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The Wall Street Journal: U.S. to Seek Client Names From UBS In Tax Case

By GLENN R. SIMPSON, CARRICK MOLLENKAMP and DAVID CRAWFORD
May 15, 2008; Page C1

U.S. prosecutors are expected to confront Swiss banking giant UBS AG with a broad subpoena for the names of wealthy American clients who may have used its services to avoid income taxes, according to lawyers and others involved in the case.

The subpoena would follow an indictment, unsealed Tuesday in Florida federal court, of former UBS private banker Bradley Birkenfeld and his alleged accomplice, Mario Staggl, a Liechtenstein businessman skilled in setting up intricate trusts in Europe and offshore tax havens. Mr. Birkenfeld pleaded not guilty Tuesday in Fort Lauderdale. Mr. Staggl, who is at large and believed to be in Liechtenstein, didn’t return phone calls or emails for comment.

UBS and the Justice Department declined to comment Wednesday.

Liechtenstein, a principality long seen as a popular place for wealthy Europeans to park funds, would be unlikely to deliver Mr. Staggl to U.S. prosecutors, said a Swiss investigator familiar with the situation.

The investigation focuses on whether UBS, Mr. Birkenfeld and Mr. Staggl helped clients hide assets in Swiss and Liechtenstein accounts, moves that allegedly allowed the clients to avoid reporting taxable income to the Internal Revenue Service from 2001 at least through 2006.

A subpoena issued to UBS would take the case to a higher level and be a black eye for the Swiss bank, which has seen its conservative reputation tarnished by $38 billion in write-downs on subprime-mortgage investments. UBS has relied on its private bank, which provides services to wealthy clients and is the world’s largest by assets under management, as a source of profit to help it through the financial crisis.

“This is just the beginning,” said David Schwedel, Mr. Birkenfeld’s partner at a Geneva financial boutique called Union Charter SA. “This appears to be the IRS’s effort to pursue UBS in what most likely will become a larger case. Bradley was not the first or only private banker of UBS to be called in on this issue. Most assuredly, he will not be the last.”

The probe has been fast moving. Mr. Birkenfeld’s former boss, Martin Liechti, the head of UBS’s wealth-management business for the Americas, was detained last month in Miami by U.S. authorities under a “material witness” warrant. Mr Liechti couldn’t be reached for comment Wednesday.

In what appears to be a related probe, California real-estate developer Igor Olenicoff, a client of Messrs. Birkenfeld and Staggl, pleaded guilty in December to a charge of filing a false 2002 tax return and agreed to cooperate with investigators. The Justice Department investigation is expected to extend to other U.S. clients.

In 2001, UBS agreed to provide U.S. tax officials with information on any customers receiving taxable U.S. income, a move seen at the time as a big step toward ending the secrecy that has helped make Switzerland a center for private banking. Under that pact, UBS agreed that its customers, for example, would fill out an IRS form that details ownership of foreign bank accounts.

That same year, though, Mr. Birkenfeld teamed up with Mr. Staggl to find ways to help clients including Mr. Olenicoff get around the agreement, according to the Florida indictment. The two traveled to the U.S. to pitch the tax-evasion products, using Mr. Staggl’s skills at setting up Liechtenstein entities that let clients shroud their ownership of bank accounts, according to the indictment.

The prosecutors’ case could be helped by Mr. Birkenfeld, a 43-year-old who had offered to hand over the names of UBS clients to the Justice Department before his indictment was unsealed, a person familiar with the situation said. On Wednesday, his lawyer, Danny Onorato, declined to comment.

Mr. Birkenfeld, who is from Boston and has lived in Switzerland for 12 years, attended a military college, Norwich University, in Vermont and also obtained a business degree from a university in Vevey, Switzerland. He got his start in finance at State Street Corp., the Boston money-management firm, where he worked in hedging currency risk. He has worked for several banks, according to an online biography.

Mr. Birkenfeld joined UBS in 2001 and worked there through 2006 before joining Union Charter. Mr. Schwedel said the U.S. probe is not related to Union Charter. He said Mr. Birkenfeld remains a partner. Mr. Birkenfeld “is and has been a trusted, hard-working loyal private banker for more than a decade and has served multiple private banks,” Mr. Schwedel said. “Never in his career has anything like this ever occurred.”

Write to David Crawford at [email protected]

Related WSJ Article

UBS Shuffles Investment Bank, Beefs Up Risk Management

By KATHARINA BART
May 14, 2008 9:23 p.m.

ZURICH – UBS AG Wednesday disclosed senior appointments at its investment bank alongside plans to beef up risk management, part of a series of measures aimed at restructuring the bank after more than $37 billion in subprime write-downs.

The Zurich-based bank said Andre Esteves will step down from running its fixed-income arm. Mr. Esteves is a former Banco Pactual partner who was charged with cleaning up after the subprime losses, which began at in-house hedge fund Dillon Read Capital Management but quickly spread to the rest of UBS’s investment bank.

Jerker Johansson, who took over as UBS’s investment bank chief two months ago, will head the fixed-income arm temporarily as UBS, which sold $15 billion in mortgage assets to U.S.-based fund manager Blackrock Inc., continues to unwind troubled mortgage positions.

“Assuming responsibility for fixed income, currencies and commodities will allow me … to review and further reposition our platform around our core client-facing product capabilities,” Mr. Johansson said in a statement.

Mr. Esteves, who held the post for 10 months, will serve as chairman and chief executive of Latin America, the bank said.

UBS has pledged to restructure its investment bank after the subprime spill by shrinking its balance sheet, reining in proprietary trading and focusing on less risky areas, such as equities and mergers-and-acquisitions advice.

Mr. Johansson appears to be making good on UBS’s promise to bulk up risk management with two new appointments in the wake of the massive write-downs, which have led UBS to two consecutive quarterly losses.

Thomas Duala, like Mr. Johansson a former Morgan Stanley executive, will join UBS in June as risk chief for the investment bank, while credit officer Philip Lofts will serve as chief operating officer for risk.

The bank also unveiled plans to merge market and credit risk into one unit.

“The creation of an integrated portfolio and concentration risk group will help break down any remaining information silos between the different risk functions,” UBS’s overall risk chief Joe Scoby said in the statement.

The changes mark the second major set of measures from Mr. Johansson, who UBS hired mid-March after ousting the former investment banking head late last year.

Mr. Johansson last week disclosed the investment bank will cut 2,600 jobs as part of an overall staff reduction of 5,500 by next year.

UBS also said its equities business, currently run by Daniel Coleman and John Wall, will be headed solely by Mr. Coleman. Mr. Wall, meanwhile, will oversee what is left of the bank’s proprietary trading desk in equities and fixed-income.

Write to Katharina Bart at [email protected]

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