Toomre Capital Markets LLC

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NYT: Indictments Said to Be Possible in UBS Inquiry

Back in late May and early June 2008, Toomre Capital Markets LLC ("TCM") wrote about Bradley Birkenfeld and the UBS private banking business serving wealthy American clients. Mr. Birkenfeld, an American citizen based in Geneva, was an mid-level UBS private banker who subsequently pled guilty to helping American clients avoid tax liabilities through various tax-avoidance schemes.

Billionaire real-estate developer Igor M. Olenicoff was a client of Mr. Birkenfeld. In late 2007, he pled guilty to charges about avoiding to pay income taxes on some $200 million in assets hidden at one point with UBS in Switzerland. As a result of this guilty plea, federal prosecutors focused on Mr. Birkenfeld's role and secured an indictment of both him and his co-conspirator, a Mario Staggl, a Liechtenstein citizen and employee of a trust bank located in that secretive country. As part of the federal investigation, Martin Liechti, a top private banker at UBS overseeing the Americas region, was detained for a period by federal authorities in Florida as a material witness.

After Mr. Birkenfeld pled guilty in June, attention shifted to just what role UBS as an organization had in facilitating tax avoidance by American citizens. Over the summer, Congress held formal hearings about the matter. In the opening remarks by Senator Carl Levin on July 18th, he declared "UBS has an estimated 19,000 so-called “undeclared accounts” for U.S. citizens with an estimated $18 billion in assets that have been kept secret from the IRS." Partly as a result of such political and prosecutorial focus, UBS announced that "it would stop offering offshore banking services to clients in the United States". The investigations into UBS's private banking practices have continued through the summer and fall.

On Tuesday November 11th 2008, The New York Times is reporting more on the status of the various investigations. In an article entitled Indictments Said to Be Possible in UBS Inquiry written by Lynnley Browning, news emerges that "A federal investigation into UBS concerning its sale of offshore private banking services to wealthy Americans is concentrating on senior and midlevel executives and bankers, and could result in one or more indictments." Further, "Investigators are sifting through more than 70 names and related account details of American clients provided by UBS over the last few months to the Justice Department, which has passed the details to the Internal Revenue Service for further scrutiny. The Justice Department and the I.R.S. plan to build both civil and criminal tax-evasion cases against some of the clients."

The really interesting issue is how prosecutors will handle the criminal investigation of the bank itself. "The most severe outcomes could include an indictment, a deferred-prosecution agreement or a plea by UBS of wrongdoing. The Securities and Exchange Commission is also investigating the bank, which owns Paine Webber, over possible violations of securities laws." Apparently, UBS disclosed in third-quarter financial statement on Nov. 4 that "the investigations are ‘focused on the management supervision and control of the U.S. cross-border business and the practices at issue.’ "

Perhaps the most intriguing piece of information from the article concerns the investigations of Robert M. Morgenthau, the Manhattan district attorney. He had issued a subpoena to the bank for the names of all United States clients who carried out wire transfers from their UBS accounts based in America to their UBS accounts based in Switzerland in recent years. The 70 names that UBS turned over were covered under that subpoena. “We have not breached Swiss banking confidentiality,” said Karina Byrne, a spokeswoman for UBS, adding that the bank had not provided what she said was “Swiss-based client data.”

Clearly, UBS is caught in a tough spot between the demands of United States prosecutors and the banking secrecy laws of Switzerland. As the pressure builds, expect more and more UBS clients to be revealed to United States authorities as UBS struggles to protect its licenses that are so critical to its large American operations. Perhaps by giving up the client information to the Americans, UBS might be able to survive. However, for those American clients who used UBS' cross-border private banking services, they better consult with criminal defense attorneys as soon as possible.

Toomre Capital Markets LLC strongly suspects that this on-going investigation is very much going to be in the news during the weeks and months to come. Class warfare between the "haves" and "have nots" are very much back on the political agenda with the election of President-elect Obama. The anger that many Americans feel is reflected in the rhetorical battle of "Main Street" against "Wall Street" over the responsibility for the cause for a $700 billion TARP program. What better way of publicly resolving some of the middle-class American anger than through some very public prosecutions of the "rich" Americans who avoided paying taxes on hidden assets?