UBS AG (UBSN) and billionaire Igor Olenicoff are scheduled to clash in court today over his claim that the bank bears blame for his failure to declare $200 million in offshore accounts on U.S. tax returns.
Olenicoff, 69, a real-estate developer, pleaded guilty in 2007 to filing a false tax return, admitting he didn’t tell the Internal Revenue Service about his offshore accounts for seven years. He was sentenced to two years’ probation and ordered to pay $52 million in back taxes, fines and penalties.
In 2008, he sued Zurich-based UBS, the largest Swiss bank, claiming it traded excessively in his accounts, engaged in racketeering and committed fraud by not telling him he owed U.S. taxes. He seeks as much as $1.7 billion in damages. Arguments on the bank’s motion to dismiss the case are set for today before U.S. District Judge Andrew Guilford in Santa Ana, California.
“UBS did not tell Olenicoff to lie on his tax returns about having an interest in foreign accounts,” the bank said in an April 2 court filing. “Olenicoff knowingly and willfully lied on his tax returns. Olenicoff’s felony conviction for subscribing to a false tax return is no one’s fault but his own.”
If Guilford lets the lawsuit go to trial on May 8 as scheduled, the case could offer new insights about Swiss bank secrecy and the complex finances of Olenicoff, who built his fortune as the chief executive officer of Newport Beach, California-based Olen Properties Corp.
Jurors at a trial may hear videotaped jailhouse testimony from Olenicoff’s former UBS banker, Bradley Birkenfeld, the only other defendant remaining of 39 originally sued, court records show. Birkenfeld is serving 40 months in a federal prison in Pennsylvania for helping Olenicoff and others evade taxes. At his sentencing, a prosecutor said Birkenfeld exposed a “massive tax scheme” at UBS while hiding his own dealings with Olenicoff.
UBS “aggressively solicited” Olenicoff and promised his offshore money “would be absolutely protected in safe, legal, effective investment structures, which would not result in tax liability or reporting requirements until the money was repatriated,” Olenicoff said in an April 2 filing. “Those assurances were untrue and UBS knew them to be untrue.”
Olenicoff claims UBS and Birkenfeld told him he didn’t have to report his Swiss income to the IRS, which was reinforced by the bank’s system of holding mail and not sending year-end tax information to him or the tax agency. Had UBS done so, Olenicoff “would have dealt with the situation before the matter rose to the level of a potential criminal liability,” according to his filing.
Larry Campagna, a Houston tax attorney who isn’t involved in the case, said Olenicoff’s lawsuit raises an important question.
“Did UBS set out to make misrepresentations to U.S. taxpayers to attract their investment funds?” said Campagna, of Chamberlain, Hrdlicka, White, Williams & Aughtry. “If UBS misrepresented facts upon which Olenicoff reasonably relied, then he’s got a case. But there’s a lot packed into the words ‘misrepresentation and reasonable reliance.’”
Olenicoff pleaded guilty after a three-year criminal probe that included a search of his office and house by IRS agents in 2005. He admitted that from 1998 to 2004, he filed false returns that hid accounts in Switzerland, Liechtenstein, England and the Bahamas.
Birkenfeld’s evidence helped lead to criminal charges against UBS in 2009. The bank avoided prosecution by paying $780 million, admitting it helped thousands of Americans evade taxes and turning over the names of 250 American clients to U.S. authorities. UBS later revealed another 4,450 accounts.
After that, a U.S. probe of offshore accounts mushroomed. Prosecutors charged almost 50 taxpayers and two dozen foreign bankers or advisers with tax crimes. Seven current or former bankers at Credit Suisse AG and Switzerland’s oldest private lender, Wegelin & Co., were indicted. Some 33,000 more Americans avoided prosecution by declaring offshore accounts to the IRS.
Olenicoff sued UBS, Birkenfeld and others in 2008. The April 2 filing claimed they “grossly mismanaged and churned Olenicoff’s assets to their own benefit,” while hiding from him millions in “secret profits they were making by placing his money at risk.”
He claimed UBS put his assets in risky investments known as Double Currency Units, or DOCUs. They combined a money market investment with a call option on one currency against a second currency.
“Birkenfeld never should have allowed Olenicoff to place the vast bulk of his assets in DOCUs,” according to the plaintiff’s April 2 filing.
Olenicoff claimed the bank engaged in racketeering by violating a 2001 agreement with the IRS to serve as a “qualified intermediary.” It was supposed to provide the IRS with tax reporting and withholding on accounts held by U.S. clients.
Olenicoff built an empire by buying land and building industrial and office parks and apartments in four U.S. states.
The developer, who began banking offshore in 1980, said in a 2009 interview that he opened an account in the Cayman Islands and eventually moved tens of millions of dollars to the Bahamas, where he began banking with Barclays Plc. (BARC) He said he got a call out of the blue in 2000 from Birkenfeld at the Geneva office of London-based Barclays, where he worked before joining UBS.
Olenicoff said Birkenfeld set out to befriend him and asked to visit him in Newport Beach to discuss his Barclays holdings, which exceeded $90 million. Birkenfeld then left Barclays, was hired at UBS and became Olenicoff’s private banker.
Olenicoff said Birkenfeld visited him in Miami, invited him to a regatta and encouraged him to come to Switzerland. In Geneva, he said, Birkenfeld and other bankers promised UBS would provide estate planning and meet IRS reporting requirements.
In its court filings, UBS said Olenicoff lied to the IRS “for at least three years before he met UBS.” After his guilty plea, he filed a Report of Foreign Bank and Financial Accounts for 1998 to 2004, disclosing an interest in 15 foreign accounts in 1998.
“Even Olenicoff cannot blame UBS for the tax fraud he committed years before he met anyone affiliated with UBS,” the bank said in its April 2 filing.
UBS said that while it admitted in its February 2009 deferred-prosecution agreement that it helped clients evade taxes, it “has never acknowledged, and it is not true, that UBS misled its own clients regarding the need to disclose accounts and pay taxes.”
The bank also said Olenicoff knew by November 2004 that his offshore accounts were “viewed as improper, indeed potentially criminal,” by the IRS. It cited a December 2004 e-mail he sent to Birkenfeld about his IRS audit.
UBS also denied in court papers that it mismanaged Olenicoff’s DOCU investments, and asserted that it fully disclosed the risks. Olenicoff made more than $9 million, or 2.3 percent, in 128 separate transactions, the bank said.
The case is Olenicoff v. UBS AG, 08-cv-1029, U.S. District Court, Central District of California (Santa Ana).
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