Toomre Capital Markets LLC ("TCM") has previously written of the bubbling scandal regarding the Swiss banking giant UBS and its activities in helping American citizens participate in various tax-avoidance schemes. Such posts included Former UBS Private Banker To Plead Guilty, Wealthy Americans Under Scrutiny in UBS Case, UBS Global Wealth Chairman Raoul Weil Indicted, and UBS Poised To Name US Tax Dodgers.

On January 13th 2009, this story is back in the news. U.S. District Judge James Cohn declared that Raoul Weil, 49, the former chairman of the global wealth management division at UBS, was a fugitive from American justice. Apparently, Mr. Weil, the head of the division in which UBS private banker Bradley Birkenfeld once worked, did not surrender to United States judicial officials on charges of conspiring to help wealthy Americans hide assets from U.S. tax authorities. In the indictment unsealed in November 2008, Mr. Weil and other unidentified bankers conspired to help approximately 20,000 Americans hide as much as twenty billion of assets in Swiss bank accounts without declaring them to U.S. tax authorities and hence paying any income taxes generated from them.

This scandal stems from the December 2007 case in which Orange County, California billionaire Igor Olenicoff pled guilty to a charge of filing a false tax return and agreed to pay $52 million in back taxes, penalties and interest. An American based in Switzerland, Bradley Birkenfeld, worked for Raoul Weil (who then oversaw UBS cross-border private banking services, including those offered to wealthy American citizens) and was the private banker for Mr. Olenicoff. Mr. Birkenfeld himself then pled guilty to conspiring to tax avoidance charges and is rumored to be cooperating with American authorities.

Mr. Weil was based in Switzerland and was a member of UBS' executive board until he stepped down after the indictment was made public. Apparently, Switzerland does not consider tax-avoidance charges serious enough to merit the extradition of its citizens. Hence, there always has been some doubt about whether Mr. Weil might ever appear before United States judicial authorities. Mr. Weil's failure to appear, though, likely will increase the pressure on his now former employer UBS to release the complete list of American citizens who had cross-border private banking accounts in Switzerland before UBS unilaterally made the decision to close them last summer.

Back in late May and early June 2008, Toomre Capital Markets LLC ("TCM") wrote about Bradley Birkenfeld and the UBS private banking business serving wealthy American clients. Mr. Birkenfeld, an American citizen based in Geneva, was an mid-level UBS private banker who subsequently pled guilty to helping American clients avoid tax liabilities through various tax-avoidance schemes.

Billionaire real-estate developer Igor M. Olenicoff was a client of Mr. Birkenfeld. In late 2007, he pled guilty to charges about avoiding to pay income taxes on some $200 million in assets hidden at one point with UBS in Switzerland. As a result of this guilty plea, federal prosecutors focused on Mr. Birkenfeld's role and secured an indictment of both him and his co-conspirator, a Mario Staggl, a Liechtenstein citizen and employee of a trust bank located in that secretive country. As part of the federal investigation, Martin Liechti, a top private banker at UBS overseeing the Americas region, was detained for a period by federal authorities in Florida as a material witness.

After Mr. Birkenfeld pled guilty in June, attention shifted to just what role UBS as an organization had in facilitating tax avoidance by American citizens. Over the summer, Congress held formal hearings about the matter. In the opening remarks by Senator Carl Levin on July 18th, he declared "UBS has an estimated 19,000 so-called “undeclared accounts” for U.S. citizens with an estimated $18 billion in assets that have been kept secret from the IRS." Partly as a result of such political and prosecutorial focus, UBS announced that "it would stop offering offshore banking services to clients in the United States". The investigations into UBS's private banking practices have continued through the summer and fall.

On Tuesday November 11th 2008, The New York Times is reporting more on the status of the various investigations. In an article entitled Indictments Said to Be Possible in UBS Inquiry written by Lynnley Browning, news emerges that "A federal investigation into UBS concerning its sale of offshore private banking services to wealthy Americans is concentrating on senior and midlevel executives and bankers, and could result in one or more indictments." Further, "Investigators are sifting through more than 70 names and related account details of American clients provided by UBS over the last few months to the Justice Department, which has passed the details to the Internal Revenue Service for further scrutiny. The Justice Department and the I.R.S. plan to build both civil and criminal tax-evasion cases against some of the clients."

The really interesting issue is how prosecutors will handle the criminal investigation of the bank itself. "The most severe outcomes could include an indictment, a deferred-prosecution agreement or a plea by UBS of wrongdoing. The Securities and Exchange Commission is also investigating the bank, which owns Paine Webber, over possible violations of securities laws." Apparently, UBS disclosed in third-quarter financial statement on Nov. 4 that "the investigations are ‘focused on the management supervision and control of the U.S. cross-border business and the practices at issue.’ "

For publication on Friday, June 6^th 2008, The New York Times has produced an article by Lynnley Browning entitled Wealthy Americans Under Scrutiny in UBS Case. This article details some of the concerns that wealthy American clients of UBS are having much agitation ahead of the expected guilty plea on Monday, June 9^th 2008 of former-UBS private banker Bradley Birkenfeld to conspiring to helping a former American client, Igor Olenicoff, avoid paying taxes on some $200 million held in undeclared UBS accounts. Previous Toomre Capital Markets LLC ("TCM") posts on Bradley Birkenfeld and UBS can be found at this tag link.

