Friday, February 8, 2013

Judges Blast UBS Depositors Who Sued UBS (2/8/13)

In Thomas v. UBS AG, 706 F.3d 846 (7th Cir. 2013), here, Judge Posner, joined by Judges Wood and Williams, rejects the claims of UBS depositors that they are entitled to damages from their co-conspirator, UBS AG.  For the earlier blog entry on the case, see Class Action Suit by U.S. Depositors in UBS (8/4/11), here.

As I noted in a prior blog just days ago, another judge reached the same conclusion.  See UBS Depositors Fail on Pleadings in Civil Case Against UBS (Federal Tax Crimes Blog 2/2/13), here.  But, Judge Posner brings power in his analytical skills, and, well, rhetorical skills, to the opinion.

Readers of this blog know the pattern.  UBS promotes to U.S. taxpayers "secret" Swiss accounts (UBS accounts in particular) to avoid paying U.S. tax.  U.S. taxpayers "willfully" -- that is a term of  art -- choose to follow that siren song.  UBS and the U.S. taxpayers thus become co-adventurers -- technical term co-conspirators -- in U.S. tax evasion.  UBS is caught flat-footed and pays a whopping $780 million fine to make its peace with the US Government.  But, UBS also rats on its former co-conspirators.  The U.S. taxpayers are targeted.  Some are prosecuted and required to pay large income tax, penalties and interest and even larger FBAR penalty. Others either join the IRS offshore voluntary disclosure initiatives or are audited; in either event they pay large income tax, penalties and interest and either  even larger  FBAR miscellaneous penalty mimicking the FBAR penalty or the FBAR penalty.  Those taxpayers are not happy.  They did not get the benefit of their bargain with UBS -- tax evasion.  Rather than take their lumps, they want to blame someone else.  So, they sue their co-conspirator, UBS.  Judge Posner trashes their claims.

After dealing with choice of law issues the only lawyers can love (well, maybe like), Judge Posner weighs in (bold face added):
The plaintiffs, and the other members of the class—who number in the thousands—are American citizens who had bank accounts in UBS in 2008 when the UBS tax-evasion scandal (of which more shortly) broke. The accounts of the three plaintiffs were large—$500,000 to $2 million each. The plaintiffs had not disclosed the existence of the accounts on their federal income tax returns, as they were required to do by Form 1040, Schedule B, which on line 7a asked (the current version is materially the same): "At any time during [2002-2008] did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?" They also did not disclose the income they earned in those accounts. Neither did they pay federal income tax on that income, though it was taxable. Eventually they 'fessed up and paid the taxes they owed plus interest on those taxes and a 20 percent penalty. They did this pursuant to an IRS amnesty program, adopted in the wake of the scandal, called the "Offshore Voluntary Disclosure Program." Internal Revenue Service, 2009 Offshore Voluntary Disclosure Program,, and Disclosure: Questions and Answers, (both  [*8] visited Jan. 31, 2013). The suit seeks to recover from UBS the penalties, interest, and other costs that the plaintiffs and the other members of the class incurred from their scrape with the IRS, plus the profits (in the hundreds of millions of dollars) they claim UBS made from the class as a result of the fraud and other wrongful acts that they allege UBS committed by inducing them to maintain their accounts with it. 
The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS. One might have expected the plaintiffs to try to show that they had forgotten they had accounts with UBS (though that would be preposterous, for these were significant investments for each of the plaintiffs). Or that UBS had told them that income earned in those accounts was somehow tax exempt and moreover that the accounts themselves were somehow not foreign bank accounts within the meaning of the tax code and so the plaintiffs didn't have to acknowledge having accounts with UBS. They don't make any of these feeble arguments. They do argue, as we'll see, that UBS was obligated to give them accurate tax advice and failed to do so, but not that it gave them inaccurate, as distinct from no, advice. 
* * * * 
There is in general no common law duty to prevent another person from violating the law. At worst, UBS, as we're about to see, violated an agreement with the IRS designed to prevent the kind of evasion that the plaintiffs engaged in. That might conceivably make UBS an aider or abettor of the plaintiffs's tax evasion and so make this case a distant relative to Everet v. Williams (Ex. 1725), better known as The Highwayman's Case and eventually reported under that name in 9 L.Q. Rev. 197 (1893). A highwayman had sued his partner in crime for an accounting of the illegal profits of their criminal activity. The court refused to adjudicate the case, and both parties were hanged. Minus the hanging and with certain exceptions (such as contribution and indemnity) irrelevant to this case, the principle enunciated in The Highwayman's Case applies to accomplices in civil wrongdoing, as noted in our recent decision in Schlueter v. Latek, 683 F.3d 350, 355-56 (7th Cir. 2012). In The Highwayman's Case one accomplice was seeking a bigger share of the profit from the crime from the other one; here one accomplice is seeking a smaller share of the costs of the crime from the other one. The principle is the same; the law leaves the quarreling accomplices where it finds them.\ 
* * * * 
The plaintiffs further argue that UBS touted the secrecy of their accounts, consistent with the Swiss tradition of secret bank accounts. The plaintiffs inferred that the bank would conceal their accounts not only from competitors, relatives, ex-spouses, private creditors, and journalists, but also from the Internal Revenue Service, thus enabling them to get away with not paying any federal income tax they might owe on the earnings in the accounts. But such a scheme would of course be illegal, bringing us back to The Highwayman's Case. 
* * * * 
This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn't asked for the imposition of sanctions on the plaintiffs and class counsel.
Well, readers will get the point.  Was Judge Posner showing some sympathy for UBS in the last quoted comment (the last in the opinion)?  Or was he just lamenting that the court system has to deal with such frivolous claims?

Errata, the decision was dated 2/7/13.  Somehow, LEXIS-NEXIS shows the decision was rendered 12/7/12 and has assigned a 2012 L-N citations.  That is wrong.  When and if L-N corrects it, I will post the corrected citation and, of course, when the F.3d citation becomes public, I will post that as well.

Addendum 2/9/13:

A Tax Notes Today Article, David D. Stewart, Appeals Court Dismisses Suit by 'Tax Cheats' Against UBS, 2013 TNT 28-6 (2/11/13), quotes several practitioners who seem to concur that Judge Posner's decision is correct.  I was particularly interested in the following practitioner observation:
Mark E. Matthews of Caplin & Drysdale said that the case arose from widespread anger among the former UBS clients over the decision to turn over account information. He said that many UBS clients believed that through its fee structure, UBS had, in practice, split the proceeds of tax evasion with them while leaving the clients to shoulder most of the risk. 
I think most of us have observed that pattern where UBS and other Swiss banks charged unusually high costs/fees for deposits and management relative to what similar services cost elsewhere.  Sophisticated taxpayers -- most of these were -- would only pay those excess fees if they were getting something in exchange.  The something in exchange was tax avoidance or evasion that they couldn't get elsewhere (at least at what they perceived as the same low risk).  In effect, economically, UBS and the taxpayers were sharing in the taxes avoided or evaded, like partners in crime (so to speak).

1 comment:

  1. ...and they shared in the cost of the crime when it was found out, too.


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.