UBS AG owes nothing to former U.S. clients who filed a “travesty” of a lawsuit against the Swiss bank over penalties and interest they paid to the Internal Revenue Service for offshore accounts, an appellate court ruled.
The lawsuit claimed that UBS, the largest Swiss bank, had a duty to inform three former clients that they had to declare their accounts to the IRS and pay any taxes owed. All three avoided prosecution by voluntarily disclosing their accounts to the IRS and paying back taxes, interest and a 20 percent penalty.
Last June, U.S. District Judge John Darrah dismissed the case filed in federal court in Chicago by Matthew Thomas, Himanshu Patel and Mathilde Guetta. A U.S. Court of Appeals panel in Chicago upheld that ruling today, saying the bank didn’t defraud the taxpayers or breach a contract or engage in malpractice, as their 2011 lawsuit claims.
“The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties” and interest “from the source, in this case UBS, of the income concealed from the IRS,” U.S. Circuit Judge Richard A. Posner wrote in today’s ruling.
Craig Mielke, an attorney for the former UBS clients, declined to comment on the decision.
Since 2009, more than 38,000 Americans have avoided prosecution by voluntarily disclosing their offshore accounts to the IRS, paying taxes and penalties, and identifying the banks, bankers and advisers who helped them hide their assets overseas.
Zurich-based UBS was charged with conspiracy in February 2009 and avoided prosecution by admitting it aided tax evasion, paying $780 million and handing over account data on 250 clients. It later disclosed information on about 4,450 more accounts.
In defending the lawsuit, UBS argued that Schedule B of IRS Form 1040 requires taxpayers to answer yes or no to whether they “have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?”
Each plaintiff falsely answered no, even though it was “inconceivable” that they could have misinterpreted the question, “regardless of what UBS representatives told or failed to tell plaintiffs,” UBS argued. Posner agreed, saying the bank had no duty to clients over their tax obligations.
“It has no duty to treat them like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits,” Posner wrote. “It has no duty to read aloud to them line 7a on Schedule B of Form 1040.”
Posner dismissed the argument that the bank should have prevented its clients from violating the law.
“This is like suing one’s parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties,” Posner wrote.
The ruling is similar to one in a lawsuit filed by billionaire Igor Olenicoff, chief executive officer of Newport Beach, California-based Olen Properties Corp. Olenicoff, a former UBS client, pleaded guilty in 2007 to filing a false tax return and admitted he hid $200 million in offshore accounts from the IRS. He was sentenced to two years’ probation and ordered to pay $52 million in back taxes, fines and penalties.
Olenicoff claimed UBS committed fraud by not telling him he owed U.S. taxes. He also said UBS traded excessively in his accounts. U.S. District Judge Andrew Guilford in Santa Ana, California, threw out Olenicoff’s lawsuit last year.
“Olenicoff has already sworn that he was not an innocent dupe,” Guilford wrote. “It is directly inconsistent for him to now claim that he unwittingly relied on UBS’ counsel. If Olenicoff wanted to claim he was misled by UBS, he had the option of pleading not guilty in the criminal proceedings.”
UBS sued Olenicoff last August for malicious prosecution. That case is pending.
In today’s ruling, Posner suggested a similar route.
“This lawsuit, including the appeal, is a travesty,” Posner wrote. “We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.”
The case is Thomas v. UBS, 11-cv-4798, U.S. District Court, Northern District of Illinois (Chicago).
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