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Soward v. Deutsche Bank AG

September 1, 2011

DAVID C. SOWARD, PLAINTIFF,
v.
DEUTSCHE BANK AG AND DEUTSCHE BANK SECURITIES, INC., DEFENDANTS.
THOMAS R. BECNEL AND JARDINE VENTURES, LLC, PLAINTIFFS,
v.
DEUTSCHE BANK AG AND DEUTSCHE BANK SECURITIES, INC., DEFENDANTS.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

I. INTRODUCTION

OPINION AND ORDER

Plaintiffs, Thomas R. Becnel and Jardine Ventures, LLC (collectively "Becnel") and David Soward, bring these diversity actions against Deutsche Bank AG and Deutsche Bank Securities, Inc. (collectively "Deutsche Bank") alleging state-law claims of fraud, conspiracy to commit fraud, fraudulent concealment, aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract and breach of implied duty of good faith and fair dealing. Soward filed his Complaint on December 10, 2010 and Becnel filed his Complaint on March 9, 2011. These cases arise out of a tax shelter scheme known as the Bond Linked Issue Premium Structure Strategy ("BLIPS Strategy"), which the parties carried out between September 1999 and May 2000. Deutsche Bank argues that each of Soward's and Becnel's claims is time-barred as well as insufficient as a matter law. Deutsche Bank now moves to dismiss Soward's Amended Complaint and Becnel's Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons given below, these two cases are dismissed in their entirety.

II. BACKGROUND*fn1

A. The BLIPS Strategy

Soward and Becnel claim that Deutsche Bank conspired with Presidio Growth LLC and Presidio Advisory Services, LLC (collectively "Presidio") to defraud them by inducing them to invest in "investment program[s]" called "Alverstone Strategic Investment Fund" ("Alverstone") and "Hubbard Strategic Investment Fund" ("Hubbard"), respectively, and to charge them fees for loans, to be supplied by Deutsche Bank, that never existed.*fn2 What Soward and Becnel refer to as an "investment program" is actually an illegal tax shelter known as the BLIPS Strategy.*fn3 On December 21, 2010, Deutsche Bank entered into a non-prosecution agreement admitting wrongdoing in connection with the BLIPS strategy.*fn4 In the NPA, Deutsche Bank admitted that "the BLIPS transactions were designed to enable BLIPS investors to claim a purported tax benefit . . . . The BLIPS transactions were designed by KPMG and Presidio to create the impression that the loans [supplied by Deutsche Bank] had an unusual premium structure at an interest rate well above prevailing market rates."*fn5 As part of the tax shelter strategy, the BLIPS customer and Deutsche Bank would enter into a series of interest rate swaps, which had the net effect of "'convert[ing] the loans to variable-rate loans, at market rates, with no premium.'"*fn6 During these transactions, Deutsche Bank "'took steps to have the BLIPS series of transactions approved with [Deutsche Bank].'"*fn7 "'[Deutsche Bank's] credit reports, for example, falsely identified the primary purpose of BLIPS as providing the investor with an opportunity to make profits based on the potential depreciation of emerging market currencies.'"*fn8

1. Soward and the BLIPS Strategy

As part of the BLIPS Strategy,*fn9 Soward entered into a credit agreement ("Soward Credit Agreement") with Deutsche Bank for loans totaling $10.4 million on or about September 3, 1999.*fn10 Deutsche Bank then opened an account for Voltaire, LLC ("Voltaire"), a limited liability company solely owned by Soward, which Presidio Growth LLC and Presidio Advisory Services, LLC (collectively "Presidio") formed for Soward.*fn11 Soward deposited $224,250.00 into the Voltaire account to serve as collateral for the loans Deutsche Bank was supposed to supply.*fn12 Approximately three weeks after Soward entered into the Soward Credit Agreement, Soward entered into an assignment and assumption agreement ("Soward Assignment Agreement") and assigned Voltaire's rights in the Soward Credit Agreement to the Alverstone Strategic Investment Fund.*fn13 Soward claims that the Fund was purportedly managed by Presidio but was actually under the control of Deutsche Bank.*fn14 The Voltaire and Alverstone accounts were closed by Deutsche Bank on May 15, 2000.*fn15 Soward alleges that the loan between Deutsche Bank and Voltaire was a sham and that Deutsche Bank and Presidio "defrauded Soward by charging him fees and interest upon the fraudulent representation that there was a bona fide loan in place."*fn16

2. Becnel and the BLIPS Strategy

Becnel's participation in the BLIPS strategy is nearly identical to Soward's. On or about September 12, 1999, Becnel entered into a credit agreement ("Becnel Credit Agreement") with Deutsche Bank for a loan totaling eighty million dollars.*fn17 Becnel then opened an account at Deutsche Bank for Jardine Ventures, LLC ("Jardine"), a limited liability company created by Presidio and solely owned by Becnel, and deposited $2.1 million into the account as collateral for the eighty million dollar loan.*fn18 Approximately three weeks after Becnel executed the credit agreement, Becnel executed an assignment and assumption agreement ("Becnel Assignment and Assumption Agreement"), assigning Jardine's rights to the Becnel Credit Agreement to Hubbard Strategic Investment Fund.*fn19 The Jardine and Hubbard accounts were closed by Deutsche Bank on or about May 15, 2000.*fn20 As with Soward, Becnel claims that the loan from Deutsche Bank was a sham.*fn21 Becnel, like Soward, alleges that because "[c]ontrol of the funds never passed from Deutsche Bank to [Becnel] . . . there was no legitimate basis for the fees charged by Deutsche Bank and Presidio."*fn22

B. The Class Actions

On January 28, 2005, Becnel filed claims "as lead plaintiff on behalf of others similarly situated against Deutsche Bank, Presidio, KPMG, Sidley Austin and others in a class action law suit."*fn23 Becnel v. KPMG, LLP, et al. was filed in the Circuit Court of Clark County, Arkansas and later removed to the United States District Court for the Western District of Arkansas.*fn24 Class certification was denied on August 9, 2005; the case was dismissed without prejudice on September 12, 2005.*fn25 On September 2, 2005, Kottler v. Deutsche Bank AG, et al. was filed in the United States District Court for the Southern District of New York involving the same investment program.*fn26 Becnel became a member of the Kottler class action.*fn27 Class certification was denied on March 29, 2010.*fn28

III. APPLICABLE LAW

A. Statute of Limitations and New York's Borrowing Statute

"When diversity of citizenship is the basis of jurisdiction, a federal court must look to the statute of limitations of the state in which it sits."*fn29 "New York courts generally apply New York's statute of limitations even when the injury giving rise to the action occurred outside New York. This general rule, however, is subject to a traditional statutory exception, New York's 'borrowing' statute."*fn30

Under New York's borrowing statute,*fn31 "when a nonresident plaintiff sues upon a cause of action that arose outside of New York, the court must apply the shorter limitations period, ...


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