Swartz v. Kpmg, LLC
| Decision Date | 13 February 2004 |
| Docket Number | No. C03-1252P.,C03-1252P. |
| Citation | 401 F.Supp.2d 1146 |
| Court | U.S. District Court — Western District of Washington |
| Parties | Theodore C. SWARTZ, Plaintiff, v. KPMG, LLC; Presidio Growth, LLC; Presidio Advisory Services, Inc., Hayes Street Management, Inc.; Norwood Holdings, Inc., Deutsche Bank AG; Deutsche Bank Securities, Inc., Sidley Austin Brown & Wood, LLP; Dale R. Baumann; John M. Larson; Robert A. Pfaff, David Amir Makov; Steven Buss; and R.J. Ruble, and their respective marital communities, if any, Defendants. |
Duncan Calvert Turner, Randall C. Johnson, Jr., Badgley Mullins Law Group, Jonathan P. Meier, Richard E. Spoonemore, Sirianni Youtz Meier & Spoonemore, Seattle, WA, for Plaintiff.
Charles J. Ha, Heller Ehrman LLP, Rudy Albert Englund, Lane Powell PC, Jessica L. Goldman, Summit Law Group, Seattle, WA, Chaya F. Weinberg-Brodt, Rachel B. Kane, Stephen L. Ascher, William J. Schwartz, Kronish Lieb Weiner & Hellman LLP, Stuart E. Abrams, Frankel & Adams, New York, NY, Brad D. Brian, Jonathan E. Altman, Richard E. Drooyan, Susan R. Szabo, Lisa J. Demsky, Munger, Tolles, & Olson, LLP, Los Angeles, CA, for Defendants.
ORDER ON MOTIONS TO DISMISS RE: CLAIMS FOR RICO, FRAUD, CONSPIRACY, BREACH OF CONTRACT, WASHINGTON CONSUMER PROTECTION ACT, NEGLIGENT MISREPRESENTATION, BREACH OF FIDUCIARY DUTY AND PROFESSIONAL MALPRACTICE
The Court, having received and reviewed:
1. Motion of Sidley Austin Brown & Wood LLP and R.J. Ruble to Dismiss
2. Plaintiff's Opposition to Motion of Defendants Sidley Austin Brown & Wood LLP and R.J. Ruble to Dismiss
3. Reply of Defendants Sidley Austin Brown & Wood LLP and R.J. Ruble to Dismiss
4. Defendants KPMG LLP's and Dale R. Baumann's Motion to Dismiss Plaintiff's Complaint
5. Plaintiff's Opposition to KPMG and Baumann's Motion to Dismiss Complaint
6. Defendants KPMG LLP's and Dale R. Baumann's Reply Brief in Support of Motion to Dismiss Plaintiff's Complaint
7. Defendants Presidio Growth, LLC's and Presidio Advisory Services, Inc.'s Notice of Motion and Motion to Dismiss
8. Plaintiff's Legal Memorandum in Opposition to Motion to Dismiss of Presidio Defendants
9. Defendants Presidio Growth, LLC's and Presidio Advisory Services, Inc.'s Reply Memorandum in Support of Defendants' Motion to Dismiss
10. Notice of Subsequent Authority Submitted by Defendants Presidio Growth, LLC's and Presidio Advisory Services, Inc.'s in Support of Motion to Dismiss
11. Defendants Deutsche Bank AG and Deutsche Bank Securities, Inc.'s Notice of Motion and Motion to Dismiss and Memorandum of Law in Support Thereof
12. Plaintiff's Opposition to Deutsche Bank's Motion to Dismiss
13. Defendants Deutsche Bank AG and Deutsche Bank Securities, Inc.'s Reply Memorandum in Further Support of Motion to Dismiss
and all declarations and exhibits attached thereto. Following oral argument, the Court announced that it was granting defendants' motions "in total." Upon further reflection, in consideration of all the issues and arguments raised orally and in writing, it is apparent that a complete dismissal is not warranted at this stage. Therefore, the Court makes the following ruling:
IT IS HEREBY ORDERED that plaintiff's RICO, fraud, negligent misrepresentation, breach of contract, declaratory judgment and Washington Consumer Protection Act claims will be dismissed with prejudice; his claim of breach of fiduciary duty against defendant KPMG will be dismissed with prejudice as well. The motion to dismiss for lack of personal jurisdiction filed by defendants Presidio Advisory Services, Inc., Deutsche Bank AG and Deutsche Bank Securities, Inc. will be GRANTED. Because those three defendants were only named in regards to causes of action which are being dismissed with prejudice, there is no point in permitting plaintiff to amend and plead sufficient jurisdictional facts as regards them.
IT IS FURTHER ORDERED that the motion is DENIED as to the following: the claim of breach of fiduciary duty against defendant Brown & Wood, the claim of professional malpractice against defendants KPMG and Brown & Wood, and the claim of conspiracy as it relates to the professional malpractice claim.
