RICO
Zuhovitzky v. UBS AG
Date: Nov. 4, 2024
Issue: Whether the Second Circuit’s interpretation of “proximate cause” conflicts with the Racketeer Influenced and Corrupt Organization (RICO) Act and ignores the Supreme Court’s admonition that there is no proximate cause bright line standard.
Case Summary: The U.S. Supreme Court declined to examine a lawsuit accusing UBS of violating the RICO Act by unlawfully and inaccurately disclosing account information to the IRS.
Esther Zuhovitzky, a citizen of Austria and Israel, held an account with UBS in Zurich, Switzerland, from 1988 to 2014. In 2005, according to Zuhovitzky, the bank fraudulently changed her account’s address from Zurich to an address in Israel that was not hers. After changing the address, UBS, its agents and directors allegedly created an exception document that allowed the bank to hold the account within its North American division, as UBS would earn higher revenues from the account. Due to similar alleged offenses, UBS was prosecuted for RICO offenses and was required to provide account information of several U.S. citizens to the IRS. Despite not being a citizen, UBS provided Zuhovitzky’s account information. Following the disclosure, the IRS audited Esther’s husband, Jonathan, who had signatory authority over Esther’s account. As a result of the audit, the IRS enforced a $5.1 million penalty against Jonathan for willfully failing to report his wife’s account.
In April 2022, the Zuhovitzkys sued UBS over the alleged mishandling of Esther’s account information, claiming UBS disclosed the information of a non-U.S. citizen and failed to adequately notify the couple of the disclosure. In June 2023, a New York federal court dismissed the lawsuit, holding that the Zuhovitzkys did not satisfy the proximate cause requirement in RICO cases. Proximate cause refers to an event or action closely related to an injury that the law considers it its primary cause. The district court found that the Zuhovitzkys did not prove any alleged harm resulting from the audit was caused by UBS itself.
In a 3-0 decision, a Second Circuit panel affirmed, finding that the Zuhovitzkys did not establish proximate cause because no direct link existed between UBS’ actions and Jonathan Zuhovitzkys’ disputes with the IRS. According to the panel, even at the pleading stage, civil RICO’s direct relation requirement is rigorous and requires dismissal where substantial intervening factors attenuate the causal connection between the defendant’s conduct and the plaintiff’s injury. Further, the panel noted that a link that is too remote, purely contingent, or indirect is insufficient. The panel pointed out that in this case, intervening causes broke the causal chain between UBS’ alleged conduct and the harm the Zuhovitzkys allegedly suffered. Because the alleged harm derived from the expenses and inconveniences associated with defending against an IRS investigation into Johnathan, as well as penalties resulting from that investigation, the panel concluded that the proximate cause of this harm was the IRS rather than UBS. The Zuhovitzkys petitioned the U.S. Supreme Court for review.
In their petition, the Zuhovitzkys argued that circuit courts disagree on the definition of “proximate cause” under RICO, with some ignoring the Supreme Court’s guidance on its flexibility and breadth. They contended that proximate cause requires a direct relationship between the injury and the predicate act but can encompass unintended harm resulting from a defendant’s actions. In addition, the Zuhovitzkys emphasized that intervening factors do not negate causation if the defendant’s conduct remains a substantial cause of the harm, relying on BCS Services Inc. v. Heartwood to support their argument. Applying these principles, the Zuhovitzkys argued that UBS’s racketeering activity directly caused them harm by wrongfully providing Esther’s account information to the IRS. In effect, this triggered penalties despite her noncitizen status. Thus, the Zuhovitzkys claimed they sufficiently established proximate cause.
Bottom Line: The U.S. Supreme Court did not set a bright line standard for establishing proximate cause by declining to review this case.
Document: Petition
