Suit against UBS may hurt U.S. business

UBS Wealth Management Americas might end up taking a financial hit because of its parent's headline-grabbing legal brawl with the U.S. government.

UBS Wealth Management Americas might end up taking a financial hit because of its parent’s headline-grabbing legal brawl with the U.S. government.

At issue is the tax status of more than 52,000 offshore accounts, worth an estimated $15 billion, held by Americans at UBS AG of Zurich, Switzerland.

“The problem for UBS in the [United States] is mostly reputational. The American wealth managers are being tarred by the same brush as the Swiss bankers involved in offshore accounts suspected of U.S. tax evasion, even though [American wealth managers] are not directly involved,” said Alois Pirker, a senior analyst for Boston-based Aite Group LLC.

High-net-worth clients have become wary of working with UBS in the United States because of the U.S. government’s stepped up efforts to detect tax evasion. Swiss banking laws, which protect depositors’ identities, have been used to skirt taxation in the U.S., according to legal and financial professionals.

“Potential clients are already skeptical of UBS because they feel UBS is now a lightning rod,” said Robert Colvin, a Houston-based attorney who heads up an eponymous firm and represents international private clients and affluent families.

SKEPTICISM ABOUNDS

It is unlikely that U.S. wealth managers will benefit from the flare-up, because most of the estimated $15 billion will stay right where it is.

“That money was in offshore accounts for a reason,” Mr. Pirker said. “I doubt there’s much overlap with the U.S. market.”

In fact, UBS, which has about $556 billion in assets under management in the United States, is more focused on protecting the identity of its clients than it is moving the accounts stateside.

The Swiss bank said that it will “vigorously contest” a civil lawsuit filed by the Department of Justice in U.S. District Court in Miami last month. The suit wants the court to enforce a “John Doe” summons by the Internal Revenue Service seeking the names of the 52,000 account holders.

U.S. District Judge Alan Gold has set a July 13 hearing date for the lawsuit unless an agreement is reached first.

But that is unlikely, legal experts said. A Justice Department spokes-man said that it may be “a long, long time” before the case is settled.

“UBS will fight this one to the death,” said attorney Thomas Ajamie, managing partner for Ajamie LLP of Houston, who specializes in international securities law.

The continuing legal wrangling, along with the bank’s $780 million settlement of a tax evasion case involving secret offshore bank ac-counts last month, has amounted to a public relations nightmare for UBS.

NEGATIVE PUBLICITY

Indeed, the negative publicity has intensified during the past few weeks.

UBS is being sued in a Swiss federal court by several U.S.-based clients with offshore accounts, seeking to prevent the disclosure of their identities. And Marcel Rohner, UBS’ beleaguered chief executive, re-signed under pressure Feb. 27. He was replaced by Oswald Grubel, former chief executive of UBS’ chief rival, Zurich, Switzerland-based Credit Suisse Group AG.

Just last week, UBS Chairman Peter Kurer was also forced out. He is being replaced by former Swiss Finance Minister Kaspar Villiger

In addition, questions have been swirling about the future of UBS’ brokerage and wealth management business in the United States and whether or not it will be sold (InvestmentNews, Feb. 16).

The speculation came on the heels of a reorganization in the bank which created the new Wealth Management Americas division headed by Marten Hoekstra, a veteran executive who has been with UBS for over 25 years.

With all this controversy and uncertainly circling around it, UBS has sought to reassure current and potential clients with a new marketing campaign touting the bank’s “commitment” to its customers “while we manage our firm though a difficult period.”

The copy in ads running in The Wall Street Journal and glossy magazines such as Fortune and Travel + Leisure also states that customers “need to be confident that our financial stability is securely underpinned.”

The campaign was launched as a response to the global economic crisis “and designed to signal to our clients our actions taken as a result,” said UBS spokesperson Kris Kagle.

E-mail Charles Paikert at [email protected].