Menzies v. Seyfarth Shaw LLP, 18-3232

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation943 F.3d 328
Docket NumberNo. 18-3232,18-3232
Parties Steven MENZIES, Plaintiff-Appellant, v. SEYFARTH SHAW LLP, an Illinois limited liability partnership, et al., Defendants-Appellees.
Decision Date12 November 2019

943 F.3d 328

Steven MENZIES, Plaintiff-Appellant,
SEYFARTH SHAW LLP, an Illinois limited liability partnership, et al., Defendants-Appellees.

No. 18-3232

United States Court of Appeals, Seventh Circuit.

Argued May 22, 2019
Decided November 12, 2019
Rehearing and Rehearing En Banc Denied December 12, 2019*

Jeffrey B. Charkow, Attorney, Harris Winick Harris LLP, Chicago, IL, for Plaintiff-Appellant.

Matthew J. Gehringer, Attorney, Perkins Coie LLP, Chicago, IL, for Defendants-Appellees Seyfarth Shaw LLP, an Illinois limited liability partnership, Graham Taylor, individually, Northern Trust Corporation, a Delaware corporation.

Keith G. Klein, Attorney, Bates McIntyre Larson, Attorney, Perkins Coie LLP, Chicago, IL, for Defendants-Appellees Seyfarth Shaw LLP, an Illinois limited liability partnership, Graham Taylor, individually.

H. Nicholas Berberian, Attorney, Kyle D. Rettberg, Attorney, Neal, Gerber & Eisenberg LLP, Chicago, IL, for Defendant-Appellee Northern Trust Corporation, a Delaware corporation.

Amy Yongmee Cho, Attorney, Peter Francis O'Neill, Attorney, Gary M. Elden, Attorney, Shook, Hardy & Bacon LLP, Chicago, IL, for Defendant-Appellee Wilmington Savings Fund Society, FSB, as successor-in-interest to Christiana Bank & Trust Company.

Before Hamilton, Scudder, and St. Eve, Circuit Judges.

Scudder, Circuit Judge.

943 F.3d 332

Insurance executive Steven Menzies sold over $64 million in his company’s stock but did not report any capital gains on his 2006 federal income tax return. He alleges that his underpayment of capital gains taxes (and the related penalties and interest subsequently imposed by the Internal Revenue Service) was because of a fraudulent tax shelter peddled to him and others by a lawyer, law firm, and two financial services firms. Menzies advanced this contention in claims he brought under the Racketeer Influenced and Corrupt Organizations Act or RICO and Illinois law. The district court dismissed all claims.

Menzies’s RICO claim falls short on the statute’s pattern-of-racketeering element. Courts have labored mightily to articulate what the pattern element requires, and Menzies’s claim presents a close question. In the end, we believe Menzies failed to plead not only the particulars of how the defendants marketed the same or a similar tax shelter to other taxpayers, but also facts to support a finding that the alleged racketeering activity would continue. To conclude otherwise would allow an ordinary (albeit grave) claim of fraud to advance in the name of RICO—an outcome we have time and again cautioned should not occur. In so holding, we in no way question whether a fraudulent tax shelter scheme can violate RICO. The shortcoming here is one of pleading alone, and it occurred after the district court authorized discovery to allow Menzies to develop his claims.

As for Menzies’s state law claims, we hold that an Illinois statute bars as untimely the claims advanced against the lawyer and law firm defendants. The claims against the two remaining financial services defendants can proceed, however.

So we affirm in part, reverse in part, and remand.


The original and amended complaints supply the operative facts on a motion to dismiss. On appeal we treat all allegations as true, viewing them in the light most favorable to Steven Menzies. See Moranski v. Gen. Motors Corp. , 433 F.3d 537, 539 (7th Cir. 2005).

Menzies is the co-founder and president of an insurance company called Applied Underwriters, Inc. or AUI. In 2002 advisers from Northern Trust approached him to begin a financial planning relationship. In time these advisers pitched Menzies and his colleague and AUI co-founder Sydney Ferenc on a tax planning strategy (dubbed the Euram Oak Strategy) to shield capital gains on major stock sales from federal tax liability. Not knowing the strategy reflected what the IRS would later

943 F.3d 333

deem an abusive tax shelter, Menzies agreed to go along with the scheme. He conducted a series of transactions that, through the substitution of various assets and the operation of multiple trusts, created an artificial tax loss used to offset the capital gains he realized upon later selling his AUI stock.

