Terror Finance Blog


Swiss Mega-Bank UBS Sued by Victims of Terrorism

Posted: 28 May 2008 11:05 AM CDT

By: Aaron Eitan Meyer

July 30th, 1997. September 4th, 1997.
March 28th, 2001. August 9, 2001. December 1, 2001.

By themselves, the dates would appear to have nothing in common. But to the victims of terrorist bombings by Hamas, these dates will not soon be forgotten. And in Rothstein et al v. UBS AG, filed on May 9th, 2008, survivors of the attacks and relatives of those murdered brought suit against the Swiss banking giant, joined in the lawsuit by survivors of the July 13, 2006 Hizbollah rocket attacks on Safed, Israel.

In the Complaint, the plaintiffs detail the role of Iran as a longtime supporter of the terrorist entities Hamas, Hizbollah and Islamic Jihad for the time period of 1996 to the present. As stated therein, “The financial support provided by Iran to Hamas, Hizbollah and the PIJ between 1996 and the present day included tens of millions of dollars in cash annually.”1

The Complaint went further to detail the alleged complicity on the part of UBS in allowing vast sums of hard currency to be made available to Iran, thus allowing that nation to provide financial support to the terrorist groups, in contravention of applicable United States laws designed expressly to prevent the same. As set forth in the Complaint, that hard currency directly enabled the terrorist groups to carry out attacks.

In 2003, a New York Times article reported that American soldiers in Iraq had found a significant cache of sequentially numbered dollars in a building within one of Saddam Hussein’s palace complexes.2 More importantly, the bills bore wrappers of the Federal Reserve. In 1996, the Federal Reserve had designated several foreign banks as Extended Custodial Inventory (“ECI”) facilities, storing Federal Reserve-issued new bills as a means to facilitate foreign distribution of United States currency.

Like Iran, Iraq had long since been on the list of countries to which new bills were prohibited. After a federal investigation was conducted into the matter, UBS reluctantly handed over to investigators a list of countries to whom it had sent dollars. That hitherto confidential list included transfers to Iran.

When further information emerged from UBS’ records, unlawful transfers to Iran were accompanied by similar transfers to Cuba and Libya, in contravention of applicable US law. The findings led to the elimination of UBS as an ECI facility, and a further $100 million fine. As more fully set forth in the Complaint, congressional hearings conducted on the matter included testimony by General Counsel of the New York Federal Reserve Thomas C. Baxter, Jr., who stated that “The dollar is so desired around the world because it is a stable, always reliable medium of exchange and store of value.”3

As alleged in the Complaint, had UBS not allowed cash to be sent to Iran, that cash could not have been routed to Hamas, and that but for that fact, Hamas could not have carried out the horrific attacks in Mahane Yehuda market, Ben Yehuda mall, and bus stop near Neve Yamin. The Hizbollah rocket attacks on Safed followed the same pattern.

After setting forth the factual allegations, the Complaint presented the legal argument. Underlying a tort claim is the requirement that the defendant knew of the consequences of its actions, in this case being the fact that Iran presented a “grave danger … to the United States and its citizens”5 by sponsoring international terrorism in the form of substantial material support to terrorist organizations including Hamas and Hizbollah.

In turn, that conduct proximately led to the terrorist attacks on the dates mentioned above, according to the Complaint. Establishing proximate cause was the next step in establishing liability on UBS’ part, pursuant in this case to 18 U.S.C. § 2333. Moreover, the Complaint continued to stress that UBS’ alleged conduct rose to the level of being “…criminal in nature, dangerous to human life, outrageous, extreme, wanton, willful, malicious…”6 sufficient to warrant punitive damages.

The Eighth Count of the Complaint consists of a further tort claim in Negligence under Israeli law, pursuant to Section 35 of Israel’s Civil Wrongs Ordinance (“CWO”). A key difference between this count and others in the Complaint is that this count does not rely on the actions of UBS per se, but instead focus on a breach in the duty of care that UBS owed to avoid injuries to the general public. The standard there is whether an ordinarily prudent or reasonable person would have acted in the same fashion under those circumstances.

The final Count of the Complaint was also under Israeli law, specifically § 12 of the CWO, which confers liability on anyone who “…participates in, assists, advises or solicits an act or omission, committed or about to be committed by another person, or who orders, authorizes, or ratifies such an act or omission…”7

The relief sought by plaintiffs consists of a demand for compensatory damages to be set at no less than $500 million as well as punitive damages for the reasons set forth earlier. In addition, the Complaint calls for treble damages pursuant to 18 U.S.C. § 2333(a) and attorneys’ fees and costs, as well as any other relief in the interests of justice.

The potential ramifications of a plaintiffs’ victory in this case can scarcely be overstated. Partly as a result of the American sub-prime mortgage crisis, UBS wrote off some $13.7 billion, dropping it $2 billion into the red.8 Were the Court to find for the plaintiffs, and grant the compensatory damages requested in the Complaint, that ruling, accompanied by the trebling of damages by statute, would constitute a $1.5 billion loss to UBS. Assuming punitive damages at even a 2:1 ratio, UBS losses could near $5 billion.

It may safely be assumed that UBS will put forth a considerable defense, and an inevitable appeal in the event of a ruling for the Plaintiffs. However, at a glance, it appears that the case will come down to whether the Court deems UBS’ complicity in providing hard currency to Iran sufficient to merit significant compensatory and punitive damages, in addition to a ruling on basic liability and negligence claims.

This case presents a different strategy than that employed in several other recent high-profile suits against banks.9 It does not predicate its claims on the Alien Tort Act or violations of international standards so much as traditional concepts of liability and negligence, amplified by applicable counter-terrorism statutes.

In his 2004 testimony to the Senate Committee on Banking, Housing, and Urban Affairs, R. Richard Newcomb, Director of the Treasury Department’s Office of Foreign Assets Control described UBS’ penalty as “a significant fine to the Federal Reserve Bank of New York for deception.”10

It could (and almost certainly will) be argued that UBS has already paid for its deceptive actions. However, that does not free the banking giant of the civil liability incurred due to the subject matter of its deception. To stretch an analogy somewhat, pleading guilty to obstructing justice doesn’t let one off the hook for the action that was the real issue.

In the larger picture of holding banks accountable for permitting funds to be transferred to terrorist organizations, this case could well prove anomalous. Surely, the majority of suits brought will not be able to rely on the ‘smoking gun’ of hard currency that US troops found in Iraq, much less the Federal Reserve’s subsequent investigation and fine. Regardless, it represents the first civil action brought by American victims of Hizbollah rocket attacks, and worthy of note if for that alone.

The plaintiffs are represented by attorneys Robert Tolchin of New York City and Nitsana Darshan-Leitner of Tel Aviv, Israel.

1. Complaint at 51.
2. $762 million, according to a NY Sun article http://www.nysun.com/foreign/probers-want-us-to-block-assets-of-cuba-at-ubs/21478
3. Complaint at 87.
4. Complaint at 91
5. Complaint at 117
6. Complaint at 124
7. Complaint at 173
8. “UBS warns of a difficult 2008 as profits dive” Times Online
9. See, e.g. Almog v. Arab Bank, 2007 WL 214433 (E.D.N.Y., 2007)
10. JS-1670, May 20, 2004, http://www.ustreas.gov/press/releases/js1670.htm


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