UBS AG will likely win dismissal of billionaire Igor Olenicoff’s lawsuit blaming the bank for events that led him to plead guilty to failing to disclose about $200 million in offshore accounts on U.S. tax forms, a judge said.
U.S. District Judge Andrew Guilford in Santa Ana, California today issued a “tentative” opinion rejecting Olenicoff’s lawsuit against Zurich-based UBS, the largest Swiss bank. Olenicoff claimed UBS committed fraud by not telling him he owed U.S. taxes. He also said the bank traded excessively in his accounts and engaged in racketeering. He sought as much as $1.7 billion in damages.
“Olenicoff cannot prove that UBS committed any wrongful act without running headlong into his own admission of criminal guilt,” Guilford wrote. “Olenicoff’s claim that he justifiably relied on UBS tax advice is entirely inconsistent with his plea agreement.”
Olenicoff, who built his fortune as the chief executive officer of Newport Beach, California-based Olen Properties Corp, pleaded guilty in 2007 to filing a false tax return. He admitted he hid offshore accounts from the Internal Revenue Service for seven years. He was sentenced to two years’ probation and ordered to pay $52 million in back taxes, fines and penalties.
Guilford said at a hearing today that he expected to issue a final ruling after considering further arguments from Olenicoff’s attorney, Thomas Newmeyer. After the hearing, Newmeyer declined to comment.
If Guilford allows the lawsuit go to trial on May 8 as scheduled, the case may offer new insights about Swiss bank secrecy and the complex finances of Olenicoff.
Olenicoff claimed UBS funneled his money to risky accounts that were “churned” to his detriment. Guilford ruled that, because Olenicoff made a profit of $12 million, he has no damages.
“To succeed on his claims, Olenicoff must show proof of non-speculative damages,” according to the 28-page opinion. “He cannot. As risky as the bank’s investment scheme may have been, Olenicoff fails to show that it actually caused him any measurable harm.”
Guilford said he rejected both Olenicoff’s claims that he got bad tax advice, and that UBS churned his accounts.
“Because neither half succeeds, all of Olenicoff’s claims against UBS must fail,” he said.
UBS had urged the judge to dismiss the case.
“UBS did not tell Olenicoff to lie on his tax returns about having an interest in foreign accounts,” the bank said in an April 2 court filing. “Olenicoff knowingly and willfully lied on his tax returns. Olenicoff’s felony conviction for subscribing to a false tax return is no one’s fault but his own.”
The evidence includes videotaped jailhouse testimony from Olenicoff’s former UBS banker, Bradley Birkenfeld, the only other defendant remaining of 39 originally sued.
Birkenfeld’s evidence helped lead to criminal charges against UBS in 2009. The bank avoided prosecution by paying $780 million, admitting it helped thousands of Americans evade taxes and turning over the names of 250 American clients to U.S. authorities. UBS later revealed another 4,450 accounts held by U.S. clients.
Birkenfeld is serving 40 months in a federal prison in Pennsylvania for helping Olenicoff and others evade taxes. At his sentencing, a prosecutor said Birkenfeld exposed a “massive tax scheme” at UBS while hiding his own dealings with Olenicoff.
Olenicoff said in an April filing that UBS “aggressively solicited” him and promised his offshore money “would be absolutely protected in safe, legal, effective investment structures, which would not result in tax liability or reporting requirements until the money was repatriated.” Those assurances, he said, were untrue and “UBS knew them to be untrue.”
Olenicoff claims UBS and Birkenfeld told him he didn’t have to report his Swiss income to the IRS, which was reinforced by the bank’s system of holding mail and not sending year-end tax information. Had UBS done so, Olenicoff “would have dealt with the situation before the matter rose to the level of a potential criminal liability,” according to his filing.
Olenicoff pleaded guilty after a three-year probe that included a search of his office and house by the IRS in 2005. He admitted that from 1998 to 2004, he filed false returns that hid accounts in Switzerland, Liechtenstein, England and the Bahamas.
After UBS admitted it helped U.S. clients cheat on their taxes, a U.S. probe of offshore accounts mushroomed. Prosecutors charged almost 50 customers and about two dozen foreign bankers or advisers with tax crimes. Seven current or former bankers at Credit Suisse AG and Switzerland’s oldest private lender, Wegelin & Co., were indicted. About 33,000 more Americans avoided prosecution by declaring offshore accounts to the IRS.
Olenicoff claimed UBS put his assets in risky investments known as Double Currency Units, or DOCUs. They combined a money market investment with a call option on one currency against a second currency.
Olenicoff built an empire by buying land and building industrial and office parks and apartments in four U.S. states. The developer, who began banking offshore in 1980, said in a 2009 interview that he opened an account in the Cayman Islands and eventually moved tens of millions of dollars to the Bahamas, where he began banking with Barclays Plc. (BARC)
He said he got a call out of the blue in 2000 from Birkenfeld at the Geneva office of London-based Barclays, where he worked before joining UBS.
In its court filings, UBS said Olenicoff lied to the IRS “for at least three years before he met UBS.” After his guilty plea, he filed a Report of Foreign Bank and Financial Accounts for 1998 to 2004, disclosing an interest in 15 foreign accounts in 1998.
Olenicoff claimed that Olen, his company, has been unable to get a loan at market rates since his guilty plea and that as a result, Olen will have to liquidate its real estate holdings.
UBS introduced evidence that Olen got two loans, for $70 million and $250 million. In his ruling, the judge said that UBS showed that “Olenicoff and his witnesses repeatedly lied about the loans in their depositions.”
“Although it is not this court’s job to make credibility determinations on summary judgment, this coordinated blatant lie does not go unnoticed,” he said.
At the hearing today, Newmeyer said that Olenicoff couldn’t get a loan at market rate, not that he couldn’t get one at all.
The case is Olenicoff v. UBS AG (UBSN), 08-cv-1029, U.S. District Court, Central District of California (Santa Ana).
To contact the reporter on this story: David Voreacos in Newark, New Jersey, at email@example.com.
To contact the editor responsible for this story: Michael Hytha at firstname.lastname@example.org.