The noteworthy fact that this article reveals "Under pressure from the authorities, UBS is considering whether to divulge the names of up to 20,000 of its well-heeled American clients, according to people close to the inquiry, a step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages. Federal investigators believe some of the clients may have used offshore accounts at UBS to hide as much as $20 billion in assets from the Internal Revenue Service. Doing so may have enabled these people to dodge at least $300 million in federal taxes on income from those assets, according to a government official connected with the investigation." [emphasis added]

If UBS were to reveal such a large list of wealthy Americans, there no doubt will be phenomenal anger directed against UBS and its CEO Marcel Rohner, who also just happens to be the head of the private banking arm when this supposed "wink and a nod" tax-avoidance activity supposedly occurred. Surely there will be considerable press coverage of this "tax scandal". There also no doubt will be considerable questioning by other UBS private banking clients about just what the value of supposed Swiss banking privacy truly is. This surely is to lead to some withdrawals and a likely decline in the UBS franchise value.

On the other hand, UBS could elect to fight the United States Justice Department. Of course, there likely then would be criminal charges against the institution itself to fight and the possible loss of United States banking and securities licenses. What the franchise value might be under such a scenario is anybody's guess. However, it is likely to be less than today's closing stock price. Would you want to own a deeply flawed investment banking franchise coupled with a disgraced private bank?

Toomre Capital Markets LLC suspects that this story is going to pick up a life of its own in coming days. With the American electorate entering the Presidential campaign season that is keenly focused on the economy and general tax policies, TCM strongly suspects that these rich Americans are about to be vilified as part of the contentious political season. UBS no doubt is going to receive plenty of bad publicity.

Earlier this week, Toomre Capital Markets LLC ("TCM") wrote about how UBS had advised current and former members of its private banking staff serving American clients to avoid traveling to the United States. The apparent concern was an indictment by American authorities against one of UBS's senior private banking executives, Bradley Birkenfeld, and a co-conspirator, Mario Staggl, a resident of Liechtenstein, a European principality where he is believed to remain at large. This tax-evasion case has led to on-going retention of Martin Liechti, who is UBS's Swiss-based head of international private banking for North and South America, as a "material witness."

Late on the afternoon of Thursday May 29^th 2008, The Wall Street Journal is reporting that Bradley Birkenfeld has apparently decided to change his plea to guilty. Apparently, in a federal court filing earlier in the day, a court clerk stated that Mr. Birkenfeld will change his plea at a hearing scheduled before U.S. District Judge William Zloch in Ft. Lauderdale, Florida on June 9th. He had previously pleaded not guilty.

The article continues "The former UBS banker is part of a larger probe that U.S. prosecutors are conducting into whether UBS advised wealthy American clients on ways to utilize complex corporate entities and off-shore locales to avoid paying U.S. taxes. The U.S. inquiry, which became public earlier this month, comes at a difficult time for UBS, which has written down some $38 billion in securities tied to subprime mortgage loans. A UBS spokesman wasn't immediately available to comment on Mr. Birkenfeld's court filing. Danny Onorato, a lawyer for Mr. Birkenfeld, said he could not discuss details of the agreement. A notice by the court clerk says the federal judge hearing the case 'will ask for a full confession' by Mr. Birkenfeld."

On Wednesday May 28^th 2008, the world awoke to the Financial Times (of London) headline UBS tells unit staff to avoid US visits. According to the FT, UBS has told current and former members of it private banking team responsible for rich US clients not to travel to the United States. Apparently, the reason for the move follows the recent indictment of one of the unit's former senior executives, Mr. Bradley Birkenfeld, who US authorities have accused of helping a billionaire client evade taxes. Perhaps the more genuine reason for the recommended travel restriction is that UBS may not yet want more negative publicity with the revelations of other wealthy Americans who sought to avoid taxes through illicit means arranged by UBS?

The FT article goes on to disclose that UBS has made legal counsel available to the more than 50 members of the private banking unit that had serviced American clients. UBS announced back in November 2007 that it had decided to wind down its cross-border private banking business with US customers, and many of these staff members have already left the private banking unit. Mr. Birkenfeld, an American citizen who has lived in Switzerland for some number of years was formerly part of the team headed by Mr. Martin Liechti, UBS' Swiss-based head of international private banking for North and South America. In April 2008, Mr. Liechti was detained by American authorities and remains in the United States as a "material witness."

Mr. Birkenfeld apparently was hired by Mr. Liechti because of his particularly close relationship with Igor Olenicoff, a US real estate tycoon, who reached a legal settlement with authorities last December. Apparently, because of his relationship with Mr. Olenicoff, Mr. Birkenfeld was able to negotiate a higher rate of remuneration than many of the other team members. Mr. Birkenfeld also apparently had only two major clients rather than the twenty or so serviced by other team members. The article concludes with information that Mr. Birkenfeld's relationship with the UBS private banking unit soured after UBS claimed that he not performed to expectations. Mr. Birkenfeld took legal action against UBS over his termination and then cooperated with the US authorities in their on-going investigations of UBS.