Aug. 19 (Bloomberg) -- UBS AG, Switzerland’s largest bank, will divulge information on 4,450 accounts to settle a U.S. lawsuit that sought names of American clients suspected of evading taxes.

Switzerland and the U.S. announced the agreement today, resolving a six-month legal tussle that put unprecedented pressure on Swiss banking secrecy. The accord will help the U.S. pursue “tax cheats around the world,” Internal Revenue Service Commissioner Douglas Shulman said on a conference call with reporters.

UBS, the world’s second-biggest manager of money for the rich, admitted in February to participating “in a scheme to defraud the U.S.” and agreed to pay $780 million and disclose the names of more than 250 clients who allegedly hid assets from the IRS. A day later, the IRS sued the Zurich-based bank for information on as many as 52,000 clients.

“UBS got caught red-handed and gave the U.S. a great opportunity to make an example of it,” says Cedric Tille, a professor at the Graduate Institute in Geneva and a former economist at the Federal Reserve Bank of New York. “I wouldn’t be surprised to see some highly visible prosecutions” among UBS account holders, he said.

UBS fell 16 centimes, or 1 percent, to 16.74 Swiss francs in Swiss trading. The shares have gained 11 percent since the U.S. and Switzerland said they had reached an agreement in principle on the tax lawsuit on July 31.

‘Tax Evasion’

“This agreement gives us what we wanted -- access to information about those UBS account holders most likely to have been involved in offshore tax evasion,” Shulman, 42, said today. “We short-circuited a protracted summons and litigation process by culling the accounts to the 4,450 that were of the greatest interest to us.”

The accounts in question had about $18 billion in assets at one time, he said. Shulman said the IRS, as a result of the UBS case, is aware of other financial institutions, law firms and entities that help Americans hide assets offshore.

“We’re going to have our targets set on all categories of folks,” Shulman said in an interview with Bloomberg Television.

Eveline Widmer-Schlumpf, Switzerland’s justice minister, said that if Switzerland hadn’t cooperated with U.S. demands, the civil and criminal litigation risks would have hung over UBS for years. The agreement removes an “existential threat” to UBS and severe consequences for the Swiss economy, Widmer- Schlumpf said at a news conference in Bern. “There’s no reason for euphoria, however.”

Rebuilding Reputation

Under the agreement, UBS will give account data to the Swiss authorities dealing with the U.S. request, who will decide which information gets passed on. Clients will be able to appeal decisions to release their data at the Swiss administrative court. Switzerland pledged to carry through on the U.S. request within a year.

“This agreement helps resolve one of UBS’s most pressing issues,” Chairman Kaspar Villiger said in a statement. “I am confident that the agreement will allow the bank to continue moving forward to rebuild its reputation through solid performance and client service.”

During the negotiations, Switzerland had argued that any disclosure by UBS would require the bank to violate the Swiss banking confidentiality law. The Swiss also threatened to seize the data sought by the IRS if U.S. District Judge Alan Gold had ordered disclosures violating Swiss privacy law.

Upholds Swiss Law

“This settlement really upholds the Swiss law,” said Peter V. Kunz, head of the business law department at the University of Bern. “I was rather surprised that the American side agreed to this. My only explanation is that the Americans were already very happy with UBS clients going to the IRS voluntarily.”

Since February, four UBS clients have agreed to plead guilty to failing to report their offshore bank accounts. Thousands of clients avoided prosecution by voluntarily disclosing their accounts to the IRS under a program that ends Sept. 23, tax lawyers said.

UBS, the European bank with the biggest writedowns and losses from the global credit crisis, suffered client withdrawals of 156.3 billion francs ($146.8 billion) from its wealth management units since March 2008. Chief Executive Officer Oswald Gruebel said on Aug. 4 that a reversal in outflows will probably lag behind a financial improvement at the bank.

Record Loss

Gruebel has cut 7,500 jobs, sold a Brazilian unit, replaced three executive board members and raised 3.8 billion francs in capital from investors since joining UBS in February to help restore the bank’s profitability and reputation. His predecessor Marcel Rohner, who once headed wealth management at UBS, reported a 21.3 billion-franc net loss for 2008, the biggest in Swiss corporate history, and relied on help from the government to keep the bank afloat.

The Swiss government, which invested 6 billion francs in UBS mandatory convertible notes to help the bank split off toxic assets, said today it will dispose of its holding immediately, according to a statement on the government’s Web site.

Swiss Finance Minister Hans-Rudolf Merz said selling the government stake in UBS “wouldn’t be a bad deal” at the moment. “We’ve said that we want to sell the stake as soon as possible,” Merz said earlier today at the press conference in Bern today.

Lost Top Ranking

UBS lost its ranking as the world’s biggest manager of money for the wealthy after Bank of America Corp. bought Merrill Lynch & Co., Scorpio Partnership said in July.

At the end of June, UBS oversaw 961 billion francs at its wealth management and Swiss bank unit, and 695 billion francs at the Americas division, which includes the former Paine Webber Inc., the company reported.

A former UBS banker, Bradley Birkenfeld, pleaded guilty to helping wealthy Americans evade taxes and has cooperated with prosecutors. He is scheduled to be sentenced on Aug. 21 in federal court in Fort Lauderdale, Florida.

Birkenfeld was a banker for California billionaire Igor Olenicoff, who pleaded guilty in December 2007 to filing a false tax return that failed to declare accounts at UBS, where he once had $200 million in assets. Olenicoff got two years probation and paid $52 million in back taxes, interest and penalties.

Diamonds in Toothpaste

In April 2008, Birkenfeld was indicted with Liechtenstein investment adviser Mario Staggl for allegedly helping Olenicoff and others evade taxes. Staggl is a fugitive. At his guilty plea, Birkenfeld said UBS earned $200 million a year by managing $20 billion in assets and setting up sham entities for clients in tax havens such as Panama and the British Virgin Islands.

Birkenfeld said as many as 60 UBS private bankers had trolled for clients at UBS-sponsored art shows, yachting regattas and golf and tennis tournaments. He said he toted customer checks to deposit in European banks and bought diamonds for one client, smuggling them to the U.S. in a toothpaste tube.

Another UBS banker, Raoul Weil, was indicted and declared a fugitive, and a third who ran the now-shuttered cross-border business, Martin Liechti, was held by the U.S. as a material witness for several months last year.

“Mr. Weil is an innocent victim in a political dispute between the United States and Switzerland over the confidentiality of customer information under Swiss banking laws,” Aaron Marcu, a New York-based attorney for Weil, said in a statement today. “Now that the dispute has been resolved through international diplomacy, the next step should be the dismissal of the unjustified indictment.”

The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: August 19, 2009 16:30 EDT