Amato v. Kpmg Llp

• Decision Date: 13 June 2006
• Docket Number: No. 06CV39.,06CV39.
• Parties: Peter & Deborah AMATO, et al., Plaintiffs v. KPMG LLP, et al., Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

Page 460

433 F.Supp.2d 460

Peter & Deborah AMATO, et al., Plaintiffs v. KPMG LLP, et al., Defendants.

No. 06CV39.

United States District Court, M.D. Pennsylvania.

June 13, 2006.

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Arthur L. Piccone, Hourigan, Kluger and Quinn, P.C., Kingston, PA, Ian M. Comisky, Matthew D. Lee, Blank Rome LLP Philadelphia, PA, Jordana Cooper, Blank Rome LLP, Cherry Hill, NJ, for Plaintiffs.

James T. Phalen, Kristen C. Limarzi, King & Spalding LLP, Washington, DC, John E. Caruso, Montgomery McCracken Walker & Rhoads, LLP, Paul G. Nofer, Don P. Foster, Klehr, Harrison, Harvey, Branzburg & Ellers, Cheryl A. Krause, Patricia A. McCausland, Dechert LLP, Philadelphia, PA, Charles A. Shea, III, Wetzel, Caverly, Shea, Phillips and Rodgers, Robert D. Schaub, Rosenn, Jenkins & Greenwald, LLP, Wilkes-Barre, PA, Lisa J. Demsky, Randall G. Sommer, Richard E. Drooyan, Munger, Tolles & Olson LLP, Los Angeles, CA, Adam J. Kaiser, Christine Chi, Lawrence M. Hill, Michael R. Hoernlein, Seth C. Farber, Dewey Ballantine LLP, New York, NY, for Defendants.

MEMORANDUM AND ORDER

JONES, District Judge.

THE BACKGROUND OF THIS ORDER IS AS FOLLOWS:

We have a plethora of motions before us which will be addressed in this Memorandum and Order. First, we have three Motions to Compel Arbitration and Stay All Proceedings, or Alternatively, for Additional Time to Respond to Complaint (does. 7, 8, 10) filed, by Defendants KPMG LLP ("KPMG"), Presidio Advisors LLC and Presidio Growth LLC (collectively, "Presidio"), and Deutsche Bank AG ("Deutsche Bank") and Deutsche Bank Securities, Inc. ("DBSI") (collectively "Deutsche Bank Defendants") on January 13, 2006. Second, pending before the Court is a Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (doc. 9) filed by Defendant Sidley Austin Brown & Wood LLP¹ ("Sidley Austin") on January 13, 2006. Finally, we have before us a Motion to Remand for Lack of Subject Matter Jurisdiction (doc. 23) filed by Plaintiffs on February 6, 2006.

For the reasons that follow, we will deny Plaintiffs' Motion to Remand, grant in part and deny in part Sidley Austin's Motion to Dismiss, order Plaintiff Mr. Chebalo to submit to arbitration his claims against the Deutsche Bank Defendants, and stay all further proceedings in this case against all Defendants pending the completion of the arbitration process between Plaintiff Mr. Chebalo and the Deutsche Bank Defendants in accordance with the arbitration clause contained in the Customer Agreement. In addition, the Court will set a telephonic status conference for December 4, 2006, which will be initiated by Plaintiffs' counsel, advising the Court on the progress of the arbitration procedure.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY:

On or about October 28, 2005, Plaintiffs² filed a complaint against Defendants³ in the Court of Common Pleas of Luzerne County, Pennsylvania alleging various misconduct relating to Plaintiffs' participation in an investment strategy known as Offshore Portfolio Investment Strategy ("OPIS"). By stipulation of the parties, the time for Defendants to respond to Plaintiffs' complaint was extended to January 6, 2006. On January 6, 2006, the Deutsche Bank Defendants, with the consent of all Defendants, removed the action to this Court.

Plaintiffs' complaint alleges that in 1998 they realized a significant capital gain from the sale of certain companies, including Keystone Automotive Warehouse. (Compl. ¶ 22-25). Plaintiffs are individuals who hoped to avoid tax liability by investing in a tax-advantaged investment strategy, OPIS, that was allegedly marketed to them by KPMG. Id. ¶¶ 25, 47, 48. Plaintiffs allege that they participated in the OPIS strategy after meeting with a representative of KPMG, who advised them that they could recognize significant tax benefits through their participation in OPIS. Id. ¶ 25. Subsequently, Plaintiffs claimed substantial tax losses on their tax returns. Id. ¶ 13. Plaintiff allege that the IRS and the Commonwealth of Pennsylvania later challenged such losses. Id. ¶¶ 32, 99-101.

The crux of the allegations in the complaint is that the Deutsche Bank Defendants engaged in a scheme to induce wealthy and sophisticated persons, like Plaintiffs, to pursue the OPIS strategy when they knew or should have known that OPIS was an abusive tax shelter that would be disallowed by the IRS. Id. ¶ 85. As a result, Plaintiffs now claim that they were misled about the propriety and nature of the OPIS strategy and seek damages from not only KPMG, Sidley Austin, and Presidio, but also against the Deutsche Bank Defendants, which provided credit and account services to Plaintiffs. Id. ¶¶ 85, 105-225.

