Knopick v. UBS Fin. Servs., Inc.

• Citation: 121 F.Supp.3d 444
• Decision Date: 18 August 2015
• Docket Number: CIVIL ACTION NO. 14–05639
• Parties: Nicholas Knopick, individually and on behalf of those similarly situated, Plaintiff, v. UBS Financial Services, Inc., Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

121 F.Supp.3d 444

Nicholas Knopick, individually and on behalf of those similarly situated, Plaintiff,

v.UBS Financial Services, Inc., Defendant.

CIVIL ACTION NO. 14–05639

United States District Court, E.D. Pennsylvania.

Signed August 18, 2015

Julie B. Negovan, Spruce Law Group LLC, Philadelphia, PA, for Plaintiff.

David C. Franceski, Jr., William T. Mandia, Alex Rubenstein, Isaac A. Hof, Stradley Ronon Stevens & Young LLP, Philadelphia, PA, for Plaintiff.

MEMORANDUM

PAPPERT, District Judge

Plaintiff Nicholas Knopick ("Knopick") brings this putative class action against UBS Financial Services, Inc. ("FS") claiming that FS, affiliated Swiss corporations, and certain employees of the Swiss corporations disregarded Knopick's instructions, invested his money recklessly, and as a result lost most of his $12 million investment. Non-party but alleged conspirator UBS AG ("AG") is a global financial services company based in Switzerland. (Am. Compl. ¶ 18, ECF No. 14.) Non-party but alleged conspirator UBS Swiss Financial Advisors ("SFA") is a Swiss corporation and a wholly owned subsidiary of AG. (Id. ¶ 17.) SFA is also a registered investment advisor with the Securities and Exchange Commission ("SEC"). (Id. ) FS is an American subsidiary of AG and an SEC registered broker-dealer and investment advisor. (Id. ¶ 15.) "AG is [allegedly] the ultimate decision maker for all its subsidiary companies and [they] operate as a single business enterprise directed by [AG]." (Id. ¶ 18.)

In February 2009, AG admitted to conspiring to defraud the United States through a scheme that enabled certain United States clients to avoid their reporting and tax obligations on income earned in overseas accounts held by AG. Knopick sues only FS, but relies heavily on AG's prior criminal wrongdoing in his effort to recoup losses incurred when SFA allegedly disregarded Knopick's instructions and "wildly and recklessly" invested his money.¹ FS moves to dismiss Knopick's amended complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons that follow, the Court grants FS's motion.²

I. Background

Though FS is the sole defendant in this case, most of the allegations in the 256–paragraph amended complaint pertain to AG. In fact, much of the amended complaint's factual background is taken verbatim from a federal information filed against AG. See United States v. UBS AG, No. 09–cr–60033, ECF No. 4 (S.D.Fl.2009). While the Court recounts a good deal of that factual background here to set the context in which Knopick purports to assert his claims, AG's criminal troubles are at best tangential to Knopick's specific allegations against FS.

Between 2000 and 2007, AG falsely reported to the IRS, and aided American citizens in falsely reporting, that "nominee offshore structures" were the beneficial owners of accounts held by AG. (Am. Compl. ¶ 34.) This scheme enabled approximately 17 million American citizens to conceal their identities and earned income from the IRS. (See id. ¶¶ 24, 66.) AG assisted its clients' deception by failing to report Form 1099 information to the IRS despite its obligation to do so. (Id. ¶¶ 24, 34.)

AG utilized a number of methods to further this scheme. AG bankers regularly traveled to the United States to discuss the undisclosed accounts, i.e. black accounts, with their clients and used "counter surveillance techniques" to protect their clients' identities while in the United States. (Id. ¶¶ 25, 34.) AG also sent communications to clients touting its past success concealing clients' identities from the United States, trained employees to evade detection, organized meetings to further discuss methods of evasion, and limited communication with American clients to avoid United States scrutiny. (Id. ¶¶ 34–52.)

AG also created SFA in 2005. (Id. ¶¶ 17, 39.) Its purpose was twofold. First, SFA was created to redirect scrutiny from AG's tax fraud scheme and "to deceive U.S. authorities to not suspect that the same customers had secret, undeclared accounts at [AG]." (Id. ¶ 54; see also id. ¶¶ 34, 38, 44, 53.) As part of this diversion, investors with SFA were required to open bank accounts with AG. (Id. ¶ 2; see also id. ¶ 145–46.) Second, SFA would provide a source of funds that AG could access to pay a fine should its fraud be discovered. (Pl.'s Opp'n Mot. Dismiss 29, ECF No. 48.)

Finally, AG initiated a Global Referral Program, run through a "Global Referral Desk" in Weehawken, New Jersey, "to manage broker efforts to attract customers to invest in undeclared accounts in Switzerland." (Id. ¶ 34.) This referral campaign incentivized AG and/or FS's brokers to refer American clients with "new net money" to AG and its financial advisors. (Id. ¶¶ 6, 7.) FS referred its American clients to SFA and AG—ostensibly through the Global Referral Desk—and arranged meetings in the United States with AG bankers.³ (Id. ¶¶ 73, 146.) When making these referrals, FS failed to inform its American clients that AG was not licensed to conduct banking transactions in the United States, that AG was under investigation by the Department of Justice ("DOJ"), and that SFA was designed to further the tax fraud scheme.⁴ (Id. ¶ 8.)

