Loftin v. QA Invs. LLC
| Decision Date | 30 April 2015 |
| Docket Number | 03 CVS 16882 |
| Citation | 2015 NCBC 41 |
| Court | Superior Court of North Carolina |
| Parties | PETER T. LOFTIN, Plaintiff, v. QA INVESTMENTS LLC; QUELLOS GROUP, LLC; PRESIDIO GROWTH LLC; and PRESIDIO ADVISORY SERVICES, INC., Defendants. |
2015 NCBC 41
PETER T. LOFTIN, Plaintiff,
v.
QA INVESTMENTS LLC; QUELLOS GROUP, LLC; PRESIDIO GROWTH LLC; and PRESIDIO ADVISORY SERVICES, INC., Defendants.
No. 03 CVS 16882
Superior Court of North Carolina, Wake
April 30, 2015
{1} THIS MATTER is before the Court on Defendants' Motion to Dismiss the Amended Complaint ("Motion"), made pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure ("Rule(s)"). For the reasons expressed below, the Motion is DENIED in part and GRANTED in part, and Plaintiff is requested to file a second amended complaint consistent with this Order & Opinion.
I. INTRODUCTION
{2} Loftin alleges claims related to the certain defendants' involvement in the development, marketing, implementation, and Loftin's subsequent purchase, of unlawful tax shelter products known as Foreign Leveraged Investment Programs ("FLIP") and Bond Linked Issue Premium Structures ("BLIPS"). This Motion is limited to the FLIP products, from which Loftin claims he experienced damages. The case was stayed for several years pending resolution of matters before the United States Tax Court. Claims against some Defendants have been dismissed. The Court has reactivated the case. QA Investments LLC and Quellos Group, LLC have moved to dismiss Loftin's claims of civil conspiracy, fraud, breach of fiduciary duty, constructive fraud, negligent misrepresentation, and unfair and deceptive trade practices ("UDTP" or "Chapter 75"). Their Motion is now before the Court and, after briefing and argument, is ripe for ruling.
II. THE PARTIES
{3} Plaintiff Peter T. Loftin is or was a resident of Wake County, North Carolina.
{4} Defendant QA Investments, LLC is a Delaware company with its principal place of business in Seattle, Washington.
{5} Defendant Quellos Group, LLC is a Delaware company with its principal place of business in Seattle Washington and is the parent of QA Investments. This Order & Opinion will refer to QA Investments, LLC and Quellos Group, LLC collectively as "QA."
{6} KPMG LLP ("KPMG") is a Delaware limited liability partnership headquartered in New York, New York. When the Amended Complaint was filed, KPMG was allegedly the third-largest accounting firm in the United States. Plaintiff voluntarily dismissed claims against KPMG with prejudice on November 20, 2013. Sidley Austin Brown and Wood, LLP ("Sidley Austin") is a Delaware limited liability partnership with its principal place of business in Chicago, Illinois and is one of the largest law firms in the United States. Claims against Sidley Austin were also voluntarily dismissed with prejudice.
{7} Defendants Presidio Growth, LLC and Presidio Advisory Services, LLC (collectively, "Presidio Defendants"), are Delaware companies with their primary places of business in San Francisco, California. Plaintiff alleges that Presidio Advisory Services, LLC, is the alter ego of Presidio Growth. This Order and Opinion will collectively refer to these defendants as "Presidio."
III. BACKGROUND
{8} Plaintiff filed his original Complaint on December 15, 2003, subsequently filing his Amended Complaint on November 8, 2006, and asserting the following claims against QA: (1) civil conspiracy, (2) fraud, (3) breach of fiduciary duty, (4) constructive fraud, (5) negligent misrepresentation, and (6) UDTP. KPMG and Sidley Austin are alleged coconspirators.
{9} The case was designated as an exceptional case and assigned to Hon. Ben F. Tennille, on July 25, 2006. The case was stayed on January 5, 2007, by a consent motion seeking to stay further proceedings pending resolution of a pending matter before the United States Tax Court. The case was subsequently assigned to the undersigned in 2011 following Judge Tennille's retirement. At Plaintiff's request, the stay was lifted following a status conference held on September 19, 2014. QA filed, and the parties briefed, the motion to dismiss after the status conference. The Court then heard oral argument on February 12, 2015.
