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SEIPPEL v. JENKENS & GILCHRIST

August 25, 2004.

WILLIAM H. SEIPPEL and SHARON A. SEIPPEL, Plaintiffs,
v.
JENKENS & GILCHRIST, P.C.; PAUL M. DAUGERDAS; SIDLEY, AUSTIN, BROWN & WOOD, LLP; R.J. RUBLE; DEUTSCHE BANK, A.G.; and DEUTSCHE BANK SECURITIES, INC., d/b/a DEUTSCHE BANK ALEX BROWN, Defendants.



The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

I. INTRODUCTION

This case arises out of tax and consulting services offered by several professional law, financial services and accounting firms. Plaintiffs, William and Sharon Seippel, filed this suit on September 10, 2003, alleging that defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, and are liable for damages and other relief arising from breach of fiduciary duty, inducing breach of fiduciary duty, fraud, negligent misrepresentation, breach of contract, malpractice, "unethical, excessive, illegal and unreasonable fees," and unjust enrichment.*fn1 The Seippels allege both federal question jurisdiction pursuant to 28 U.S.C. § 1331 and diversity jurisdiction pursuant to 28 U.S.C. § 1332. The Sidley Defendants and Deutsche Bank Defendants now move to dismiss.*fn2 The Sidley Defendants move in the alternative to strike the Seippels' prayer for damages to the extent it seeks recovery for back taxes, interest, and certain professional fees.

  II. BACKGROUND

  A. Defendants' Alleged Conspiracy

  The following facts are drawn from the allegations in the Amended Complaint and the RICO Statement.*fn3 For the purpose of this motion, these allegations are assumed to be true.

  Between 1996 and 2003, the Sidley Defendants, in concert with the Jenkens Defendants, were engaged in the development and promotion of a variety of tax shelters, including one labelled "Currency Options Bring Reward Alternatives," or "COBRA."*fn4 In late 1997 and 1998, the Sidley Defendants entered into an alliance to operate, market and promote these tax shelters with a number of other accounting and financial services firms, including, among others, the Deutsche Bank Defendants and Ernst & Young LLP.*fn5

  Pursuant to this alliance, each of the defendants authorized these firms to represent that the shelters were developed by the accounting firm soliciting the taxpayer, and that they had been independently "vetted" and determined to be "legitimate" and "conservative" by the Lawyer Defendants.*fn6 In fact, the shelters were developed by the Lawyer Defendants themselves.*fn7 The soliciting firms promised the taxpayers that the Lawyer Defendants would provide opinion letters attesting to the legitimacy of the shelters, and that these letters would "protect any participant from the imposition of penalties by tax authorities."*fn8

  Though these letters were "canned" and required little additional work, the Lawyer Defendants charged substantial fees, calculated as a percentage of the capital losses each client would claim on its tax returns.*fn9 The defendants agreed that on some transactions, the Jenkens Defendants would provide the first opinion letter and take the "lion's share" of the fees, and the Sidley Defendants would provide a secondary letter and receive a smaller fee, while on other transactions the positions would be reversed.*fn10

  The Lawyer Defendants' undisclosed role in marketing and promoting the shelters both compromised their objectivity, and "presented a risk that the [tax authorities] would and could claim that the opinion letters . . . would not shield them from the assessment of penalties."*fn11 The defendants agreed that "the firms soliciting prospective participants . . . would overstate what those opinion letters would conclude regarding the legitimacy of the tax scheme being promoted and would understate its risks and the likelihood of an audit."*fn12 The defendants further agreed that the taxpayer would not receive the opinion letters until after it had engaged in the promoted transactions.*fn13 Finally, defendants agreed that the accounting firms soliciting taxpayers would represent that the tax shelter "was a `proprietary' product of that firm so . . . prospective participants could not take it to their own attorney or accountant for an opinion as to its legitimacy."*fn14

