May 7 (Bloomberg) -- UBS AG, the world's biggest money manager for rich individuals, said the U.S. Department of Justice is investigating whether the Swiss bank helped clients evade American taxes.

One senior bank employee was ``briefly detained'' by U.S. authorities as a ``material witness,'' the firm said in an e- mailed statement. The Financial Times reported that the employee was Martin Liechti, the Zurich-based head of UBS's international wealth management business for the Americas. Rohini Pragasam, a UBS spokeswoman in New York, declined to comment on the FT report. Liechti could not immediately be reached for comment.

Clients pulled a net 12.8 billion francs ($12.1 billion) from UBS's asset- and wealth-management units in the first quarter, the first withdrawal in almost eight years as the bank's writedowns swelled to $38 billion. German prosecutors said in March they're weighing a criminal investigation into whether UBS helped clients evade taxes.

``UBS has been hit by a perfect storm,'' said Edwin Merner, who oversees $2 billion at Atlantis Investment Research Corp. in Tokyo. ``Clients may run away if they think they'll leak information to tax authorities in Germany and the U.S.''

Department of Justice

UBS fell 1.8 percent to 34.6 francs in Swiss trading. The bank said yesterday it plans to cut about 5,500 jobs, including as many as 2,600 at its investment-banking unit, which had 18.2 billion francs of first-quarter losses. Chief Executive Officer Marcel Rohner told analysts he expects ``tough business conditions'' to continue.

The U.S. Department of Justice is investigating UBS's conduct in relation to services provided by Swiss-based client advisers to U.S. clients between 2000 and 2007, the bank said. The U.S. Securities and Exchange Commission is also investigating whether UBS employees in Switzerland who advised U.S. clients failed to register with the agency as required.

The employee who was detained hasn't been charged with any wrongdoing, though will remain in the U.S. ``pending discussions with the U.S. authorities regarding resolution of his status as a witness,'' the bank said.

UBS, which said it's cooperating with the probe, pledges on the Web site of its U.S. private bank to help meet objectives including income generation and ``tax minimization.'' It doesn't offer tax or accounting advice.

German Probe

Damage to its reputation from subprime losses led to an 82 percent drop in net new money inflows to its private bank in the first three months of the year, UBS said yesterday. Wealth management international and the Switzerland unit had 2.5 billion francs of net new money, compared with 23.4 billion francs in the previous quarter. Wealth management U.S. clients added 3.1 billion francs, down from 8.1 billion francs.

Prosecutors in Germany are considering opening a criminal probe into allegations that UBS offered Germans help in hiding funds from local tax authorities, the Mannheim Prosecutors' Office said March 31.

UBS is also being investigated by the U.S. Attorney's Office for the Southern District of New York in connection with tax shelters sold to wealthy individuals from 1996 to 2000.

HVB Group, the German bank bought by UniCredit SpA, in 2006 agreed to pay $29.6 million to avoid prosecution on charges it helped accounting firm KPMG LLP sell illegal tax shelters that allowed wealthy Americans to evade more than $500 million in taxes. KPMG agreed to pay $456 million to avoid prosecution a year earlier.

The Swiss bank is also among banks investigated by U.S. state officials into how they marketed auction-rate bonds to investors. Auction-rate failures led to surging costs for some borrowers after dealers stopped bidding for bonds investors didn't want.

UBS announced yesterday that it will exit the U.S. municipal bond market as part of an overhaul of its investment banking operations. The $2.6 trillion municipal market had its worst start in 12 years in the first quarter.

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Last Updated: May 7, 2008 12:16 EDT