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Tax Shelter Suit Against Sidley Austin, Deutsche Bank May Proceed

A federal judge has declined to dismiss a civil suit brought by a husband and wife who claim that Sidley Austin Brown & Wood and Deutsche Bank Securities Inc., offered a tax shelter the firms knew would be challenged by the Internal Revenue Service.

Southern District Judge Shira Scheindlin said William and Sharon Seippel's complaint sufficiently alleged fraud and that the couple's allegations against the defendants could stand because they went further than alleging aiding and abetting liability.

Judge Scheindlin's ruling came on motions to dismiss the second amended complaint in Seippel v. Sidley Austin Brown & Wood, 03 Civ. 6942. The first complaint, which alleged claims including racketeering and excessive fees, was dismissed last year by the judge.

The tax shelters at issue involved digital options or swaps in foreign currency, known as COBRA. Alleged misrepresentations about the legality of the shelters were made by Charles Paul of Ernst & Young, but the Seippels charged that Paul was acting on behalf of Deutsche Bank and others, including Brown & Wood ' the previous incarnation of Sidley Austin.

Scheindlin quickly disposed of the defendants' first objection in the motions to dismiss, finding that the Seippels had alleged fraud with sufficient particularity under the Private Securities Litigation Reform Act of 1995.

The judge then ruled that the claims regarding the COBRA transaction were not time barred, finding that the defendants did not “point to any press reports, complaints or other public documents” referring to an IRS notice on the propriety of COBRA, “or explicitly calling COBRA's lawfulness into question, or to anything that might have caused ordinary taxpayers to suspect that it was not safe to rely on the advice of their tax lawyers.”

Scheindlin then turned to the firms' claim that the Seippels had alleged “aiding and abetting” liability, for which the U.S. Supreme Court has held there is no private right of action under the federal securities laws.

The U.S. Supreme Court held in Central Bank of Denver, N.A., v. First Interstate Bank of Denver, 511 U.S. 164 (1994), that in order for a person or entity to be held liable for a material misstatement or omission or for committing a manipulative act they must be a “primary violator.”

Scheindlin said the 2nd U.S. Circuit Court of Appeals in Wright v. Ernst & Young, 152 F.3d 169 (1998), interpreting Central Bank, adopted a “bright line” rule that rejected holding secondary actors liable under a “substantial participation test.” Instead, the circuit held that a “defendant must actually make a false or misleading statement in order to be held liable under Section 10(b),” and “a secondary actor cannot incur primary liability under the Act for a statement not attributed to that actor at the time of its dissemination ' that is, in advance of the investment decision.”

But Scheindlin noted that the Seippels' allegations “are very different from those at issue in Central Bank and Wright,” where the defendants knew of the purported fraud, but only through transactions with the defrauders, and failed to expose it.

“In contrast, the Seippels do not allege that defendants merely assisted in a fraud conceived and perpetrated by Ernst & Young,” she said. “Rather, the Seippels allege that defendants engineered and were key members of the conspiracy to defraud.”

The Seippels, she said, charged that the defendants conceived COBRA and agreed that Ernst & Young would sell it to taxpayers.

“In essence, the Seippels allege that defendants made misrepresentations to them, albeit indirectly, using Paul as their agent and mouthpiece,” she said, “If true, these allegations are sufficient to hold defendants liable as primary violators,” because the Wright case “does not require that a defendant directly communicate the alleged misrepresentation to the plaintiff.”

A public sparring match is set to take place between Tower Snow Jr., the former chairman of now-defunct Brobeck, Phleger & Harrison, and Ronald Greenspan, the firm's bankruptcy trustee.

The opponents will square off in either bankruptcy court or before a jury in district court. Snow asked U.S. Bankruptcy Judge Dennis Montali to allow a jury to hear Greenspan's $2.7 million suit against him. But Greenspan's lawyer filed a motion asking the judge to deny Snow's request.

