United States District Court, S.D. New York
September 6, 2005.
JOHN J. SHALAM Plaintiff,
KPMG, LLP, et. al, Defendants.
The opinion of the court was delivered by: HAROLD BAER, JR., District Judge
OPINION & ORDER
This civil action is before me on a motion to dismiss by
several Defendants. For the reasons set forth below, the motion
is GRANTED and Plaintiffs' Complaint is dismissed.
Plaintiff alleges that he was defrauded through the marketing
and sale of tax advice. The facts below are drawn from the
allegations in the Complaint and are presumed to be true for
purposes of this motion to dismiss.
Plaintiff is the founder and CEO of Audiovox Corporation, a
publicly traded company. He claims that in early 2000, his
personal accountant, KPMG, was aware that he intended to sell his
Audiovox stock and would realize a significant amount of taxable
income. He alleges that KPMG and other Defendants helped him to
implement a tax strategy known as BLIPS to create a capital loss
to off-set against his capital gains in his 2000 taxes. The IRS
has since denounced this tax shelter. KPMG has entered into a
Deferred Prosecution Agreement with the federal government in a
criminal investigation based on tax shelters, including BLIPS,
and eight former officers have been indicted. (United States v.
KPMG LLP, No. 05 Cr. 903, S.D.N.Y.) Plaintiff asserts six claims: (1) securities fraud pursuant to
§ 10(b) of the Exchange Act, (2) professional malpractice, (3)
fraudulent inducement, (4) negligent misrepresentation and
constructive fraud, (5) declaratory judgment and (6) various
According to the Complaint, Shalam's BLIPS transaction was as
follows: On January 14, 2000, "defendants caused Congo Ventures
LLC ("Congo") to be formed as the limited liability company
through which defendants arranged that Mr. Shalam would make the
investment" in BLIPS. Complaint at ¶ 113. Plaintiff claims that
in early 2000, his personal accountant, KPMG was aware that he
intended to sell Audiovox stock and would realize significant
capital gain. He alleges that KPMG induced him to engage in the
BLIPS tax strategy to lower what he would owe the IRS, and that
KPMG and Brown & Wood knowingly misrepresented to him that it was
"more likely than not" that BLIPS would survive court scrutiny as
a viable tax shelter. Shalam relied on these representations and
omissions and entered the shelter in 2000 for that year's tax
returns. In 2004, the IRS disavowed the BLIPS tax benefit and as
a result, Shalam claims that he had to pay millions in federal
and state taxes and interest. Brown & Wood and KPMG provided
Shalam with opinion letters in September and November 2000,
respectively. In January 2002, KPMG wrote Shalam to inform him of
an announcement by the IRS about the shelter and to encourage him
to make disclosure of his BLIPS transaction. A month later, Brown
& Wood sent a similar letter, but did not purport to provide any
definite advice as to whether the Plaintiff should participate in
the IRS's disclosure program. As recently as August 2005, KPMG
admitted to fraudulent conduct in connection with BLIPS and other
A. Applicable Legal Standard
When ruling on a motion to dismiss pursuant to Fed.R.Civ.P.
12(b)(6), the Court must construe all factual allegations in the
complaint in favor of the non-moving party. Allen v.
Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991). The
Court's consideration is limited to facts stated on the face of
the complaint and in documents appended to the complaint or
incorporated in the complaint by reference, as well as to matters of which judicial notice may be taken. Id. Dismissal of
a claim is proper only where "it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which
would entitle him to relief." Conley v. Gibson, 355 U.S. 41,
45-46 (1957). There is a heightened standard of pleading in
claims of fraud or mistake. Fed.R.Civ.P. 9(b) requires
"circumstances constituting fraud or mistake shall be stated with
B. Statute of Limitations
A plaintiff must bring a Section 10(b) claim within "2 years
after the discovery of the facts constituting the violation," or
"5 years after such violation," whichever comes first.
28 U.S.C. § 1658(b).
Shalam's Section 10(b) claims are time-barred under the
five-year limitations period because the only securities
transaction alleged in the Complaint, Shalam's February 2000
Audiovox stock sale, occurred on February 25, 2000, more than
five years before the present suit, which was filed on April 7,
2005. As such, the Court need not discuss whether Shalam's
Complaint is barred by the two-year limitations period.
Shalam argues that when fraudulent acts occur after the
relevant securities transaction, the limitations period runs from
the last of those acts. Unfortunately, this is not the law. The
statute of limitations in federal securities law cases "starts to
run on the date the parties have committed themselves to complete
the purchase or sale transaction." Grondahl v. Merritt & Harris,
Inc., 964 F.2d 1290, 1294 (2d Cir. 1992) citing Radiation
Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972)
(emphasis omitted) (A cause of action under Section 10b starts to
run on the date that the purchase or sale of securities in
question occurred.); see also, In re Adelphia Communs. Corp.
Sec. & Derivative Litigation, 2005 U.S. Dist. LEXIS 14444, at
*10 (S.D.N.Y. Jul. 8, 2005). When the harm or damage happens does
not matter for statute of limitation purposes. Grondahl,
964 F.3d at 1294.
Because this shelter is founded on a complicated tax strategy,
Shalam argues that I should look at the tax strategy as a whole
and the limitations period should not start until the date the
fraudulent opinion letters were sent in September and November
2000. But the cases he cites to support this argument did not
address limitations issues, but rather they focus on whether the
Private Securities Litigation Reform Act ("PSLRA") applies in
actions where the securities were just a component of a larger
transaction that included non-securities transactions. S.E.C. v.
Zandford, 535 U.S. 813, 153 L. Ed. 2d 1, 122 S.Ct. 1899 (2002)
(held that securities fraud exists where "securities transactions
and breaches of fiduciary duty coincide."); Ling v. Deutche
Bank, 2005 U.S. Dist. LEXIS 9998 (S.D.N.Y. May 26, 2005) (Baer,
J.). To be subject to the PSLRA, the allegedly fraudulent
activity must be in connection with the purchase or sale of
securities. This has no bearing on when the statute of
limitations period begins. The underlying policy of the PSLRA was
and is that it be applicable to actions with some connection to
the purchase or sale of securities. That policy would not be
served if the start of the limitations period could be shifted by
additional interactions or communications between the parties.
See, e.g., Zola v. Gordon, 685 F. Supp. 354, 364 n. 10
Also, a subsequent action that serves only to complete a
transaction, essentially the hook on which the Plaintiff hangs
his Complaint, does not effect the onset of the statute of
limitations. Isanka v. Spectrum Technologies USA Inc.,
131 F.Supp. 2d 353, 359 (N.D.N.Y. 2001). When stripped of its outer
arguments, all that matters is the date the Plaintiff sold his
stock. None of the Defendants' subsequent actions sending
letters, signing tax returns, etc. bear on when the limitations
As such, Plaintiff's securities fraud claims are barred by the
Statute of Limitations pursuant to 28 U.S.C. § 1658(b). Having
dismissed the federal claims, the Court declines to exercise
supplemental jurisdiction over the remaining state-law claims.
For the foregoing reasons, Defendants' motion to dismiss is
GRANTED. The Clerk of the Court is instructed to close any open
motions and remove this case from my docket.
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