The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge
This case arises from the well-documented sale of illegal tax shelters by the accounting firm KPMG and the law firm Brown & Wood in the late 1990s and early 2000s. Plaintiffs used the tax shelters and have sued and recovered moneys from KPMG and Brown & Wood. They now sue two banks and an investment advisor who are alleged to have participated and assisted in the formation, promotion, and execution of these failed tax shelters.
Plaintiffs Mark Kottler, Karen S. Long, and Robert E. Long ("Plaintiffs") sue on behalf of themselves and Class Members similarly situated ("Class Members"), seeking recovery on seven causes of action: (1) violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962; (2) civil conspiracy to defraud; (3) common law fraud; (4) aiding and abetting fraud; (5) unjust enrichment; (6) breach of fiduciary duties; and (7) aiding and abetting breach of fiduciary duties.*fn1 Defendants move to dismiss the complaint. For the reasons that follow, the motions are GRANTED in part and DENIED in part.
The facts summarized below are taken from the Amended Complaint, the allegations of which must be assumed true for purposes of these motions to dismiss. The crux of the Amended Complaint is that two banks, Defendants Deutsche Bank AG and Bayerische Hypo- und Vereinsbank AG ("HVB"), and an investment advisor, Presidio Advisors LLC, along with co-conspirators KPMG and Sidley Austin Brown & Wood ("Brown & Wood")*fn2 participated in a scheme to defraud the Plaintiffs. Plaintiffs allegedly relied on misleading representations made by the Defendants and the co-conspirators and purchased tax products that were subsequently found by the Internal Revenue Service ("IRS") to be unlawful tax-avoidance schemes. In sum, Presidio developed the tax strategies, KPMG, a major accounting firm, marketed the strategies to their clients (high net worth individuals), the law firm of Brown & Wood gave independent legal approval of the strategy in the form of an opinion letter, and two banks, Deutsche Bank and HVB (among others), provided funds that facilitated the financials so that the tax strategies could be implemented. In the end, the strategies were determined to be fraudulent tax avoidance schemes and Plaintiffs, who participated in two such strategies-OPIS and BLIPS*fn3 -now sue the alleged co-conspirators on the theory that the Defendants knew the schemes were unlawful and yet marketed and sold the strategies to them in return for millions of dollars in fees.
Plaintiff Mark Kottler participated in the OPIS strategy and Plaintiffs Karen and Robert Long were involved in the BLIPS strategy. Both tax strategies work similarly, involving a complex series of bank-financed transactions in which the taxpayer purchases shares, options, and warrants in foreign entities in order to effectuate tax shelters. The purchasers are individuals who had previously realized a substantial capital gain, which is offset by a planned loss in the foreign investment, thereby rendering their tax liability at or close to zero.
Defendant Deutsche Bank*fn4 is the largest bank in Germany and one of the largest financial institutions in the world. Its only branch in the United States is in New York. Deutsche Bank allegedly "provided approximately $10.8 billion in lines of credit for OPIS and BLIPS transactions." (Amended Complaint ("Am. Compl.") ¶ 84.) Plaintiffs claim that Deutsche Bank (and all the Defendants alike) knew the tax strategies were fraudulent and yet participated in a scheme to reap millions of dollars in fees from clients like the members of the Class.
Defendant HVB*fn5 is the second largest bank in Germany and a major global financial institution. It is headquartered in Munich and its presence in the United States consists of a single branch located in New York City. HVB allegedly provided nearly $2.5 billion dollars of credit in support of the tax strategies sold and marketed by KPMG. (Id.)
Defendant Presidio*fn6 is an investment advisory firm, founded by former KPMG partners, that formed a relationship with KPMG through which Presidio would develop tax-based products, and KPMG would market and sell them to its clients. This relationship continued over several years, and the Amended Complaint asserts that Presidio actually developed, or was closely linked to the development of, the tax shelters at issue in this litigation. (Id. ¶ 82.)
Presidio also purportedly acted as a confidential tax advisor to many class members and allegedly had a fiduciary relationship with them. According to the Amended Complaint, the opinion letters issued by KPMG and/or Brown & Wood "indicated that Presidio acted as 'investment advisor' to the investor and that Presidio had 'designed' an investment 'strategy' (in the OPIS opinion letters) or that Presidio had 'designed' an investment 'program' (in the BLIPS opinion letters)." (Id. ¶ 63.) Furthermore, the BLIPS opinion letter asserted that "'Presidio acted independently of, and at arm's length from' the bank involved in the transaction," a statement Plaintiffs assert is false and misleading. (Id. ¶ 67.)
According to the Amended Complaint, "the involvement of [both Deutsche Bank and HVB] was critical to the success of the fraudulent scheme." (Id. ¶ 86.) Plaintiffs claim that the fraudulent tax scheme required the execution of "exotic financial transactions that no financial institution would undertake in the ordinary course of business." (Id.) As a result, Plaintiffs assert that the entire scheme would not have been possible but for the participation of the banks as lenders. Plaintiffs further contend that HVB knew that the tax schemes were fraudulent but still approved false representations about their role in the schemes, and agreed that these false representations could be communicated to the purchasers of the tax scheme through the opinion letters issued by KPMG and Brown & Wood. (Id. ¶ 87.)