Bennett Murphy, a partner at Los Angeles' Hennigan, Bennett & Dorman, argued that Greenspan is seeking a return of distributions Snow received unlawfully ' not money damages under contract or tort ' and that such claims do not trigger a jury trial.

Murphy also says the bankruptcy court has jurisdiction over the matter, noting that Snow went through the court in obtaining releases of liability from former Brobeck partners and other parties.

Snow's attorney, John Dwyer, says that under recent case law it's clear that Snow has a right to a jury trial.

Greenspan claims Snow received distributions from Brobeck when the firm was insolvent, in violation of the California Corporations Code and state and federal fraudulent conveyance law. In a footnote in his filing, Greenspan says he is not contesting Snow's right to a jury trial under claims relating to fraudulent conveyance law, only under the corporations code.

Dwyer, a partner at Cooley Godward, says he wouldn't have expected Greenspan to split the case and argue that half the claims could be heard by a jury, just to keep half out.

“We're surprised they are so afraid of a jury trial they are willing to drop half their claims,” he says.

In January, Greenpan sued Snow and other former Brobeck partners for distributions they received from the firm in 2001 and 2002. At latest count, 212 partners had settled for amounts less than Greenspan cited in his complaints; Snow and 15 other former partners have not settled.

In his filing, Murphy also swiped at Snow for using his request for a jury trial to tell his side of the story about Brobeck's collapse. He asked Montali to strike the bulk of Snow's narrative.

Snow “is not alone among former Brobeck partners in seeking to unburden himself by laying out his version of the Brobeck saga,” Murphy wrote. “That does not mean defendant is free to burden the record of this court with page after page of his competing view of firm history where the text is devoid of any relationship either to the allegations of the trustee or the affirmative defenses of the defendant.”

Separately, Greenspan has begun to deal with claims against Brobeck's estate. He recently filed a document with the court specifying which of the claims by 450 unsecured creditors he would allow.

Murphy says the trustee has yet to consider claims by Brobeck's landlords and a couple hundred employees.

“We anticipate filing objections to part of the employees' claims,” Murphy says.

Tax Shelter Suit Against Sidley Austin, Deutsche Bank May Proceed

A federal judge has declined to dismiss a civil suit brought by a husband and wife who claim that Sidley Austin Brown & Wood and Deutsche Bank Securities Inc., offered a tax shelter the firms knew would be challenged by the Internal Revenue Service.

Southern District Judge Shira Scheindlin said William and Sharon Seippel's complaint sufficiently alleged fraud and that the couple's allegations against the defendants could stand because they went further than alleging aiding and abetting liability.

Judge Scheindlin's ruling came on motions to dismiss the second amended complaint in Seippel v. Sidley Austin Brown & Wood, 03 Civ. 6942. The first complaint, which alleged claims including racketeering and excessive fees, was dismissed last year by the judge.

The tax shelters at issue involved digital options or swaps in foreign currency, known as COBRA. Alleged misrepresentations about the legality of the shelters were made by Charles Paul of Ernst & Young, but the Seippels charged that Paul was acting on behalf of Deutsche Bank and others, including Brown & Wood ' the previous incarnation of Sidley Austin.

Scheindlin quickly disposed of the defendants' first objection in the motions to dismiss, finding that the Seippels had alleged fraud with sufficient particularity under the Private Securities Litigation Reform Act of 1995.

The judge then ruled that the claims regarding the COBRA transaction were not time barred, finding that the defendants did not “point to any press reports, complaints or other public documents” referring to an IRS notice on the propriety of COBRA, “or explicitly calling COBRA's lawfulness into question, or to anything that might have caused ordinary taxpayers to suspect that it was not safe to rely on the advice of their tax lawyers.”

Scheindlin then turned to the firms' claim that the Seippels had alleged “aiding and abetting” liability, for which the U.S. Supreme Court has held there is no private right of action under the federal securities laws.

The U.S. Supreme Court held in Central Bank of Denver, N.A., v. First Interstate Bank of Denver , 511 U.S. 164 (1994), that in order for a person or entity to be held liable for a material misstatement or omission or for committing a manipulative act they must be a “primary violator.”

