Khan v. Seidman

• Decision Date: 21 April 2011
• Docket Number: NO. 4-10-0583 cons.,NO. 4-10-0504,cons.,4-10-0504,cons.,4-10-0583 cons.
• Parties: SHAHID R. KHAN; ANN C. KHAN; SRK WILSHIRE INVESTMENTS, LLC; SRK WILSHIRE PARTNERS; SRK WILSHIRE INVESTORS, INC.; THERMOSPHERE FX PARTNERS, LLC; and KPASA, LLC, Plaintiff-Appellants, v. BDO SEIDMAN, LLP; PAUL SHANBROM; MICHAEL COLLINS; EQUILIBRIUM CURRENCY TRADING, LLC; SAMYAK VEERA; GRANT THORNTON, LLP; GRAMERCY ADVISORS, LLC; JAY A. JOHNSTON; and MARC HELIE, Defendants, and DEUTSCHE BANK AG; DEUTSCHE BANK SECURITIES, INC., d/b/a DEUTSCHE BANK ALEX. BROWN; and DAVID PARSE, Defendants-Appellees. SHAHID R. KHAN; ANN C. KHAN; SRK WILSHIRE INVESTMENTS, LLC; SRK WILSHIRE PARTNERS; SRK WILSHIRE INVESTORS, INC.; THERMOSPHERE FX PARTNERS, LLC; and KPASA, LLC, Plaintiffs-Appellants, v. BDO SEIDMAN, LLP; PAUL SHANBROM; MICHAEL COLLINS; DEUTSCHE BANK AG; DEUTSCHE BANK SECURITIES, INC., d/b/a DEUTSCHE BANK ALEX. BROWN; DAVID PARSE; EQUILIBRIUM CURRENCY TRADING, LLC; JAY A. JOHNSTON; and MARC HELIE, Defendants, and GRANT THORNTON, LLP, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

SHAHID R. KHAN; ANN C. KHAN; SRK WILSHIRE INVESTMENTS, LLC SRK WILSHIRE PARTNERS; SRK WILSHIRE INVESTORS, INC.; THERMOSPHERE FX PARTNERS, LLC and KPASA, LLC, Plaintiff-Appellants, v. BDO SEIDMAN, LLP; PAUL SHANBROM; MICHAEL COLLINS EQUILIBRIUM CURRENCY TRADING, LLC; SAMYAK VEERA GRANT THORNTON, LLP; GRAMERCY ADVISORS, LLC; JAY A. JOHNSTON; and MARC HELIE, Defendants, and DEUTSCHE BANK AG; DEUTSCHE BANK SECURITIES, INC., d/b/a DEUTSCHE BANK ALEX. BROWN; and DAVID PARSE, Defendants-Appellees. SHAHID R. KHAN; ANN C. KHAN; SRK WILSHIRE INVESTMENTS, LLC; SRK WILSHIRE PARTNERS; SRK WILSHIRE INVESTORS, INC.; THERMOSPHERE FX PARTNERS, LLC; and KPASA, LLC, Plaintiffs-Appellants, v. BDO SEIDMAN, LLP; PAUL SHANBROM; MICHAEL COLLINS; DEUTSCHE BANK AG; DEUTSCHE BANK SECURITIES, INC., d/b/a DEUTSCHE BANK ALEX. BROWN; DAVID PARSE; EQUILIBRIUM CURRENCY TRADING, LLC; JAY A. JOHNSTON; and MARC HELIE, Defendants, and GRANT THORNTON, LLP, Defendant-Appellee.

NO. 4-10-0504, cons.

NO. 4-10-0583 cons.

APPELLATE COURT OF ILLINOIS FOURTH DISTRICT

Dated: April 21, 2011.

Appeal from Circuit Court of Champaign County No. 09L140

Honorable Jeffrey B. Ford, Judge Presiding.

JUSTICE APPLETON delivered the judgment of the court, with opinion. Justices McCullough and Myerscough¹ concurred in the judgment and opinion.

OPINION

In these two consolidated appeals, the plaintiffs are Shahid R. Khan (Khan) and Ann C. Kahn along with various business entities that Khan formed for the purpose of creating artificial losses, which he hoped would reduce his taxable income. Khan was not the one who came up with the tax-avoidance schemes. Rather, according to the complaint, he followed the advice of Paul Shanbrom at BDO Seidman, LLP, advice that was reinforced by a variety of co-conspirators, including the defendants in these two appeals.

In one of the appeals, case No. 4-10-0504, the defendants are Deutsche Bank AG (Deutsche Bank); Deutsche Bank Securities, Inc., d/b/a Deutsche Bank Alex. Brown (Brown); and David Parse, an employee of Deutsche Bank (collectively, Deutsche defendants). According to the complaint, Shanbrom and Parse advised Khan to engage in some "investment strategies" in 1999 and 2000 in order to create ordinary losses, and Deutsche Bank and Brown helped implement these strategies.

In the other appeal, case No. 4-10-0583, the defendant is Grant Thornton, LLP, which prepared the 2000 tax returns for one of the plaintiff corporations, Thermosphere FX Partners, LLC, claiming the fake losses. The Khans then used the information from this tax return in their own individual tax returns. The tax returns, however, were incorrect because, as the Internal Revenue Service (IRS) had warned in itspublications, such contrived losses lacked economic substance and therefore were not allowable. Consequently, plaintiffs ended up losing a lot of money. Not only were the substantial fees they paid to defendants a total waste, but plaintiffs incurred liability to the IRS for back taxes, interest, and penalties. All this is according to the complaint.

