Tax Analysts Blog

The UBS Poker Game

Posted on Jul 15, 2009

Litigation is a bit like a poker game. Each player has a clear objective: collect as many of the other guy's chips as you can. As a means to that end, gamblers learn not to telegraph their hand. Above all else, never display weakness when bluffing.

Over the coming weeks the U.S. Department of Justice will try to maintain its best poker face with respect to UBS, the Swiss banking giant, in a high- stakes lawsuit before a federal court in Miami. The trial had been scheduled for July 13 but was pushed back to early August to allow the parties time to negotiate a settlement. Each side is smart enough to connect the dots and see where this litigation is headed. My guess is that both sides realize UBS will lose on the merits of the case ... but also that the DOJ is bluffing when it comes to what they would do next.

Those of you following the UBS affair already know that the litigation isn't really about UBS. The bank already admitted wrongdoing and paid the U.S. government a fine of $780 million for it's part in helping Americans evade U.S. taxes. This case is about the government's efforts to pursue those unnamed UBS account holders who didn't pay their taxes (estimates range as high as $15 billion). Instead of a pile of poker chips, the stakes at the courthouse in Miami are a client list with 52,000 names on it.

Here's a likely scenario for the end-game if it doesn't settle. Trial begins the morning of August 3. UBS immediately moves to dismiss the proceedings on grounds that complying with the DOJ summons requires them to violate Switzerland's strike bank secrecy laws. This issue has already been fully researched and briefed. The Swiss government, technically not a party to the litigation, obviously supports UBS's motion to dismiss. This preliminary motion is really what the entire case is all about; the trial itself should be reduced to a formality once the judge denies the motion -- which he will. UBS's legal defense is designed to win sympathy on op-ed pages, but on legal grounds it's pretty much a clear loser.

At that point, a judgment in the DOJ's favor will easily follow. The U.S. government has won -- or has it? The DOJ's hope is that UBS will play nice and just hand over the names. Not likely. The same day the U.S. claims victory in court, Swiss bank regulators in Zurich take swift action (as they've already promised to do) and forcibly confiscate UBS's client list to physically prevent the bank from complying with the order of the federal court in Miami. UBS is hit with a massive fine for their failure to comply with the court order (confiscation of the client list by the Swiss government is not a legal excuse). UBS declines to pay the big fine and any related penalties.

Here's where we get to the bit about the U.S. bluffing.

In a conventional judicial proceeding, the prevailing party has clear options when the losing party doesn't pay up. Entry of judgment is followed by debtor interrogatories in which the loser must disclose the extent of his or her assets and their precise whereabouts. Once those details are known, the judgment creditor goes after those assets -- either by garnishing financial assets or by levy and seizure of physical assets. The creditor can retail the assets or auction them off and apply the proceeds to satisfy the monetary claim.

In the case of UBS, interrogatories can be dispensed with. The bank's assets are well known; it operates numerous branches and offices across the U.S. and has trading accounts with many other financial institutions. Now for the $15 billion question: Will the U.S. government have the courage to follow through and enforce its victory in court? When called on to show their cards, will the DOJ have the chutzpah to seize UBS's assets? The Swiss think not. They're probably correct. Marty Sullivan has discussed the reasons for that in a recent post. It's more about international diplomacy than taxes.

That's my call. The Swiss know the DOJ is bluffing and will obviously use that to their advantage during negotiations. This makes an out-of-court settlement all the more likely. Too bad, I like a good poker match.

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