A Washington law firm that worked for Bradley Birkenfeld, the former UBS AG (UBSN) banker who exposed how the Swiss lender helped Americans evade taxes, claims it’s owed $13 million of his $104 million whistle-blower award.
Birkenfeld hired Schertler & Onorato LLP in 2006 to help him tell the U.S. how UBS used Swiss bank secrecy to cheat the Internal Revenue Service. Birkenfeld, now 47, told his story the next year to the IRS, the U.S. Justice Department, the U.S. Senate and the Securities and Exchange Commission. He agreed in October 2007 to pay the law firm 12.5 percent of any IRS whistle-blower award, according to court documents.
Birkenfeld served 31 months in prison after pleading guilty to conspiracy and was released on Aug. 1, six weeks before the IRS gave him the largest federal whistle-blower award for an individual. Birkenfeld had fired Schertler & Onorato in 2008, and his new law firm says the 12.5 percent accord is no longer binding.
“I hereby request that you confirm in writing that your firm does not assert any financial interest in any whistle- blower claim that Mr. Birkenfeld may have related to his allegations against UBS,” attorney David C. Colapinto of Washington-based Kohn, Kohn & Colapinto LLP wrote to the Schertler firm in December 2010.
Attorney David Schertler refused to waive his firm’s financial claim. Last year, before it was clear that Birkenfeld would ever see his big payday, a federal judge referred the matter to an arbitrator. The arbitrator has yet to rule.
Birkenfeld’s impact on Zurich-based UBS, the largest bank in Switzerland, is undisputed. A neurosurgeon’s son from Brookline, Massachusetts, he spent 15 year in Swiss banking, including five at UBS. He was one of as many as 60 UBS employees who trolled the U.S. for rich clients, even though the bankers lacked required SEC licenses, he told Senate investigators. They visited art shows, yachting regattas and golf and tennis tournaments, he said.
Prosecutors have said Birkenfeld’s disclosures led them to charge UBS in 2009 with conspiracy. The bank avoided prosecution by paying $780 million, admitting it fostered tax evasion from 2000 to 2007, and turning over data on 250 Swiss accounts. UBS later agreed to provide information on another 4,450 accounts. Since then, at least 33,000 Americans voluntarily disclosed offshore accounts to the IRS, generating more than $5 billion in tax revenue.
The IRS said Birkenfeld provided “exceptional cooperation,” gave information on taxpayer behavior that the agency hadn’t detected, and led to substantial changes in UBS practices, according to an agency explanation released by Stephen Kohn of Kohn, Kohn & Colapinto.
“While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere,” Birkenfeld’s disclosures “formed the basis for unprecedented actions against UBS,” according to the IRS document.
While he sat in prison in Minersville, Pennsylvania, Birkenfeld filed a lawsuit accusing Schertler & Onorato of malpractice and breach of fiduciary duty. The complaint, filed in August 2011 without a lawyer in Superior Court in Washington, sought $10 million in damages.
Birkenfeld claimed the firm mishandled negotiations with the Justice Department, which refused in 2007 to grant him either immunity or a subpoena he said he needed to reveal information otherwise protected by Swiss law.
When prosecutors charged him in 2008, they said he wasn’t truthful about his own role in helping a billionaire client break the law.
Birkenfeld also sued in federal court in Washington, claiming Schertler & Onorato violated his constitutional rights in May 2008 when he met with prosecutors two days after his arrest. At that meeting and in other instances, Birkenfeld claimed, a prosecutor said he couldn’t meet with Senate or SEC investigators, and his lawyer didn’t respond, violating Birkenfeld’s right to free speech and his right to due process.
In October 2011, Schertler & Onorato denied Birkenfeld’s allegations and filed a counterclaim, saying he didn’t give his lawyers “complete information about the extent of his illegal conduct and activities.”
That counterclaim said a Schertler lawyer gave a Form 211, titled an “Application for Reward for Original Information,” to IRS agent Matthew Kutz at a meeting on June 12, 2007. A copy of the form, provided to Bloomberg News by Schertler & Onorato, shows it was signed by Birkenfeld and given “through counsel” to Kutz “in person.”
Schertler & Onorato helped Birkenfeld “navigate the complex and evolving” process at the “newly formed IRS Whistleblower Office,” according an October 2011 court filing by the firm.
A retainer letter, sent on Oct. 23, 2007, outlined the 12.5 percent whistle-blower fee and a cap on hourly fees at $80,000, according to the firm’s counterclaim.
Birkenfeld also signed a second representation letter on May 9, 2008, for the firm to represent him after his arrest. It called for an advance of $50,000.
In his December 2010 letter to Schertler, Colapinto said Birkenfeld’s second retainer letter superseded the first one, which meant the firm “relinquished its financial interest” in the whistle-blower award. It also referenced an IRS Form 211 filed in 2007.
“There is no evidence that your firm performed any work on that claim or that your firm perfected the claim as required by either the statute or IRS regulations governing the whistle- blower reward program,” Colapinto wrote.
In an interview last month, Stephen Kohn said that his firm filed the official Form 211 with the IRS Whistleblower Office.
“Schertler never filed a 211,” Kohn said. “Whether Brad did or not is a secondary issue. Schertler never met with the office until we got involved, and the lawyers, to the best of our knowledge, didn’t meet with the office. We filed the claim.”
Schertler disputed Kohn’s account.
“It is indisputable that Schertler & Onorato communicated directly with the IRS Whistleblower Office and followed the explicit instructions received from that office on how to properly register Mr. Birkenfeld as a whistle-blower,” Schertler said in an e-mail yesterday.
The IRS also told the firm how to ensure that what he gave Kutz “would qualify for treatment as information provided to the IRS under the Whistleblower Program.”
Dean Patterson, an IRS spokesman, declined to comment on the case.
“Federal law prohibits the IRS from discussing specific taxpayers or situations,” he said in an e-mail.
Birkenfeld’s brother, Doug, didn’t respond to an e-mail asking whether Bradley would comment on the fee dispute.
Kohn, Kohn & Colapinto has declined to say how much of the whistle-blower award it will receive for work on Birkenfeld’s behalf.
In November 2011, lawyers from Kohn, Kohn & Colapinto moved on Birkenfeld’s behalf to voluntarily dismiss both the Superior Court and federal lawsuits he originally filed without an attorney. Schertler & Onorato’s counterclaim is still pending.
U.S. District Judge Robert L. Wilkins dismissed the federal case, ordering that Kohn, Kohn & Colapinto place any IRS whistle-blower payments in a trust account and segregate 12.5 percent, as well as $77,024, “until the fee dispute is resolved.”
The judge said that the Attorney-Client Arbitration Board of the District of Columbia Bar should handle the matter.
The cases are Birkenfeld v. Schertler & Onorato, 11-cv- 1529, U.S. District Court, District of Columbia (Washington); and Birkenfeld v. Schertler & Onorato LLP, 2011-CA-6905, District of Columbia Superior Court (Washington).
To contact the reporters on this story: David Voreacos in Newark, New Jersey at email@example.com; Peter S. Green in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Michael Hytha at email@example.com