  The Seippels contend that "defendants either knew or should have known from the outset that the COBRA tax shelter would not pass muster with the IRS or the Virginia tax authorities."*fn15 In support of this allegation, the Seippels point to two Internal Revenue Service rulings, IRS Notice 1999-59 and Notice 2000-44, and to a decision of the Third Circuit Court of Appeals, ACM Partnership v. Commissioner.*fn16 Notice 1999-59, released in December 27, 1999, stated that "certain types of transactions . . . that are being marketed to taxpayers for the purpose of generating . . . artificial losses are not allowable for federal income tax purposes."*fn17 Notice 2000-44, released on September 5, 2000, "specified [that] the precise transaction marketed . . . as the COBRA transaction" was not properly allowable for tax purposes.*fn18 Nevertheless, defendants continued to market the transactions.*fn19

  B. The Seippels' COBRA Transaction

  William Seippel was approached by Ernst & Young in late 1999 in connection with one of the defendants' tax shelters. Mr. Seippel, a senior executive at a Virginia company, was planning to change his employment, exercise his stock options and sell the resulting stock. Ernst & Young was Mr. Seippel's employer's auditor, and provided "tax advice, and other financial services" to Mr. Seippel and other senior executives of the company.*fn20 Through this relationship, Ernst & Young "knew of Mr. Seippel's plans and the substantial gains that the Seippels would have to recognize upon engaging in the Stock Options Transaction and the resulting tax liability."*fn21 Acting on this knowledge, Charles Paul of Ernst & Young approached the Seippels, pursuant to the defendants' scheme, to "advis[e] them that a lawful strategy named [COBRA] could drastically reduce the tax liability that would otherwise result from Mr. Seippel's engaging in the Stock Options Transaction."*fn22 The Seippels had a series of meetings and telephone and email conversations with Paul in late 1999, during which Paul represented that "COBRA was 100 percent legitimate, and backed by two blue chip law firms (Jenkens & Gilchrist and Brown & Wood) [and] was not only completely legal and based on `loopholes' created by the IRS, but actually was `conservative.'"*fn23 Paul represented that the COBRA shelter had been developed by Ernst & Young, not by the Lawyer Defendants. Paul told the Seippels that the Lawyer Defendants would provide opinion letters confirming the propriety of the COBRA transaction, and represented that these letters would "in the event of any IRS audit . . . enable the Seippels to satisfy the IRS auditors as to the propriety of the tax returns [and] would serve as a protection against the imposition of tax penalties."*fn24

  At some point in late 1999, after being contacted by Ernst & Young, Mr. Seippel sold his stock and realized a large gain.*fn25 During the same period, the Seippels agreed to participate in the COBRA transaction to reduce their tax liability for that gain. Mr. Seippel formed various entities, including an S corporation, WSWP Virginia Investors, Inc. ("WSWP"), a limited laibility company, WHS LLC ("WHS") and a partnership, WSWP Partners, to engage in the transaction. On December 1, 1999, WHS entered into the currency options transaction described above, purchasing long options and selling short options on foreign currency exchanges. WHS used Deutsche Bank to conduct the transactions. The options had an expiration date of December 23, 1999. On December 2, 1999, Mr. Seippel, through WHS, contributed his currency options to WSWP Partners. On December 12, 1999, WSWP Partners made a purchase of Canadian dollars. On December 27, 1999, Mr. Sieppel contributed his interest in WSWP Partners to WSWP. WSWP Partners was liquidated, and the Canadian dollars were distributed to WSWP. On December 29, WSWP sold all of its investment in the Canadian dollars.*fn26

  In February 2000, Mr. Seippel received an opinion letter from Jenkens and Gilchrist "stating that the Seippels could properly and legally claim losses totaling $12,000,000 on their tax returns as a result of the COBRA transaction."*fn27 In March 2000, Mr. Seippel received a similar opinion from Brown & Wood, stating that "the IRS should not be successful were it to assert a penalty. . . for positions taken in [the Seippels'] U.S. Federal income tax [returns] with respect to the [COBRA] transactions."*fn28 The Jenkens & Gilchrist opinion letter stated that IRS Notice 1999-59, released on December 27, 1999, did not apply to COBRA. The Brown & Wood opinion letter did not mention the Notice, nor did any other communication from defendants to the Seippels apart from the Jenkens & Gilchrist opinion letter. The defendants never informed the Seippels about IRS Notice 2000-44, released on September 5, 2000.*fn29

