* Customers sought to blame bank for tax evasion
* Judge says "odd" for "tax cheats" to seek recovery
* UBS paid $780 million fine in 2009 settlement with U.S.
By Jonathan Stempel
Feb 7 (Reuters) - Calling them "tax cheats" and their lawsuit a "travesty," a U.S. appeals court threw out an effort by some American customers of UBS AG to recover damages over bank services that resulted in their having evaded U.S. taxes.
The decision by the 7th U.S. Circuit Court of Appeals in Chicago may provide closure to some litigation tied to UBS' 2009 admission that it helped several thousand wealthy Americans evade taxes. The Swiss bank also paid a $780 million fine in settling with the U.S. Department of Justice.
Thursday's decision arose from a July 2011 lawsuit by three customers who had held Swiss bank accounts at UBS, and joined an Internal Revenue Service amnesty program that required them to pay back taxes on balances plus 20 percent penalties.
Matthew Thomas of California, Himanshu Patel of Arizona and Mathilde Guetta of New York argued that UBS failed to tell them to disclose their accounts, which ranged from $500,000 to $2 million. They also said UBS violated obligations it took on by joining a 2001 IRS program designed to thwart tax evasion.
In seeking class-action status on behalf of U.S. customers with similar accounts from 2002 to 2008, the plaintiffs demanded that UBS cover settlement costs, and pay hundreds of millions of dollars of alleged profit tied to the fraud, court papers show.
But the 7th Circuit said UBS' obligations under the 2001 IRS program did not run to the plaintiffs, and that UBS had no general duty to prevent them from breaking the law.
Writing for a three-judge panel, Circuit Judge Richard Posner likened the plaintiffs' case to children who sue their parents to recover tax penalties because the parents failed to raise them to be honest people.
"The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties ... from the source, in this case UBS, of the income concealed from the IRS," Posner wrote. "This lawsuit, including the appeal, is a travesty."
UBS spokeswoman Karina Byrne said the bank was pleased with the decision, which she said showed that "plaintiffs cannot turn to UBS to blame it for their own omissions or failures to disclose offshore accounts and to pay taxes."
David Deary, a lawyer for the plaintiffs, did not immediately respond to requests for comment.
Thursday's decision came 10 months after a California federal judge dismissed Russian billionaire Igor Olenicoff's similar lawsuit against UBS over the bank's handling of $200 million he kept in offshore accounts.
Roughly one dozen banks including Credit Suisse AG remain under scrutiny in U.S. criminal tax evasion probes. On Jan. 4, the 272-year-old Swiss private bank Wegelin & Co said it would close after pleading guilty to helping Americans evade taxes.
Circuit Judges Diane Wood and Ann Claire Williams joined Posner's decision in full. The decision upheld a June 2012 ruling by U.S. District Judge John Darrah in Chicago.
The case is Thomas et al v. UBS AG, 7th U.S. Circuit Court of Appeals, No. 12-2724.
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