If there was an annual award for litigation chutzpah, the 2013 winners would likely be the three individuals whose case against banking giant UBS was tossed out last week by an appalled US 7th Circuit Court of Appeals, in Chicago.
The plaintiffs in Thomas et al. v UBS were caught up in the brazen tax evasion conspiracy led by Switzerland’s largest bank. For years, UBS lured tens of thousands of people to hide their wealth in secret accounts and evade US taxes on the money and the sizable earnings it generated.
After the conspiracy was exposed in 2008 and the United States launched an investigation into UBS that led to an indictment, a plea agreement was struck. UBS was required to disclose the names and accounts of 4,450 people in the United States. Plaintiffs Matthew Thomas of California, Himanshu Patel of Arizona and Mathilde Guetta of New York were among them.
The plea agreement between UBS and the US Justice Department was pushed mightily by the Swiss government, which does not view tax evasion as a crime and fights to preserve the bank secrecy for which the tiny nation has been famous for three-quarters of a century. The deal required UBS to disclose only a small percentage of the US taxpayers who had secret accounts, and triggered an avalanche of criticism of the Justice Department for its leniency.
Up to 52,000 US persons had secret accounts at UBS
The US Senate Permanent Subcommittee on Investigations, led by Senator Carl Levin of Michigan, had found that up to 52,000 US persons had secret UBS accounts. The scandal led to passage in 2010 of the Foreign Account Tax Compliance Act (FATCA), which many major non-US banks decry.
But for the small number of US taxpayers that UBS coughed up to the IRS, leniency was not an option. Instead, they felt the sting of US prosecution, IRS tax and penalty assessments, and embarrassing publicity.
So in 2011 Thomas, Patel and Guetta—each of whom had between $500,000 and $2 million in a UBS account—sued the bank for allegedly causing their problems.
Blasting the suit by ‘tax cheats,’ court fires warning shot to other US evaders
On February 7, a three-judge panel of the US 7th Circuit Court of Appeals in Chicago, led by the respected, often acerbic Judge Richard A. Posner, gave short shrift to the lawsuit and unanimously upheld the decision by US District Judge John W. Darrah to dismiss the suit.
Posner’s opinion will undoubtedly cause US taxpayers caught with hidden, tax-evading offshore accounts that may now be disclose to think twice before pinning responsibility for their problems on their bankers.
The suit sought to recover from UBS the IRS penalties, interest and other costs the plaintiffs incurred, plus the sizable profits UBS had made from them and other tax-evading US customers.
Expressing “surprise that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and (their) class counsel,” Posner threw out the plaintiffs’ arguments with unsparing language.
“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,” he wrote.
Posner reminded the plaintiffs that from 2002 to 2008, when they had UBS accounts, they “had not disclosed the … accounts on their income tax returns, as they were required.”The plaintiffs also failed to disclose the income they earned in the accounts and to pay income tax on it.
“Eventually they ‘fessed up and paid the taxes they owed plus interest on those taxes and a 20 percent penalty” under an IRS amnesty initiative called the “Offshore Voluntary Disclosure Program,” which was spawned by the UBS scandal.
Judge compares ‘preposterous’ arguments to ancient ‘Highwayman’s Case’
“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),” said Posner.
“Or that UBS had told them that income earned in those accounts was somehow tax exempt and… that the accounts themselves were somehow not foreign bank accounts… so the plaintiffs didn’t have to acknowledge [them],” the veteran judge added.
“They don’t make any of these feeble arguments. They do argue… 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,” he continued.
Alluding to the classic definition of chutzpah, Posner said, “Our plaintiffs… argue… that (UBS) should have prevented them 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.”
Citing a case from 1725, commonly called The Highwayman’s Case, the judge said that warring partners in crime deserve no deference in the law. In that case, according to Posner, “A highwayman had sued his partner in crime for an accounting of the illegal profits…. The court refused to adjudicate the case, and both parties were hanged.”
Posner said, “Minus the hanging and with certain exceptions…, (this) principle… applies to accomplices in civil wrongdoing… the law leaves the quarreling accomplices where it finds them.”
Ruling says UBS reporting duties were no shield to individual tax obligations
Posner dispatched other arguments by the plaintiffs would equal celerity. They said they were third-party beneficiaries under the IRS Qualified Intermediary Program, which “requires participating banks to report to the IRS tax information about depositors who were U.S. taxpayers and to withhold ‘U.S.-source income,’” and pay it to the IRS.
The plaintiffs said the failure of UBS to inform tax authorities of their accounts was a breach of the program, a breach that entitled them to damages from UBS.
Posner said: “It’s unlikely… the IRS would want the tax cheats… to be able to shift the burden of the penalties that the IRS imposes on tax cheats to the foreign banks. True, that would increase the banks’ incentives to comply with the contract. But offsetting this effect would be the reduction in the taxpayers’ incentive to honor their tax obligations if they could shift the cost of cheating on their taxes to the foreign banks.”
The judge rejected other arguments of the plaintiffs — that they had “implied, oral and/or written contracts with UBS to provide [them] with professionally competent tax advice,” that UBS urged them to continuing investing while concealing its agreement with IRS to report their accounts and that by letting them think that keeping their money in foreign accounts would allow them to evade federal tax law and thus caused the plaintiffs to commit tax fraud.
This, Posner said, was a “frivolous theory of liability.”
UBS should consider sanctions on plaintiffs for ‘travesty’ suit, says judge
“If it were adopted, not only would everyone have a legally enforceable duty to prevent crimes and other wrongs when he could; a failure to perform the duty would give the… wrongdoer a right of action against the failed protector,” he added.
The plaintiffs also argued, Posner wrote, that UBS “touted the secrecy of their accounts, and inferred that the bank would conceal their accounts not only from competitors, relatives, ex-spouses, private creditors, and journalists, but also from the IRS, thus enabling them to get away with not paying any federal income tax they might owe on the earnings…. But such a scheme would of course be illegal, bringing us back to The Highwayman’s Case.”
The taxpayers also argued that UBS had a fiduciary obligation to them, “similar to the duty that arises from a gross disparity in knowledge between… a lawyer and a client, … or a physician and a patient.” This duty, the plaintiffs argued, “requires that the provider treat the recipient as well as he would want himself treated.”
Posner said a bank is not a “fiduciary of its depositors (but)… merely a creditor. 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. It has no duty to read aloud to them line 7a on Schedule B of Form 1040.”
The taxpayer’s other claims alleging unjust enrichment, negligence and malpractice by UBS are “frivolous squared,” concluded Posner.
“This lawsuit, including the appeal, is a travesty,” he said, wondering why UBS wasn’t seeking sanctions against the plaintiffs and their lawyers.