News & Articles


02 / 14 / 2013

Thomas v. UBS AG, 2013 TNT 31-12 (N.D.Ill. 2012)
A Federal court has dismissed a class action lawsuit filed by former UBS AG clients brought against the bank, for damages they claimed were caused by the bank's purported breach of fiduciary duty, malpractice, and fraud.  The class action was built on the notion that these US clients of UBS AG could sue the bank because they were not told that they were required to disclose the UBS Swiss accounts and had to pay taxes on all income derived therefrom.  The bank purportedly failed to file 1099 forms, withhold taxes, or otherwise advise with respect to reporting requirements, even though UBS signed a QI Agreement and knew that the accounts were owned and/or held by US clients.  It was further alleged that UBS AG assisted the US clients in selling their US securities and reinvesting in other types of assets that UBS was said to have falsely maintained did not trigger reporting obligations.  Other allegations were that UBS assisted in the setting up of offshore entities by non-US individuals or entities which UBS maintained did not trigger a reporting obligation.  The class action relied heavily on a deferred prosecution agreement, and quoted from a NY Times article, a SEC complaint filed against the bank, an IRS civil action filed against the bank, and a transcript of a US Senate Subcommittee hearing.  As to each member of the class, that person's laws were applied, so that the claims of UBS client, Thomas, were bound by California law, the claims of UBS client, Patel, by Arizona law, and the claims of UBS client Guetta, by New York law. 
When it comes to the purported malpractice of UBS, the class action plaintiffs claimed that "but-for" UBS' failure, class action plaintiffs would have disclosed their UBS Swiss accounts on their US tax returns and paid taxes and would not have been assessed and have paid back-taxes.  The court was of the view that they did not sufficiently allege a duty, as the QI agreement was between the UBS and the IRS (a 65-page standardized agreement), with UBS' obligations running to the IRS, not the plaintiffs.  The court rejected the notion that the plaintiffs were third party beneficiaries.  Even if they were, the court also noted that they did not adequately explain why the bank had a "tax-advising" obligation, or how the bank's alleged negligence caused them to fail to disclose their foreign accounts on the Schedule B to their US individual income tax returns.
When it comes to a claim that the bank committed a breach of fiduciary duty, the plaintiffs recognized that generally banks do not typically owe fiduciary duties to depositors; but here, the relationship was not typical, that it involved a bank acting as an investment advisor and a tax advisor.  The issue becomes what was UBS's role in managing the plaintiffs' investment portfolio, but even then, how the breach of any duty, assuming one existed, proximately cause the assessment and payment of back-taxes and penalties as a result of their owning a UBS Swiss Account. 
The court rejected the plaintiffs allegations regarding claims of unjust enrichment, because the plaintiffs made "threadbare" allegations. 
As for claims of fraud, the plaintiffs claimed that in order to induce them to either open or continue their Swiss accounts, UBS omitted material facts, by failing to inform them about tax-reporting requirements of the QI Agreement, failing to prepare and deliver IRS Forms W-9, and failing to inform plaintiffs about the duty to disclose the accounts to the US Government.  While alleging that they met with UBS representatives on a number of occasions, the plaintiffs failed to allege WHAT any of these bankers told them. 
A key feature of the court's decision rests with whether the plaintiffs could show how they were injured.  The court viewed the plaintiffs allegations in this regard as nebulous.  They claimed to have first become aware of their tax obligations upon the IRS' announcement of the 2009 Offshore Voluntary Disclosure Policy.  However, the court noted that what was notably missing is any allegation as to what gave rise to their tax-reporting obligations in the first place, and why UBS is responsible for their failures to know of this obligation, prior to 2009.
In an interesting footnote, the court had this to say about the notion that plaintiffs justifiably relied on UBS.  The court stated that even if UBS lied to the US Government, the argument essentially boils down to:  "because you lied to the US Government, the US Government did not discover my lie until later, which led me to pay much more money than if my lie had been discovered earlier."  See Olenicoff v. UBS AG, No. 08-cv-1029 (C.D.Calf. 2012).
NOTE:  In lender liability cases, parties must be careful to distinguish between a "duty to investigate" and a "duty to disclose," where the latter can arise out of a special relationship or circumstance, not limited to the normal lender-depositor relationship.