UBS: The Saga Continues

The UBS (UBS) saga continues.  I was struck by the last two paragraphs:

In its most recent quarterly filing, UBS said that Robert M. Morgenthau, the New York district attorney, had issued a subpoena to the bank for the names of all United States clients who carried out wire transfers from their UBS accounts based in America to their UBS accounts based in Switzerland in recent years. The 70 names that UBS turned over were covered under that subpoena.

“We have not breached Swiss banking confidentiality,” said Karina Byrne, a spokeswoman for UBS, adding that the bank had not provided what she said was “Swiss-based client data.”

I'm not close to this situation, and I'm far from an expert in private banking, but my hunch is that when UBS was pitching these offshore accounts to US clients, they fell all over themselves to trumpet how Swiss banking secrecy laws would protect clients from unwelcome inquiries by outside tax authorities like the IRS:  "Don't worry, we won't give up your names to the IRS or the Justice Department because we're simply not allowed to."  That commitment didn't last.  Look for lawsuits.

If there is a lesson here it may be this:  If you're considering entering into an arrangement with another party and there is some legal risk involved, ask yourself

1)  What does the other guy gain by sweet-talking you into downplaying the legal risk?

2)  If the potential legal risk becomes actual legal risk, what does the other guy lose by selling you out?

In the case of UBS, the answer to the first is, unsurprisingly, "a lot":  Being able to charge fees on $20 billion is a good deal.  The answer to the second, a little surprisingly, is "not that much."  UBS will suffer great reputational harm from all this, especially in the US, but chances are that will blow over in time.  It may have to walk away from a significant piece of US wealth management, but it will survive.  It certainly has a brighter future than many of its clients whose names are now in the hands of US prosecutors.

I guess this is another point in favor of the boutique wealth manager model:  You want whoever handles your money to go out of business, or worse, if it should ever mistreat you.

Update: I spoke too late--UBS has already been sued.  I expect many more though, perhaps an (upper) class action lawsuit.

Comments

[Big Al45:]

Only 70 names? Is this a misprint? I would have expected at least one more zero.

If you engage in acts that you know are illegal (i.e. not reporting US taxable income and transferring that income overseas), why should you expect your co conspirator to behave legally? (per Swiss law)

UBS' needed to avoid prosecution under RICOH and money laundering statutes. A lawsuit by unhappy customers is a small price to pay for avoiding jail time.

2008 Nov 11 03:37 PM

[Steven Hansen:]

i thought the government by law was notified anyway when money above a certain amount is moved offshore. in any event, no client can sue because of a disclosure made under court order.

2008 Nov 12 03:49 AM

[James Wilson:]

Will Phil Graham go to jail if UBS fails?

2008 Nov 12 05:09 AM

[Kurtosis:]

Phil Gramm works for UBS Investment Bank, which is fairly separate from the Wealth Mangement Division. He essentially does lobbying for UBS IB in the US, and does not really manage any units or make policy. He is not that high up in the food chain actually.

On Nov 12 05:09 AM James Wilson wrote:

> Will Phil Graham go to jail if UBS fails?

2008 Nov 15 08:29 AM