{10} The Court recites the following facts solely for purposes of this Motion, accepting the allegations of the Complaint as true without assuming the truth of Loftin's legal conclusions. Walker v. Sloan, 137 N.C.App. 387, 392, 592 S.E.2d 236, 241 (2000).[1]
A. Development of FLIP
{11} In the mid-to-late 1990s, KPMG began developing turn-key tax products that it could market to high income clients. (Am. Compl. ¶ 12.) KPMG enlisted QA to assist in constructing transactions involving offshore entities: FLIP, and later for the Offshore Portfolio Investment Program ("OPIS"). (Am. Compl. ¶ 14.) Tax products involving these transactions were very complex, "and [were] really based more on the structuring of the entities involved in the securities transactions rather than the security transactions themselves." (Am. Compl. ¶ 15.) {12} In September 1996, QA sent a confidential memo to UBS AG ("UBS") that outlined the basics of the securities transactions, including that KPMG would follow up with a memo describing how the tax objectives were to be achieved. Because FLIP was a prepackaged product, the nature of the transactions did not vary between clients; only the amount of capital loss required to achieve the desired tax impact varied.
B. Loftin's Purchase of FLIP
{13} During the summer of 1997, Loftin expected a possible capital gain of $30 million from the sale of a business. Loftin's advisors recommended that he meet with KPMG regarding how to handle the tax effect of the capital gains. During a meeting on August 7, 1997, KPMG representatives recommended that Loftin purchase FLIP.
{14} During that meeting and others, KPMG stated that Loftin could reap substantial returns, as well as tax benefits, from investing in FLIP. Upon asking whether his lawyer could review FLIP, he was told that his lawyer would be unable to understand the complexity of the transaction. Loftin was reassured that the tax transaction was researched and confirmed by both KPMG and Sidley Austin.
{15} A KPMG partner told Loftin that, in order to invest in FLIP, he would have to engage QA, which was knowledgeable about FLIP and the transactions of which FLIP was comprised. KPMG also told him that he must retain KPMG to perform his accounting and tax returns. That partner assured Loftin that FLIP complied with IRS rules and regulations and that FLIP would not lead to IRS scrutiny.
{16} Loftin signed an engagement letter with KPMG for FLIP on August 22, 1997. Loftin then executed an Investment Advisory Agreement with QA as the investment advisor and KPMG as the financial advisor on September 3, 1997.
{17} On September 5, 1997, QA directed Loftin to authorize two wire transfers, one for the purchase of UBS shares, and one to purchase a warrant in a Cayman Island Corporation called Lark Haven Capital, Inc. ("Lark Haven"). QA then directed Maples & Calder, a law firm, to incorporate Lark Haven as a Cayman Island exempt entity. On September 15, 1997, as directed by KPMG and QA, Lark Haven retained QA as its investment advisor. On September 16, 1997, QA purchased a warrant from Lark Haven that would expire on September 30, 1998.
{18} On October 21, 1997, KPMG billed QA for consultation regarding the tax consequences of transactions entered into on behalf of Loftin by QA.
{19} Between September 1997 and May 12, 1999, QA performed numerous other similar transactions, implementing FLIP on Loftin's behalf.
C. Loftin's Claimed Losses
{20} In or around September 1997, KPMG began having internal discussions regarding whether FLIP should register with the IRS as a tax shelter, ultimately deciding against registration. During these discussions, on October 9, 1997, QA wrote to KPMG requesting a letter from KPMG to alleviate QA's concern about penalties for noncompliance with IRS tax shelter registration provisions. KPMG then communicated to QA that it did not intend to register FLIP as a tax shelter. QA elected not to register FLIP as a tax shelter at that time.
{21} On or about March 27, 1998, UBS informed QA that it would no longer participate in the FLIP strategy because of its concern that it should be registered as a tax shelter.
{22} On June 1, 1998, QA registered FLIP with the IRS as a tax shelter without informing Loftin.
{23} On October 12, 1998, KPMG filed Loftin's 1997 tax returns, claiming a $27, 416, 629.00 long-term capital loss associated with FLIP. In October 2000, the IRS initiated an audit of Loftin's 1997 tax return. Loftin quickly executed a power of attorney, allowing KPMG's tax controversy professionals to represent him in the audit. KPMG later withdrew from the representation.
{24} The IRS disallowed all capital losses on Loftin's tax returns related to FLIP, and assessed him with $6, 024, 998.00 in tax deficiencies and $2, 326, 169.99 in penalties, plus interest on the back taxes.
{25} In 2003, the Senate released a report entitled "U.S. Tax Shelter Industry: The Role of Accountants, Lawyers and Financial Professionals" ("2003 Senate Report"). The 2003 Senate Report described KPMG's development, aggressive marketing, and concealment of "potentially abusive and illegal tax shelters." (Am. Compl. ¶ 94(a).) It further stated that certain other major banks and investment advisory firms were also involved.
{26} On April 13, 2005, a further Senate report was issued, which included a statement that "[s]ome investment advisors, including Presidio Advisory Services and the Quellos Group, helped develop, design, market, and execute potentially abusive or illegal tax shelters such as FLIP, OPIS and BLIPS." (Am. Compl. ¶ 95(c).)
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