Scheindlin said the 2nd U.S. Circuit Court of Appeals in Wright v. Ernst & Young , 152 F.3d 169 (1998), interpreting Central Bank, adopted a “bright line” rule that rejected holding secondary actors liable under a “substantial participation test.” Instead, the circuit held that a “defendant must actually make a false or misleading statement in order to be held liable under Section 10(b),” and “a secondary actor cannot incur primary liability under the Act for a statement not attributed to that actor at the time of its dissemination ' that is, in advance of the investment decision.”

But Scheindlin noted that the Seippels' allegations “are very different from those at issue in Central Bank and Wright,” where the defendants knew of the purported fraud, but only through transactions with the defrauders, and failed to expose it.

“In contrast, the Seippels do not allege that defendants merely assisted in a fraud conceived and perpetrated by Ernst & Young,” she said. “Rather, the Seippels allege that defendants engineered and were key members of the conspiracy to defraud.”

The Seippels, she said, charged that the defendants conceived COBRA and agreed that Ernst & Young would sell it to taxpayers.

“In essence, the Seippels allege that defendants made misrepresentations to them, albeit indirectly, using Paul as their agent and mouthpiece,” she said, “If true, these allegations are sufficient to hold defendants liable as primary violators,” because the Wright case “does not require that a defendant directly communicate the alleged misrepresentation to the plaintiff.”

A public sparring match is set to take place between Tower Snow Jr., the former chairman of now-defunct Brobeck, Phleger & Harrison, and Ronald Greenspan, the firm's bankruptcy trustee.

The opponents will square off in either bankruptcy court or before a jury in district court. Snow asked U.S. Bankruptcy Judge Dennis Montali to allow a jury to hear Greenspan's $2.7 million suit against him. But Greenspan's lawyer filed a motion asking the judge to deny Snow's request.

Bennett Murphy, a partner at Los Angeles' Hennigan, Bennett & Dorman, argued that Greenspan is seeking a return of distributions Snow received unlawfully ' not money damages under contract or tort ' and that such claims do not trigger a jury trial.

Murphy also says the bankruptcy court has jurisdiction over the matter, noting that Snow went through the court in obtaining releases of liability from former Brobeck partners and other parties.

Snow's attorney, John Dwyer, says that under recent case law it's clear that Snow has a right to a jury trial.

Greenspan claims Snow received distributions from Brobeck when the firm was insolvent, in violation of the California Corporations Code and state and federal fraudulent conveyance law. In a footnote in his filing, Greenspan says he is not contesting Snow's right to a jury trial under claims relating to fraudulent conveyance law, only under the corporations code.

Dwyer, a partner at Cooley Godward, says he wouldn't have expected Greenspan to split the case and argue that half the claims could be heard by a jury, just to keep half out.

“We're surprised they are so afraid of a jury trial they are willing to drop half their claims,” he says.

In January, Greenpan sued Snow and other former Brobeck partners for distributions they received from the firm in 2001 and 2002. At latest count, 212 partners had settled for amounts less than Greenspan cited in his complaints; Snow and 15 other former partners have not settled.

In his filing, Murphy also swiped at Snow for using his request for a jury trial to tell his side of the story about Brobeck's collapse. He asked Montali to strike the bulk of Snow's narrative.

Snow “is not alone among former Brobeck partners in seeking to unburden himself by laying out his version of the Brobeck saga,” Murphy wrote. “That does not mean defendant is free to burden the record of this court with page after page of his competing view of firm history where the text is devoid of any relationship either to the allegations of the trustee or the affirmative defenses of the defendant.”

Separately, Greenspan has begun to deal with claims against Brobeck's estate. He recently filed a document with the court specifying which of the claims by 450 unsecured creditors he would allow.

Murphy says the trustee has yet to consider claims by Brobeck's landlords and a couple hundred employees.

“We anticipate filing objections to part of the employees' claims,” Murphy says.