the February settlement," said Weiner, who now teaches at George Washington University.

UBS entered a "deferred prosecution agreement" with the U.S. government in February, after admitting it helped some clients hide data, and paid a $780 million fine.

UBS, which employs 27,000 people in the United States and manages more than $600 billion at its Wealth Management Americas division, is struggling to recover from the subprime crisis.

Analysts say failure to resolve the tax row ahead of the court hearing in Miami would hurt UBS's shares next week.

"It is impossible to predict the outcome. We are telling clients to be cautious," Dirk Becker, a bank analyst at Kepler Equities. "I am sure talks are happening right now. If the trial starts, this would be a bad sign for UBS."

On Wednesday, U.S. District Judge Alan Gold, set to preside over next week's hearing, gave the Justice Department until noon (1600 GMT) on Sunday to say whether it is prepared to seize UBS assets in its bid to force it to disclose data, raising hopes that a settlement was in sight.