UBS closer to settling suit with bondholders over tax withholdings

UBS Financial Services has been granted preliminary approval to settle a class action lawsuit against it with bondholders for $2.5 million. The settlement stems from charges that UBS allegedly reported tax information incorrectly and cost investors millions, according to the suit. 

The bank is accused of not reporting amortizable bond premiums on tax forms that clients use to prepare their returns, which turned into a substantial overstatement of taxable income and overpayment of taxes. 

The case was brought on behalf of the settlement class as a breach of contract by Richard Goodman who was also a victim of the error. According to court filings, prior to 2014, Goodman purchased a significant number of taxable municipal bonds that were held in a brokerage account controlled by UBS. Once he discovered the reporting error, he contacted the bank, received the correct data and discovered that his 1099s had overstated his income by $200,868.34 over a four-year period.   

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Goodman maintains that he was told the bank would issue corrected statements if a client or their financial advisor raised the issue. He also alleges that FINRA Letters of Acceptance, Waiver and Consent from 2015 and 2019, showed UBS admitted to systemic errors in tax reporting related to municipal bonds. 

UBS could not be reached for comment.

Investors who buy taxable bonds for more than their face value can amortize the premium for the life of the bond and reduce their taxable income. According to the suit, UBS only reported only the gross amount of interest on their clients 1099s.  

The wronged parties include U.S. residents that "acquired At-Issue Taxable Municipal Securities at a premium (above par value), in a taxable account maintained by UBS between January 2014 through December 31, 2019," according to the suit.

The suit could set precedent by forcing brokers to seek protection by having their clients sign liability waivers in connection with their tax reporting. The next settlement hearing has been scheduled for Dec. 7 to determine if the terms are agreeable to the settlement class. 

The lawsuit comes on the heels of an $850,000 settlement UBS made with a Texas public school district over the bank's inability to underwrite bonds. The fracas was put in motion via a state law prohibiting government contracts with companies that "boycott" the fossil fuel industry. 

In 2020, the SEC knocked UBS with a $10 million settlement to resolve charges that it circumvented prioritizing retail investors in certain municipal bond offerings. Instead of going to legitimate retail buyers, the bonds were routed to flippers who then resold them to broker-dealers at a quick profit.

The case is Goodman v. UBS Financial Services, 21-cv-18123, U.S. District Court, New Jersey.