  The Seippels paid the Jenkens Defendants $338,880 for their opinion letter, legal advice and assistance in establishing the entities required to carry out the COBRA transaction. This fee was calculated as a percentage of the $12,000,000 in losses created by the transaction.*fn30 The Seippels paid Brown & Wood $21,180 for the second opinion letter.*fn31 The Seippels contend that both payments were "unethically excessive," because the letters were "canned" and the lawyers "expended little, if any, time or effort" in creating them.*fn32 Ernst & Young prepared the Seippels' 1999 and 2000 tax returns. These returns used the COBRA losses to offset and reduce the Seippels' tax liability.*fn33

  In March 2002, Ernst & Young informed Mr. Seippel that it had received subpoenas in an IRS investigation of COBRA.*fn34 In July 2002, the Seippels retained new tax and legal advisors, and discovered the alleged fraud for the first time.*fn35 The Seippels allege that they have paid and will continue to incur substantial damages in the form of fees paid to these new advisors retained to "rectify . . . Defendants' wrongdoing."*fn36 The Seippels' 1999 and 2000 tax returns have been audited by the IRS and Virginia tax authorities, and the Seippels have "had to make tax payments in an amount exceeding $5 million they were promised they would not have to make" and "have paid interest and/or penalties . . . totaling over $1 million and owe additional such amounts."*fn37 The Seippels also allege various other injuries, including losses caused by having liquidated assets at fire sale prices to meet their tax obligations, and the loss of alternative legitimate tax savings.*fn38

  III. LEGAL STANDARD

  A motion to dismiss should be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief."*fn39 At the motion to dismiss stage, the issue "is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed, it may appear on the face of the pleading that a recovery is very remote and unlikely, but that is not the test."*fn40

  A complaint need not state the legal theory, facts, or elements underlying the claim except in certain instances. Pursuant to the simplified pleading standard of Rule 8(a) of the Federal Rules of Civil Procedure, "a complaint must include only `a short and plain statement of the claim showing that the pleader is entitled to relief.'"*fn41 In contrast, the heightened pleading standard of Rule 9(b) requires that in claims of fraud or mistake "the circumstances constituting fraud or mistake shall be stated with particularity."*fn42

  The task of the court in ruling on a motion to dismiss is "merely to assess the legal feasibility of the complaint, not to assay the weight of evidence which might be offered in support thereof."*fn43 When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor.*fn44

  IV. DISCUSSION

  A. Ripeness

  The Deutsche Bank Defendants argue that the Seippels' claims are not ripe, because there has been no final resolution of the Seippels' dispute with the IRS and Virginia tax authorities.*fn45 This argument is unavailing. The fact that the Seippels may not ultimately owe the tax authorities additional taxes does not mean that their action is not ripe. The Seippels allege that they have been damaged, and continue to be damaged, as a result of defendants' conduct. Their damages include the fees paid to defendants, losses incurred in the COBRA transactions, expenses paid to accountants and attorneys that are assisting the Seippels in defending the audits, losses caused as a result of being forced to sell assets at distressed prices to meet tax obligations, and tax penalties already assessed and paid.*fn46 These injuries are immediate and definite, and therefore satisfy the case or controversy requirement contained in Article III of the Constitution.*fn47 Moreover, those damages which remain contingent — penalties, taxes and interest that may be assessed in the future, and professional fees that may be incurred — are the appropriate subject of the Seippels' claim for declaratory relief.*fn48

  B. RICO Claims

  The Seippels assert RICO claims against all defendants. RICO provides for civil and criminal liability for entities engaged in "a pattern of racketeering activity."*fn49 A person who suffers injury as a result of a RICO violation may sue an entity pursuant to 18 U.S.C. § 1964. To demonstrate a "pattern" of racketeering activity, a plaintiff must show at least two predicate acts of racketeering activity occurring within a ten-year period.*fn50

  Defendants contend that Section 107 of the Private Securities Litigation Reform Act ("PSLRA") of 1995,*fn51 bars the Seippels' RICO claim because the alleged predicate acts describe conduct that would have been actionable as securities fraud. The PSLRA amended RICO to provide that "no person may rely upon conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962."*fn52 "In amending RICO, Congress was clear in stating that the PSLRA ...


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