* US clients allege Swiss bank failed to advise properly
* Lawsuits charge asset bankers have legal obligation to
By Lynnley Browning
March 30 The case of a wealthy U.S. businessman
who pleaded guilty to evading taxes but then sued the Swiss bank
where he hid his money is scheduled to go to trial on May 8, the
first major test of civil legal challenges to Swiss banks that
sold offshore private banking services to help Americans evade
The civil suit, filed against UBS AG in federal
court in Santa Ana, California - and another filed against UBS
in federal court in Chicago - will probe whether clients can
legally rely on their private bankers' assertions there is no
need to disclose the accounts on their tax returns or sign
Tax lawyers describe the suits, emerging from a crackdown by
federal authorities on Swiss banks, as the first of their kind
in the United States to assert that Swiss bankers made improper
assertions to their U.S. clients about the tax implications of
their offshore accounts.
In the California case filed in 2008, Russia-born American
billionaire Igor Olenicoff accuses UBS of fraud in handling some
$200 million he kept in offshore accounts and wrongfully
advising him he did not have to report them to the
tax-collecting IRS. Olenicoff pleaded guilty to tax evasion in
2007 and to lying on his tax returns by failing to disclose his
offshore accounts, and paid $52 million in back taxes. His suit
seeks $500 million in damages.
The Chicago case, which seeks class-action status, was filed
in June 2011 on behalf of former UBS clients Matthew Thomas of
California and Himanshu Patel of Arizona. Thomas and Patel
previously paid back taxes, interest and penalties to the IRS
related to their Swiss accounts. They accuse UBS of fraud and
breach of fiduciary duty for allegedly telling them that their
accounts, opened when the two worked overseas during the last
two decades, did not have to be disclosed to the IRS.
UBS argues in both cases that its clients have a duty to
know what to declare on their U.S. tax returns. A UBS
spokeswoman in New York, Karina Byrne, declined to comment
specifically on the lawsuits, but said the bank "does not give
any tax advice to our clients, and we encourage clients to seek
third-party tax advice."
U.S. INVESTIGATION UNDER WAY
The two cases are unfolding at a time when U.S. authorities
are conducting a major investigation into the Swiss banking
industry. The U.S. Justice Department has indicted one Swiss
private bank, Wegelin, and charged scores of Swiss bankers and
their American clients with tax evasion.
In 2009, UBS averted indictment and paid a $780 million fine
to the U.S. Justice Department as part of a deferred-prosecution
agreement in which it admitted to fraud and conspiracy in
helping about 19,000 wealthy Americans hide up to $20 billion in
secret bank accounts.
Olenicoff's name had been provided to the U.S. Justice
Department earlier. The other two plaintiffs came forward to the
IRS through voluntary disclosure programs, created in the wake
of the UBS probe, that drew in 33,000 U.S. taxpayers with
unreported accounts in Switzerland and elsewhere.
It is legal for U.S. residents to hold offshore bank
accounts, but the IRS requires taxpayers to disclose the
accounts on their tax returns as well as to sign special
disclosures provided by the banks, known as W9 forms.
Under a U.S. Treasury program known as qualified
intermediary, banks are required to collect the W9 forms and
withhold taxes - typically 28 percent to 31 percent - on
proceeds from U.S. securities held in client accounts and to
send that money to the IRS.
If clients refuse to sign the disclosures, the banks must
sell any U.S. securities held in the offshore accounts, a
process that triggers a tax bill for the client and a
requirement that the bank report the sale and the client's
identity to the IRS.
UBS admitted as part of its agreement in 2009 that it did
not collect or require clients to sign the forms, while
concealing their identities from the IRS under Swiss bank
secrecy laws. Olenicoff, a property developer whose wealth was
estimated by Forbes in March 2012 at $2.6 billion, argues in
part that UBS told him he did not have to sign the disclosures
and that the investment accounts he was in complied with U.S.
In March 2010, the judge in Olenicoff's case rejected UBS's
motion to dismiss the case, noting that "while banks typically
do not owe fiduciary duty to their depositors, there are some
situations where a fiduciary duty is owed."
Thomas and Patel allege that UBS never told them they had to
sign W9s and failed to withhold required taxes on U.S.
securities in their accounts.
David Deary, a Dallas-based lawyer for Thomas and Patel,
said the potential number of plaintiffs in his case, which would
cover American customers of UBS from 2002-2008 who entered
voluntary disclosure programs with the IRS, could reach 25,000.
"Our clients simply followed UBS's advice that they did not
have to declare and pay taxes on the investment income," he
Some tax experts, including Jay Soled, an accounting
professor specializing in tax at Rutgers University, say
potential plaintiffs might not come forward for fear of airing
dirty laundry about their own taxes.
The cases against UBS may differ in one key way from the
fraud and breach of fiduciary duty claims filed in recent years
against some accounting, auditing and law firms by wealthy
Americans who had bought tax shelters. Plaintiffs in those civil
cases, which resulted in hefty settlements, were bolstered by
legal opinions from the law firms blessing their invalid
shelters - something the UBS clients lack, tax lawyers said.
Larry Campagna, a tax lawyer at Chamberlain Hrdlicka in
Houston, said most juries would be unsympathetic to a wealthy
U.S. resident who relied on a foreign banker for tax advice.
But Jonathan Strouse, a tax lawyer at Holland & Knight in
Chicago, said that even if Swiss bank clients had a duty to know
they should have reported the secret accounts on their tax
returns, they could still have "false representation" cases
against banks which gave them improper information. "A lot of
the clients had huge tax bills, and they're going to be looking
to get back anything they can from the banks," Strouse said.