Seippel v. Jenkens & Gilchrist, P.C.
| Decision Date | 25 August 2004 |
| Docket Number | No. 03 Civ. 6942(SAS).,03 Civ. 6942(SAS). |
| Citation | 341 F.Supp.2d 363 |
| Parties | William H. SEIPPEL and Sharon A. Seippel, Plaintiffs, v. JENKENS & GILCHRIST, P.C.; Paul M. Daugerdas; Sidley, Austin, Brown & Wood, LLP; R.J. Ruble; Deutsche Bank, A.G.; and Deutsche Bank Securities, Inc., d/b/a Deutsche Bank Alex Brown, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Blair C. Fensterstock, Maureen McGuirl, Josiah Greenberg, Fensterstock & Partners, L.L.P., New York City, for Plaintiffs.
Laurence M. Hill, Seth C. Farber, Dewey Ballantine, L.L.P., New York City, for Defendants Deutsche Bank AG and Deutsche Bank Securities.
Ann E. Schofield, McDermott, Will & Emery, New York, New York, Michael A. Pope, Douglas E. Whitney, McDermott, Will & Emery, Chicago, Illinois, Joseph A. Ginsburg, Levin & Ginsburg, Ltd., Chicago, Illinois, for Defendants Jenkens & Gilchrist and Paul Daugerdas.
Aaron R. Marcu, Darren L. Schlanger, Covington & Burling, New York, New York, Brad D. Brian, Bruce D. Abbot, Munger, Tolles & Olson, L.L.P., Los Angeles, California, for Defendant Sidley Austin Brown & Wood.
Stuart Abrams, Frankel & Abrams, New York City, for Defendant R.J. Ruble.
This case arises out of tax and consulting services offered by several professional law, financial services and accounting firms. Plaintiffs, William and Sharon Seippel, filed this suit on September 10, 2003, alleging that defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, and are liable for damages and other relief arising from breach of fiduciary duty, inducing breach of fiduciary duty, fraud, negligent misrepresentation, breach of contract, malpractice, "unethical, excessive, illegal and unreasonable fees," and unjust enrichment.1 The Seippels allege both federal question jurisdiction pursuant to 28 U.S.C. § 1331 and diversity jurisdiction pursuant to 28 U.S.C. § 1332. The Sidley Defendants and Deutsche Bank Defendants now move to dismiss.2 The Sidley Defendants move in the alternative to strike the Seippels' prayer for damages to the extent it seeks recovery for back taxes, interest, and certain professional fees.
The following facts are drawn from the allegations in the Amended Complaint and the RICO Statement.3 For the purpose of this motion, these allegations are assumed to be true.
Between 1996 and 2003, the Sidley Defendants, in concert with the Jenkens Defendants, were engaged in the development and promotion of a variety of tax shelters, including one labelled "Currency Options Bring Reward Alternatives," or "COBRA."4 In late 1997 and 1998, the Sidley Defendants entered into an alliance to operate, market and promote these tax shelters with a number of other accounting and financial services firms, including, among others, the Deutsche Bank Defendants and Ernst & Young LLP.5
Pursuant to this alliance, each of the defendants authorized these firms to represent that the shelters were developed by the accounting firm soliciting the taxpayer, and that they had been independently "vetted" and determined to be "legitimate" and "conservative" by the Lawyer Defendants.6 In fact, the shelters were developed by the Lawyer Defendants themselves.7 The soliciting firms promised the taxpayers that the Lawyer Defendants would provide opinion letters attesting to the legitimacy of the shelters, and that these letters would "protect any participant from the imposition of penalties by tax authorities."8
Though these letters were "canned" and required little additional work, the Lawyer Defendants charged substantial fees, calculated as a percentage of the capital losses each client would claim on its tax returns.9 The defendants agreed that on some transactions, the Jenkens Defendants would provide the first opinion letter and take the "lion's share" of the fees, and the Sidley Defendants would provide a secondary letter and receive a smaller fee, while on other transactions the positions would be reversed.10
The Lawyer Defendants' undisclosed role in marketing and promoting the shelters both compromised their objectivity, and "presented a risk that the [tax authorities] would and could claim that the opinion letters ... would not shield them from the assessment of penalties."11 The defendants agreed that "the firms soliciting prospective participants ... would overstate what those opinion letters would conclude regarding the legitimacy of the tax scheme being promoted and would understate its risks and the likelihood of an audit."12 The defendants further agreed that the taxpayer would not receive the opinion letters until after it had engaged in the promoted transactions.13 Finally, defendants agreed that the accounting firms soliciting taxpayers would represent that the tax shelter "was a `proprietary' product of that firm so ... prospective participants could not take it to their own attorney or accountant for an opinion as to its legitimacy."14
