Toomre Capital Markets LLC

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Former UBS Private Banker To Plead Guilty

Earlier this week, Toomre Capital Markets LLC ("TCM") wrote about how UBS had advised current and former members of its private banking staff serving American clients to avoid traveling to the United States. The apparent concern was an indictment by American authorities against one of UBS's senior private banking executives, Bradley Birkenfeld, and a co-conspirator, Mario Staggl, a resident of Liechtenstein, a European principality where he is believed to remain at large. This tax-evasion case has led to on-going retention of Martin Liechti, who is UBS's Swiss-based head of international private banking for North and South America, as a "material witness."

Late on the afternoon of Thursday May 29th 2008, The Wall Street Journal is reporting that Bradley Birkenfeld has apparently decided to change his plea to guilty. Apparently, in a federal court filing earlier in the day, a court clerk stated that Mr. Birkenfeld will change his plea at a hearing scheduled before U.S. District Judge William Zloch in Ft. Lauderdale, Florida on June 9th. He had previously pleaded not guilty.

The article continues "The former UBS banker is part of a larger probe that U.S. prosecutors are conducting into whether UBS advised wealthy American clients on ways to utilize complex corporate entities and off-shore locales to avoid paying U.S. taxes. The U.S. inquiry, which became public earlier this month, comes at a difficult time for UBS, which has written down some $38 billion in securities tied to subprime mortgage loans. A UBS spokesman wasn't immediately available to comment on Mr. Birkenfeld's court filing. Danny Onorato, a lawyer for Mr. Birkenfeld, said he could not discuss details of the agreement. A notice by the court clerk says the federal judge hearing the case 'will ask for a full confession' by Mr. Birkenfeld."

According to a Bloomberg story on the same subject, "By changing his plea, Mr. Birkenfeld is signaling he will help prosecutors and identify other UBS customers who shielded assets to escape paying income taxes, said Eileen O'Connor, former head of the Justice Department's tax division. 'He's decided to cooperate,' said O'Connor, now a partner at the Pillsbury Winthrop Shaw Pittman law firm in Washington. The indictment, unsealed May 13, alleges Birkenfeld and Staggl attempted to sidestep rules in a U.S.-Switzerland tax treaty that requires information to be exchanged on some financial transactions. The pair -- and others not identified by prosecutors -- allegedly traveled to the U.S. to pitch their schemes." The Bloomberg article continues:

The billionaire beneficiary, unnamed in court papers except for his initials, has been identified as Igor Olenicoff, founder of Olen Properties Corp. He pleaded guilty in December to a charge of filing a false tax return and agreed to pay $52 million in back taxes, penalties and interest.

Olenicoff was ranked 236 on the Forbes Magazine list of the 400 wealthiest Americans this year, with a net worth of $1.7 billion. He was sentenced to probation, 120 hours of community service and a $3,500 fine in April.

Birkenfeld, 43, and Staggl helped Olenicoff evade U.S. income taxes on about $200 million in assets, prosecutors said.

The case is U.S. v. Bradley Birkenfeld and Mario Staggl, 08- 60099, U.S. District Court for the Southern District of Florida, Fort Lauderdale. [A link to the indictment is here.]

Toomre Capital Markets LLC suspects that Mr. Birkenfeld has decided to "spill the beans" on other wealthy Americans who used the services of UBS to avoid paying taxes. The key question regarding UBS' potential liability is how full Mr. Birkenfeld's (and potentially Mr. Liechti's) still undisclosed "black books" are with American individuals who conspired to avoid paying taxes due. Certainly, if there are a number of such individuals, UBS will have much more negative publicity (and likely at least civil liability) around their private banking activities.

With UBS's demonstrated incompetence in the fixed-income markets and now this private banking scandal, one really has to wonder just where there is value in owning the common stock of this Swiss banking giant. Reader comments and thoughts are welcome.