Plaintiffs allege that "KPMG expressly represented to present plaintiffs that KPMG and the [Sidley Austin] law firm would independently provide opinion letters." Id. ¶¶ 61, 108. As a result, Plaintiffs "reasonably relied to their significant detriment on the independence of Brown & Wood in connection with entering into the OPIS transaction and in engaging Brown & Wood." Id. ¶ 61. Moreover, Plaintiffs allege in the complaint that Sidley Austin wrongfully issued alleged "independent" opinion letters to Plaintiffs that concluded it was "more likely than not" that the tax deductions generated by OPIS would be upheld if challenged by the IRS. Id. ¶ 67. Plaintiffs allege that Sidley Austin knew or should have known that OPIS was not "more likely than not" to be upheld by the IRS, since it based this opinion on facts that it knew or should have known were not correct and in any event, since the transaction had no economic substance other, than to reduce taxable income. Id. ¶¶ 67, 153. Plaintiffs assert that KPMG, acting as Sidley Austin's agent in this alleged fraudulent marketing endeavor, represented to Plaintiffs that the promised tax opinion of Sidley Austin was "independent." Id. ¶ 154. The Senate Subcommittee found the evidence suggested that Sidley Austin and KPMG were "close collaborators, rather than independent actors." Id. ¶ 60.

Plaintiffs additionally allege that the Senate Subcommittee questioned Sidley Austin's compliance with American Bar Association Model Rule 1.5, which prohibits charging of unreasonable fees. Id. ¶ 65. Sidley Austin was paid at least $50,000 for each allegedly "independent" opinion letter and Plaintiffs allege that the letters were in fact canned creations. Id. ¶¶ 64, 69. Plaintiffs assert that Chief Judge Thomas F. Hogan of the United States District Court for the District of Columbia has already stated that Sidley Austin's tax shelter opinion letters have "little indication" that they are "independent opinion letters that reflect any sort of legal analysis, reasoned or otherwise. In fact, when examined as a group, the letters appear to be nothing more than an orchestrated extension of KPMG's marketing machine." Id. ¶ 69 (quoting United States v. KPMG LLP, 316 F.Supp.2d 30, 40 (D.D.C.2004)).

Plaintiffs' complaint alleges the following twenty causes of action: (1) misrepresentation/fraud against KPMG; (2) negligent misrepresentation against KPMG; (3) breach of fiduciary duty against KPMG; (4) professional malpractice against KPMG; (5) consumer fraud against KPMG; (6) aiding and abetting fraud, aiding and abetting breaches of fiduciary duty against KPMG; (7) civil conspiracy against all Defendants; (8) misrepresentation/fraud against Sidley Austin; (9) negligent misrepresentation against Sidley Austin; (10) breach of fiduciary duty against Sidley Austin; (11) professional malpractice against Sidley Austin; (12) consumer fraud against Sidley Austin; (13) aiding and abetting fraud, aiding and abetting breaches of fiduciary duty; (14) misrepresentation against Deutsche Bank; (15) negligent misrepresentation against Deutsche Bank; (16) aiding and abetting fraud, aiding and abetting breaches of fiduciary duty against Deutsche Bank; (17) misrepresentation/fraud against Presidio; (18) negligent misrepresentation against Presidio; (19) consumer fraud against Presidio; and (20) aiding and abetting fraud, aiding and abetting breaches of fiduciary duties against Presidio. Plaintiffs also seek punitive damages against all Defendants.

The Motions pending before the Court have been fully briefed and the Court heard oral argument on such Motions on May 24, 2006.

DISCUSSION:

A. Sidley Austin's Motion to Dismiss

Defendant Sidley Austin filed a Motion to Dismiss this action pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 12(b)(6), or, in the alternative, pursuant to Fed.R.Civ.P. 9(b). Before elaborating upon Sidley Austin's Motion, we will provide the applicable standard of review for a motion to dismiss. In considering a motion to dismiss, a court must accept the veracity of a plaintiff's allegations. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); see also White v. Napoleon, 897 F.2d 103, 106 (3d Cir.1990). In Nami v. Fauver, 82 F.3d 63 65 (3d Cir.1996), our Court of Appeals for the Third Circuit added that in considering a motion to dismiss based on a failure to state a claim argument, a court should "not inquire whether the plaintiffs will ultimately prevail, only whether they are entitled to offer evidence to support their claims." Furthermore, "a complaint should not be dismissed for failure to state a claim unless 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, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see also District Council 47 v. Bradley, 795 F.2d 310 (3d Cir.1986).

We initially note that in considering Defendant Sidley Austin's Motion, we must construe the complaint in the light most favorable to Plaintiffs, take the allegations in the complaint as true, and draw all reasonable inferences that can be drawn from the pleading in Plaintiffs' favor.

i. Fraud, Negligent Misrepresentation, and Consumer Fraud Claims

In...