Northern Trust worked with others in marketing and implementing the strategy. Christiana Bank, for example, served as trustee for some of Menzies’s trusts while tax attorney Graham Taylor and his law firm, Seyfarth Shaw, provided legal advice. Taylor repeatedly assured Menzies and Ferenc of the tax shelter’s legality, eventually opining that there was a "greater than 50 percent likelihood that the tax treatment described will be upheld if challenged by the IRS." Taylor stood by his more-likely-than-not opinion even after being indicted in 2005 for the commission of unrelated tax fraud—a development he never disclosed to Menzies.

In 2006 Menzies sold his AUI stock to Berkshire Hathaway for over $64 million. Nowhere in his 2006 federal income tax return did Menzies report the sale or any related capital gains. Nor did Christiana Bank, which filed tax returns on behalf of Menzies’s trusts, report any taxable income from the stock sale. When the IRS learned of these developments, it commenced what became a three-year audit and found that the primary purpose of the Euram Oak Strategy was tax evasion. Facing large fines and potential adverse legal action, Menzies agreed in October 2013 to settle with the IRS, paying over $10 million in back taxes, penalties, and interest.

In April 2015 Menzies filed suit in the Northern District of Illinois, advancing a civil RICO claim and various Illinois law claims against Taylor, Seyfarth Shaw, Northern Trust, and Christiana Bank. The district court granted the defendants’ motion to dismiss, but from there twice allowed Menzies to amend his complaint. Indeed, the district court afforded Menzies a full year of discovery to develop facts to support renewed pleading of the RICO claim that appeared in his second amended complaint in August 2017. On the defendants’ motion, the district court dismissed that complaint for failure to state any claim. Menzies now appeals.


A. The RICO Bar for Actionable Securities Fraud

Before addressing the district court’s dismissal of Menzies’s RICO claim, we confront a threshold issue pressed by the defendants—whether an amendment to the RICO statute added by the Private Securities Litigation Reform Act of 1995 or PSLRA precluded Menzies from bringing a RICO claim in the first instance. We agree with the district court that the bar now embodied in 18 U.S.C. § 1964(c) did not prevent Menzies from pursuing a RICO claim on the facts alleged in his complaint.

In enacting the PSLRA, Congress did more than seek to curb abusive practices in securities class actions by, for example, imposing a heightened pleading standard, requiring a class representative to be the most adequate plaintiff, and limiting damages. See Amgen Inc. v. Connecticut Ret. Plans & Trust Funds , 568 U.S. 455, 475–76, 133 S.Ct. 1184, 185 L.Ed.2d 308 (2013) (describing the PSLRA). The enactment also amended RICO to prohibit a cause of action based on "any conduct that would have been actionable as fraud in the purchase or sale of securities ." 18 U.S.C. § 1964(c) (emphasis added).

Upon reviewing the allegations in Menzies’s original complaint, the district court denied the defendants’ motion to dismiss

943 F.3d 334

the RICO claim based on the bar in § 1964(c). The district court started with the observation that "nothing about the sale of his AUI stock itself was fraudulent." Menzies v. Seyfarth Shaw LLP , 197 F. Supp. 3d 1076, 1116 (N.D. Ill. 2016) (" Menzies I "). "By selling Plaintiff a bogus tax shelter plan," the court reasoned, "[d]efendants were attempting to hide the resulting income from Plaintiff’s sale of stock from the IRS," and "[i]n both form and substance" this was a "case about tax shelter fraud, not securities fraud." Id .

The defendants urge us to reverse, contending that the RICO bar applies because the whole point of the Euram Oak Strategy was for Menzies to avoid realizing taxable gains from a stock sale. But for the stock sale, the tax shelter meant nothing, thereby easily satisfying, as the defendants see it, the requirement for the alleged fraud to be "in connection with" the sale of a security and thus actionable as securities fraud under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.

We see the analysis as more difficult. By its terms, the bar in § 1964(c), as the district court recognized, requires asking whether the fraud Menzies alleged in his complaint would be actionable under the securities laws, in particular under section 10(b) and Rule 10b-5. See Rezner v. Bayerische Hypo-Und Vereinsbank AG , 630 F.3d 866, 871 (9th Cir. 2010) (assessing the PSLRA bar and explaining that "[a]ctions for fraud in the purchase or sale of securities are controlled by section 10(b) of the Securities Exchange Act of 1934"); Bixler v. Foster , 596 F.3d 751, 759–60 (10th Cir. 2010) (adopting a similar approach); Affco Investments 2001,...

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