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UBS Whistle-Blower Settles Fee Dispute Over $104 Million

Bradley Birkenfeld, the former UBS AG (UBSN) banker who exposed how the Swiss lender helped Americans evade taxes, settled legal disputes with a law firm that claimed it was owed $13 million of his $104 million whistle-blower award.

The Washington firm of Schertler & Onorato LLP claimed Birkenfeld owed it 12.5 percent of any whistle-blower award he got from the Internal Revenue Service. Birkenfeld sued the firm in Superior Court of the District of Columbia, claiming it mishandled his case. Both cases were dismissed yesterday, court records show. Terms weren’t disclosed.

“The parties to this litigation hereby notify the court that this case has been settled,” lawyers for Birkenfeld and Schertler & Onorato wrote in a filing yesterday in Superior Court.

In a separate filing in federal court in the District of Columbia, the lawyers said Birkenfeld agreed to dismiss “the arbitration of the fee dispute filed before the D.C. Attorney-Client Arbitration Board.”

Birkenfeld hired Schertler & Onorato in 2006 to help him tell the U.S. how UBS used Swiss bank secrecy to cheat the IRS. Birkenfeld told his story the next year to the IRS, the U.S. Justice Department, the U.S. Senate and the Securities and Exchange Commission. He agreed in October 2007 to pay the law firm 12.5 percent of any IRS whistle-blower award, according to court documents.

Guilty Plea

Birkenfeld served 31 months in prison after pleading guilty to conspiracy and was released in August 2012, six weeks before the IRS gave him the largest federal whistle-blower award for an individual. Birkenfeld had fired Schertler & Onorato in 2008, and his new law firm, Washington-based Kohn, Kohn & Colapinto LLP, said the 12.5 percent accord is no longer binding.

Birkenfeld’s impact on Zurich-based UBS, the largest bank in Switzerland, is undisputed. A neurosurgeon’s son from Brookline, Massachusetts, he spent 15 year in Swiss banking, including five at UBS. He was one of as many as 60 UBS employees who trolled the U.S. for rich clients, even though the bankers lacked required SEC licenses, he told Senate investigators. They visited art shows, yachting regattas and golf and tennis tournaments, he said.

Conspiracy Charge

Prosecutors have said Birkenfeld’s disclosures led them to charge UBS in 2009 with conspiracy. The bank avoided prosecution by paying $780 million, admitting it fostered tax evasion from 2000 to 2007, and turning over data on 250 Swiss accounts. UBS later agreed to provide information on another 4,450 accounts. Since then, at least 38,000 Americans voluntarily disclosed offshore accounts to the IRS, generating more than $5.5 billion in tax revenue.

The IRS said Birkenfeld provided “exceptional cooperation,” gave information on taxpayer behavior that the agency hadn’t detected, and led to substantial changes in UBS practices, according to an agency explanation released by Stephen Kohn of Kohn, Kohn & Colapinto.

While he sat in prison in Minersville, Pennsylvania, Birkenfeld filed a lawsuit accusing Schertler & Onorato of malpractice and breach of fiduciary duty. The complaint, filed in August 2011 without a lawyer in Superior Court, sought $10 million in damages.

Birkenfeld claimed the firm mishandled negotiations with the Justice Department, which refused in 2007 to grant him either immunity or a subpoena he said he needed to reveal information otherwise protected by Swiss law.

Federal Suit

When prosecutors charged him in 2008, they said he wasn’t truthful about his own role in helping a billionaire client break the law.

Birkenfeld also sued in federal court in Washington, claiming Schertler & Onorato violated his constitutional rights in May 2008 when he met with prosecutors two days after his arrest. At that meeting and in other instances, Birkenfeld claimed, a prosecutor said he couldn’t meet with Senate or SEC investigators, and his lawyer didn’t respond, violating Birkenfeld’s right to free speech and his right to due process.

In October 2011, Schertler & Onorato denied Birkenfeld’s allegations and filed a counterclaim, saying he didn’t give his lawyers “complete information about the extent of his illegal conduct and activities.”

‘Complex’ Process

That counterclaim said a Schertler lawyer gave a Form 211, titled an “Application for Reward for Original Information,” to IRS agent Matthew Kutz at a meeting on June 12, 2007. A copy of the form, provided last year to Bloomberg News by Schertler & Onorato, shows it was signed by Birkenfeld and given “through counsel” to Kutz “in person.”

Schertler & Onorato helped Birkenfeld “navigate the complex and evolving” process at the “newly formed IRS Whistleblower Office,” according an October 2011 court filing by the firm.

A retainer letter, sent on Oct. 23, 2007, outlined the 12.5 percent whistle-blower fee and a cap on hourly fees at $80,000, according to the firm’s counterclaim.

Birkenfeld also signed a second representation letter on May 9, 2008, for the firm to represent him after his arrest. It called for an advance of $50,000.

In his December 2010 letter to Schertler, Colapinto said Birkenfeld’s second retainer letter superseded the first one, which meant the firm “relinquished its financial interest” in the whistle-blower award. It also referenced an IRS Form 211 filed in 2007.

‘No Evidence’

“There is no evidence that your firm performed any work on that claim or that your firm perfected the claim as required by either the statute or IRS regulations governing the whistle-blower reward program,” Colapinto wrote.

Birkenfeld’s brother, Doug, didn’t respond to an e-mail asking whether Bradley would comment on the fee dispute. Attorney David Schertler, of Schertler & Onorato, didn’t immediately respond to a request for comment.

The cases are Birkenfeld v. Schertler & Onorato, 11-cv-1529, U.S. District Court, District of Columbia (Washington); and Birkenfeld v. Schertler & Onorato LLP, 2011-CA-6905, District of Columbia Superior Court (Washington).

To contact the reporter on this story: David Voreacos in federal court in Newark, New Jersey, at dvoreacos@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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