In August 2007, AG Executives decided to "freeze" the tax fraud scheme "rather than exit the business to comply with U.S. law." (Id. ¶ 65.) Soon thereafter, AG learned that the DOJ was investigating its cross-border business. (Id. ) The SEC also contacted AG in December 2007 regarding the tax scheme. (Id. ¶ 151.) AG admitted guilt and signed a deferred prosecution agreement with the DOJ on February 11, 2009, in which in it agreed to pay a $780 million fine and to implement substantial reforms. (Id. ¶ 66; see also Pl.'s Opp'n Mot. Dismiss Ex. C.)

Knopick established investment and banking relationships with SFA and AG in early 2007—a few months before a whistleblower reported the tax fraud scheme to the DOJ. On January 19, 2007, Knopick formalized a relationship with FS and opened a brokerage account for retirement funds. (See Am. Compl. ¶ 76; see also id. at Ex. A.) Knopick also signed the "Basic documents for account/custody account relationship" with SFA on January 23, 2007. (Id. at Ex. C.) Among these documents was an Asset Management Agreement, which gave SFA "absolute discretion" to "buy and sell in cash or on a forward basis ... any investments in domestic and offshore investment companies, investment funds, any other collective instrument and fund-like instruments, [to] carry out investments on a fiduciary basis in all countries and currencies, [to] decide on investment timing" and "[to] carry out all and any other transactions for [his] account as it may from time to time determine." (See id. ) Knopick also completed a "Portfolio Management International" form and a "Portfolio Management Asia Opportunities" form on which he indicated an "above average risk tolerance," a "growth" or "equity" investment strategy, and a "main objective" to allocate assets to international and Asian investments. (Id. ) After opening these accounts, Knopick wired approximately $12 million from his Wachovia Bank account in Pennsylvania to AG. (Id. ¶ 78.) Unbeknownst to Knopick, "his investments and relationship, and the very existence of [SFA], were used by [AG] and [SFA], with [FS's] knowledge ... to cover for the ‘black accounts.’ " (Id. ¶ 21.)

In March or April of 2007, Seifert, Knopick's licensed investment broker and advisor with FS, introduced Knopick to Knöpfel. (Id. ¶¶ 16, 77.) Seifert allegedly praised Knöpfel's "investment prowess," which, along with Knöpfel's claims of success, induced Knopick to open two investment accounts with SFA. (Id. ¶¶ 77–78, 126, 141.) Knopick carefully explained his investment strategy to Knöpfel. (Id. ¶ 78.) This investment strategy was apparently to invest in "blue chip common stocks with high dividend yields and us[e] those dividends to make interest payments on margin loans used, in part, to fund securities purchases." (Id. ¶¶ 134, 185.)

After meeting with Knöpfel, Knopick opened a deposit account and a margin loan account with AG. (Id. ¶¶ 79, 108, 146.) On April 3, 2007, Knopick signed the "Basic document for account/custody account relationship" with AG to open those accounts. (Id. ¶ 108, Ex. B.) Knopick also signed an AG Basic Agreement for collateral loans. (Id. ¶ 114, Ex. B.) As part of this agreement Knopick pledged the assets in his SFA account as collateral for the margin loans. (Id. ¶¶ 116–19.) Knopick was allegedly required to open these accounts to invest with SFA. (Id. ¶¶ 79, 146.) Throughout this process Knopick was never informed that AG was not licensed to conduct banking activities in Switzerland with American citizens. (Id. ¶¶ 79, 145.)

Knöpfel allegedly disregarded Knopick's investment strategy and invested Knopick's money "wildly and recklessly," by "trading his dollars into foreign currencies and purchasing an inexplicable collection of stocks and bonds denominated in those foreign currencies." (Id. ¶ 85.) Despite Knopick's instructions to "purchase assets with dividends that cover the interest on the margin loans" and Knöpfel's duty to comply with those instructions, Knöpfel apparently "leveraged [Knopick's] account to purchase volatile securities." (Id. ¶¶ 87, 134, 137.) He also "purchased bonds that paid interest at a rate lower than the interest rate on the margin loans" even though he was not authorized to do so. (Id. ¶¶ 85, 87.)

Knöpfel and his assistant concealed their fraud by regularly informing Knopick that his investments were performing well. (Id. ¶ 86.) Knöpfel never disclosed that AG was under investigation by the DOJ or that "his account had been created as a cover for, and in furtherance of, [the tax evasion] scheme." (Id. ¶ 86.) AG, SFA, and FS likewise failed to inform Knopick that the DOJ launched an investigation in September 2007 or that AG was contacted by the SEC in December 2007. (Id. ¶¶ 86, 151.) Knopick never would have invested with SFA or conducted banking activities...