The Deutsche defendants moved to dismiss the complaint pursuant to sections 2-615 and 2-619 of the Code of Civil Procedure (735 ILCS 5/2-615, 2-619 (West 2008)), asserting the legal insufficiency of the complaint and also invoking the statute of limitations in section 13-205 of the Code (735 ILCS 5/13-205 (West 2008)). Grant Thornton likewise moved to dismiss the complaint on the grounds that it was legally insufficient and time-barred. The trial court concluded that the statute of limitations in section 13-205 barred the actions against the Deutsche defendants and that the statute of limitations in section 13-214.2(a) (735 ILCS 5/13-214.2(a) (West 2008)) and the statute of repose in section 13-214.2(b) (735 ILCS 5/13-214.2(b) (West 2008)) barred the actions against Grant Thornton. Therefore, the court granted defendants' motions for dismissal. The court also found, pursuant to Rule 304(a) (Ill. S. Ct. R. 304(a) (eff. Feb. 26, 2010)), that there was no just reason to delay either enforcement or appeal of these rulings.

In our de novo review in these two appeals, taking the well-pleaded facts of the complaint to be true and drawing reasonable inferences in plaintiffs' favor, we hold that the trial court erred by concluding that the claims against defendants are time-barred. Therefore, we reverse the trial court's judgments in the two cases, and we remand the cases for further proceedings.

I. BACKGROUND

A. The 1999 Digital Options Strategy

1. Shanbrom and Parse Pitch the Strategy to Khan

Beginning in approximately 1993, BDO performed auditing services for Chromecraft, a company of which Khan was part owner. Michael Collins, a partner at BDO, was in charge of auditing services for Chromecraft, and as of 1999, he had been one of Khan's trusted accountants and advisors for some six years.

In 1999, Khan requested his own partner at Chromecraft to ask Collins if he knew anyone who could advise him on purchasing foreign currency. Khan needed Japanese yen because he was in negotiations to buy a Canadian company that manufactured plastic automobile bumpers and the Japanese owners of the company wanted to be paid in yen. Because Khan had no experience in foreign-currency trading, he needed guidance.

Collins referred Khan to Paul Shanbrom, who was a member of BDO's Tax Solutions Group and reputedly an expert in foreign-currency trading, and in September 1999, Khan and one of his estate-planning advisors had a meeting with Collins and Shanbrom. The meeting went beyond the subject of simply purchasing the needed foreign currency. Shanbrom introduced Khan to an "investment strategy" involving the purchase and sale of digital options on foreign currency (the Digital Options Strategy), a strategy which, according to Shanbrom, not only gave Khan a chance to double his money but also allowed him to claim a tax loss if he happened to lose money on his investments in foreign currency. Shanbrom told Khan that BDO had designed the Digital Options Strategy in such a way that it had economic substance for tax purposes. It purportedly had economicsubstance because Khan had a good chance of making a substantial return. According to the complaint, "Khan did not understand the intricacies of the investments, the tax code or the mechanism that allowed him to receive the tax benefits; however, he trusted BDO's expertise in this area and their representations." In other words, Khan had only a vague idea of what the 1999 Digital Options Strategy was all about.

The "investment" part of the strategy involved the buying and selling of options in foreign currency. When someone buys an option, that person buys the right, but not the obligation, to buy or sell a given quantity of assets (in this case, foreign currency) at a fixed price, or "strike price," within a specified time, regardless of the market price, or "spot price," of the assets. (A "spot price" is the same thing as a "spot rate.") An option is "digital," or "binary," if the investor stands to win or lose a predetermined amount in full: in other words, the payout will be all of the predetermined amount or nothing (1 or 0, in binary terms). Essentially, a digital option is an all-or-nothing wager that the spot price will be at or above a given price on a certain date. Or it can be an all-or-nothing wager that the spot price will be at or below the given price on that date.

If the investor is betting that the spot price will be at or above the given price on a certain date, the investor has a long option. On the other hand, if the investor is betting that the spot price will be at or below the given price on a certain date, the investor has a short option.

Shanbrom recommended hiring David Parse of Deutsche Bank to assist Khan in acquiring these long and short options. Shanbrom arranged a conference call between himself, Parse, and Khan. In this conference call, Parse told Khan many of the same thingsthat Shanbrom had told him, including that the Digital Options Strategy was a good way to make money and, alternatively, a perfectly legal way to reduce taxable income. It was agreed that Deutsche Bank would handle the "investment" component of this strategy. Paragraph 63 of the complaint recounts the conference call as follows:

"During this conference call, Parse, along with Shanbrom, reiterated the 'sales pitch' and reassured Khan that the Digital Options Strategy was completely legal. Parse, along with Shanbrom, further discussed the steps of the Digital Options Strategy and informed Khan that Deutsche Bank would handle all aspects of the investments in foreign currencies. According to Parse, Deutsch [sic] Bank had internal procedures to determine the proper amounts and types of the foreign currency investments that would be appropriate for Khan's circumstances. Parse told Khan that Parse would make all decisions with respect to the amounts and types of foreign currency investments since he was the expert. Parse again reiterated that Plaintiffs would have a good chance of making a profit on the foreign currency investments. Parse represented to Khan that the foreign currency options that Khan would be executing were actual investments. Shanbrom and Parse never informed Khan that the foreign currency digital options were simply private bets with Deutsche Bank onwhere the underlying currencies would be on a particular date and time and that Deutsche Bank controlled the outcome."

According to the complaint, Deutsche Bank controlled the outcome in that, as the "calculation agent," Deutsche Bank had the contractual right to accept or disregard any spot price. Presumably, Deutsche Bank's role as calculation agent was stated in the form contracts between Deutsche Bank and Khan (who signed them in his capacity as partner or corporate officer of various plaintiffs). Khan, however, did not understand the import of this designation of Deutsche Bank as calculation agent. He did not understand...