IT IS FURTHER ORDERED that plaintiff and the remaining defendants are to conduct initial discovery pursuant to FRCP 26(f) and submit a Joint Status Report to the Court by no later than March 26, 2004.
Plaintiff has brought a series of RICO and state law claims against a variety of defendants. Some of the defendants have not appeared; some of them have been voluntarily dismissed. Pending before the Court are a series of motions to dismiss brought by the remaining defendants in the action.
In July of 1999, plaintiff realized approximately $18 million in profits from the sale of a business. His broker at Merrill Lynch referred him to defendant KPMG ( a major accounting firm) for tax planning advice. The strategy they promoted to him was a plan called BLIPS (Bond Linked Issue Premium Structure) which was designed to create artificial economic losses which would offset his capital gains and diminish his tax liability. Prior to entering into the transaction, plaintiff signed a written "engagement letter-agreement" with KPMG which disclosed the potential risks of the plan and acknowledged that results were not guaranteed.
The transactions comprising the BLIPS plan occurred between September 30 and November 29, 1999. KPMG arranged a line of credit with defendant Deutsche Bank ("DB") in the amount of $53 million for a company called Gascoyne LLC (which KPMG had set up for Swartz). Plaintiff claims this was not a true loan (DB had final approval over the use of the funds and required a 1.0125:1 ratio of collateral to loan), although loan fees were charged.
The line of credit was contributed by Gascoyne to a new limited liability company, Longs Strategic Investment Fund ("Longs") — Swartz was a 90% owner of this company, with defendants Presidio Growth. LLC and Presidio Advisory Services, Inc. ("Presidio") owning the other 10% and exercising control over the fund management. Two foreign currency trades were conducted by Presidio.
On November 30, 1999, Longs was dissolved. A number of shares of Microsoft stock which had been "contributed" by Gascoyne were returned along with tax opinion letters from KPMG and the law firm of defendant Brown & Wood ("B & W"1) stating that the shares had a basis equal to any capital contributed to Long's, which had the effect of creating an "artificial short term capital loss."
On December 27, 1999, the IRS issued a notice concluding that the BLIPS tax plan did not produce bona fide deductions for income tax purposes. On September 5, 2000, an additional notice was issued regarding variations on the plans covered in the original notice and expanding the potential penalties for participation in or promotion of such schemes to include criminal liability.
On December 31, 1999, KPMG and B & W issued tax opinions indicating their belief that it was "more likely than not" that BLIPS would be upheld if challenged by the IRS. When plaintiff's original accounting firm withdrew from preparation of his tax returns, KPMG prepared them.
Plaintiff's 2000 tax return (filed in October 2000) claimed the BLIPS transaction as a write-off, despite the fact that (as the complaint alleges) plaintiff was aware by August 2000 that the claimed deductions were questionable. Plaintiff filed two subsequent tax returns (in 2001 and 2002) in which he had the opportunity to, but did not, amend the claimed BLIPS deduction.
On June 6, 2003, plaintiff initiated this lawsuit with a complaint charging the defendants with violations of RICO and the Washington Consumer Protection/Unfair Business Practices Act, as well as fraud, negligent misrepresentation, breach of contract, professional negligence, breach of fiduciary duty and conspiracy.
The IRS did eventually challenge plaintiff's claim of loss via the BLIPS transaction. Not until after the complaint was filed in this case did they finally disallow the claimed deduction. Although plaintiff has paid the back taxes and accrued interest, he has not alleged that any penalties have been assessed against him. In fact, nowhere has plaintiff alleged that the IRS action against him has been finalized. Other damages alleged by plaintiff include the fees he paid to the various co-defendants, professional fees paid to mitigate the damages which defendants allegedly caused and the money he might have saved if he had tried to mitigate his tax burden through legitimate means.
The Court reviews these motions pursuant to the requirements of FRCP 12(b). All allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party. Cervantes v. United States, 330 F.3d 1186, 1187 (9th Cir.2003); Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir.2003). Conclusory allegations and unwarranted inferences, however, are insufficient to defeat a motion to dismiss. See Warren, 328 F.3d at 1139; Associated Gen. Contractors v. Metropolitan Water Dist. of S. California, 159 F.3d 1178, 1181 (9th Cir.1998); In re Syntex Corp. Sec. Litig., 95 F.3d 922, 926 (9th Cir.1996). A complaint should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim that would entitle the plaintiff to relief. See No. 84 Employer-Teamster Joint Council v. America West Holding Corp., 320 F.3d 920, 931 (9th Cir.2003); In re Zimmer, 313 F.3d 1220, 1222 (9th Cir.2002); Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir.2002); Wyler Summit Partnership v. Turner Broadcasting System, 135 F.3d 658, 661 (9th Cir.1998).
The defendants alleged multiple grounds for dismissal in their motions. In the case of those claims which the Court finds cannot be rehabilitated through amendment (i.e., there is no...
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