The Seippels contend that "defendants either knew or should have known from the outset that the COBRA tax shelter would not pass muster with the IRS or the Virginia tax authorities."15 In support of this allegation, the Seippels point to two Internal Revenue Service rulings, IRS Notice 1999-59 and Notice 2000-44, and to a decision of the Third Circuit Court of Appeals, ACM Partnership v. Commissioner.16 Notice 1999-59, released in December 27, 1999, stated that "certain types of transactions... that are being marketed to taxpayers for the purpose of generating ... artificial losses are not allowable for federal income tax purposes."17 Notice 2000-44, released on September 5, 2000, "specified [that] the precise transaction marketed... as the COBRA transaction" was not properly allowable for tax purposes.18 Nevertheless, defendants continued to market the transactions.19
William Seippel was approached by Ernst & Young in late 1999 in connection with one of the defendants' tax shelters. Mr. Seippel, a senior executive at a Virginia company, was planning to change his employment, exercise his stock options and sell the resulting stock. Ernst & Young was Mr. Seippel's employer's auditor, and provided "tax advice, and other financial services" to Mr. Seippel and other senior executives of the company.20 Through this relationship, Ernst & Young "knew of Mr. Seippel's plans and the substantial gains that the Seippels would have to recognize upon engaging in the Stock Options Transaction and the resulting tax liability."21 Acting on this knowledge, Charles Paul of Ernst & Young approached the Seippels, pursuant to the defendants' scheme, to "advis[e] them that a lawful strategy named [COBRA] could drastically reduce the tax liability that would otherwise result from Mr. Seippel's engaging in the Stock Options Transaction."22
The Seippels had a series of meetings and telephone and email conversations with Paul in late 1999, during which Paul represented that "COBRA was 100 percent legitimate, and backed by two blue chip law firms (Jenkens & Gilchrist and Brown & Wood) [and] was not only completely legal and based on `loopholes' created by the IRS, but actually was `conservative.'"23 Paul represented that the COBRA shelter had been developed by Ernst & Young, not by the Lawyer Defendants. Paul told the Seippels that the Lawyer Defendants would provide opinion letters confirming the propriety of the COBRA transaction, and represented that these letters would "in the event of any IRS audit ... enable the Seippels to satisfy the IRS auditors as to the propriety of the tax returns [and] would serve as a protection against the imposition of tax penalties."24
At some point in late 1999, after being contacted by Ernst & Young, Mr. Seippel sold his stock and realized a large gain.25 During the same period, the Seippels agreed to participate in the COBRA transaction to reduce their tax liability for that gain. Mr. Seippel formed various entities, including an S corporation, WSWP Virginia Investors, Inc. ("WSWP"), a limited liability company, WHS LLC ("WHS") and a partnership, WSWP Partners, to engage in the transaction. On December 1, 1999, WHS entered into the currency options transaction described above, purchasing long options and selling short options on foreign currency exchanges. WHS used Deutsche Bank to conduct the transactions. The options had an expiration date of December 23, 1999. On December 2, 1999, Mr. Seippel, through WHS, contributed his currency options to WSWP Partners. On December 12, 1999, WSWP Partners made a purchase of Canadian dollars. On December 27, 1999, Mr. Sieppel contributed his interest in WSWP Partners to WSWP. WSWP Partners was liquidated, and the Canadian dollars were distributed to WSWP. On December 29, WSWP sold all of its investment in the Canadian dollars.26
In February 2000, Mr. Seippel received an opinion letter from Jenkens and Gilchrist "stating that the Seippels could properly and legally claim losses totaling $12,000,000 on their tax returns as a result of the COBRA transaction."27 In March 2000, Mr. Seippel received a similar opinion from Brown & Wood, stating that "the IRS should not be successful were it to assert a penalty ... for positions taken in [the Seippels'] U.S. Federal income tax [returns] with respect to the [COBRA] transactions."28 The Jenkens & Gilchrist opinion letter stated that IRS Notice 1999-59, released on December 27, 1999, did not apply to COBRA. The Brown & Wood opinion letter did not mention the Notice, nor did any other communication from defendants to the Seippels apart from the Jenkens & Gilchrist opinion letter. The defendants never informed the Seippels about IRS Notice 2000-44, released on September 5, 2000.29
The Seippels paid the Jenkens Defendants $338,880 for their opinion letter, legal...
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