U.S. judge delays UBS tax trial, parties in settlement talks

July 13, 2009

ZURICH/MIAMI, July 13 (Reuters) – A federal judge in Miami approved a delay in a high-profile trial on Monday in which U.S. tax authorities hoped to force UBS AG to reveal the identities of thousands of Americans suspected of using the Swiss bank to evade taxes.

The postponement was requested in a joint motion from UBS and the U.S. Justice Department on Sunday as the parties announced for the first time that they were engaged in talks for a possible out-of court settlement of the case centering on Switzerland’s jealously guarded tradition of bank secrecy.

Presiding Judge Alan Gold of U.S. District Court for the Southern District of Florida agreed to the request to delay the trial’s opening until Aug. 3 and said he would gladly give further extensions on request “to assist in accomplishing any goal of settlement.”

Gold also set a telephone status conference for July 29, when he said he hoped the participants would be prepared to say whether the Aug. 3 trial would take place as scheduled.

“UBS welcomes Judge Gold’s decision,” said Karina Byrne, a spokeswoman for the bank.

“It is a positive development,” she added, saying “intensive negotiations” would now be taking place over the next two weeks.

The case, seen as key to the future of the global offshore banking industry, seeks to force UBS to reveal the identities of 52,000 rich Americans suspected of using secret bank accounts to dodge taxes. This would be in breach of Swiss bank secrecy laws.

A source familiar with the situation told Reuters the talks, now led by the U.S. and Swiss governments, were aimed at finding a way to allow the transfer of bank client data without breaching Swiss law. The source did not rule out a payment from UBS.

At the very least, any settlement is likely to dent Swiss privacy laws, however. It could involve the transfer of some client data, but would help UBS move on from a damaging row that is hurting its brand and deflecting it from its aim to return to profit.

“NEAR-TERM POSITIVE”

Tax lawyers say European governments, which are also trying to recoup unpaid tax money from offshore banks, will closely watch the outcome of the U.S. tax dispute and could also put pressure on Switzerland as a global fight against tax cheats gathers pace.

“The ultimate settlement of this case should remove a key regulatory overhang on UBS stock and serve as a near-term positive even if the ‘green shoots’ of operational recovery may take longer,” said Kinner Lakhani, an analyst at Royal Bank of Scotland.

“It has always been our view that this matter will be better resolved through negotiations at the appropriate levels of the U.S. and Swiss governments and not through ongoing litigation,” said James Nason, spokesman for the Swiss Banking Association, who also welcomed the move.

The subprime crisis has led UBS to report the biggest annual loss in Swiss corporate history in 2008 and accept state aid. It is losing clients at its wealth management division, but a resolution of the tax spat could give it some relief.

“If the U.S. case settles soon then definitely I believe the net new money flows will improve worldwide, slowly but surely, also in Wealth Management Americas,” said Vontobel analyst Teresa Nielsen.

The Department of Justice, which cautioned on Sunday it was still ready to ratchet up its legal fight with UBS, said any settlement would necessarily include the bank providing data on a significant number of its U.S. clients.

A person familiar with the situation told Reuters last week that, to circumvent Swiss law, the Swiss government could agree to disclose UBS bank client data indirectly, possibly by helping the U.S. Internal Revenue Service cross-check U.S. banks’ data about transfers from Switzerland and UBS.

UBS Chairman Kaspar Villiger said last week the focus of the discussions was the client data, not a possible fine and said that speculation of UBS having to pay billions of dollars in the tax dispute were completely unfounded.

Earlier this year, the bank agreed to pay $780 million and to disclose around 250 U.S. client names when it settled a separate but linked criminal case in the United States.

U.S. tax officials have accused UBS of hiding $20 billion of U.S. taxpayers’ money in undeclared offshore accounts, or just over 1 percent of the bank’s total wealth under management.

UBS employs 27,000 people in the United States and manages more than $600 billion at its Wealth Management Americas division.

The bank, which has written down more than $50 billion in the subprime crisis, is due to report second-quarter results on Aug. 4. The government, which controls a 9 percent stake, has said it will not sell the stake before then without UBS’ consent.

(Additional reporting by Rupert Pretterklieber, Martin De Sa’Pinto and Katie Reid; Editing by Erica Billingham and Matt Daily)

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