In addition, HVB is accused of generating false reports, "reversing" bank transactions in connection with the tax shelters to make them appear as though they did not occur at all, and cooperating with Deutsche Bank by accepting money and lending it to tax shelter clients in exchange for fees and profits (in order to minimize Deutsche Bank's exposure to increased reputational risk and to legitimize the legality of the tax shelters). (Id. ¶ 88.)
III. Senate Investigation, Criminal Investigations, and Civil Settlements
In October 2002, the U.S. Senate Permanent Subcommittee on Investigations of the Committee of Governmental Affairs ("Senate Subcommittee") began an investigation into the development, marketing, and implementation of abusive and unlawful tax shelters, including OPIS and BLIPS. In November 2003, the Senate Subcommittee held two days of hearings and issued an initial report on its investigation. A little more than a year later, on February 8, 2005, the Senate Subcommittee issued its final report (the "Report"). The Amended Complaint lists six general findings from the Report, almost entirely related to the unlawful activity of KPMG and Brown & Wood.*fn7 (Id. ¶¶ 6-8.) Indeed it is the Report which frames the substantive basis for the complaint. The other substantive basis for the complaint is the criminal proceedings against some of the co-conspirators.*fn8
In August 2005, Domenick DeGiorgio, the HVB vice-president principally responsible for HVB's participation in the tax strategies, pleaded guilty to two counts of conspiracy to defraud the IRS, wire fraud, and tax evasion. DeGiorgio admitted that the BLIPS strategy "lacked economic justification, was described in a misleading fashion, and was essentially a 'sham' transaction." (Id. ¶ 105.) As part of that plea, he admitted that he "knowingly participated in HVB's making sham loans in which no money left the bank, the loans were never funded, false paperwork was created, and that he knew that BLIPS was falsely described as a long-term leverage transaction when in fact, it was a short-term unleveraged transaction." (Id. ¶ 11.)
In February 2006, HVB entered into a deferred prosecution agreement under which it agreed to pay nearly $30 million in fines, restitution and penalties. Pursuant to this agreement, HVB admitted criminal misconduct and stated that it: admits and accepts that . . . through the conduct of certain HVB employees, during the period from 1996 through 2003, HVB . . . participat[ed] in and implement[ed] fraudulent tax shelter transactions, including . . . ("BLIPS") . . . HVB personnel engaged in conduct that was unlawful and fraudulent, including: (i) agreeing to participate in fraudulent tax shelter transactions; and (ii) preparing and signing false and fraudulent factual recitations, representations, and documents as part of the documentation underlying the shelters. (Id. ¶ 14.)
On September 2, 2005, Plaintiffs, both individually and on behalf of others similarly situated, filed a class action suit against KPMG, Brown & Wood, Deutsche Bank, HVB; and Presidio. On December 23, 2005, this Court issued an order staying the matter pending resolution of a similar class action suit in New Jersey, Simon v. KPMG, No. 05 Civ. 3189, 2006 WL 1541048 (D.N.J. June 2, 2006). On January 4, 2007, Defendants KPMG and Brown & Wood were voluntarily dismissed from the action with prejudice because of the settlement of the Simon action. On that same date, the stay was lifted and the Plaintiffs were given leave to amend the Complaint, which they did on February 9, 2007.
The Amended Complaint was filed, naming Deutsche Bank, Presidio, and HVB as defendants. The Defendants separately moved to dismiss the Amended Complaint between March 19, 2007 and May 3, 2007, and the Plaintiffs opposed those motions. On March 12, 2008, while the motions were pending before this Court, Mark Kottler, individually, voluntarily dismissed his claims against Deutsche Bank.
I. Standard for Motion to Dismiss
On a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court "must accept as true all of the factual allegations contained in the complaint," and construe the complaint in the light most favorable to the plaintiff. Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1975 (2007) (citation and quotation marks omitted). But mere "formulaic recitation of the elements of a cause of action" will not suffice; instead, "[f]actual allegations must be enough to raise a right to relief above the speculative level." Id. at 1965. To survive a motion to dismiss, courts require "enough facts to state a claim to relief that is plausible on its face." Id. at 1974; see also Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) (a plaintiff must "amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible.") (emphasis added). The Court may dismiss a claim where it "appears beyond doubt" that the plaintiff can prove no facts that would entitle him to relief. Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991) (citation omitted). Rule 9(b) of the Federal Rules of Civil Procedure sets forth a heightened pleading requirement for complaints alleging fraud. See Fed. R. Civ. P. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.").
Each Defendant moves separately to dismiss individual claims and the Amended Complaint in its entirety, while also incorporating their co-Defendants' arguments into their own separate motion. The Court turns now to the analysis of the motions to dismiss.
Plaintiffs allege that all defendants violated the RICO statute, 18 U.S.C. § 1962(c), which makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . ." 18 U.S.C. § 1962(c).*fn9 A person who suffers injury as a result of a RICO violation may sue an entity pursuant to 18 U.S.C. § 1964. To state a claim under §1962(c), a plaintiff must allege that a defendant engaged in (1) conduct, (2) of an enterprise, (3) through a pattern (4) of racketeering activity (5) resulting in (6) injury to business or property. Anatian v. Coutts Bank (Switz.) Ltd., 193 F.3d 85, 88 (2d Cir. 1999) (quoting ...