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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 that the firms knew would be challenged by the Internal Revenue Service (IRS). Judge Shira Scheindlin of New York’s southern district 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. Scheindlin’s ruling came last week on motions to dismiss the second amended complaint in Seippel v. Sidley Austin Brown & Wood, No. 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, a predecessor firm 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. COBRA not time barred 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 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 commission of a manipulative act the person or entity must be a “primary violator.” Scheindlin said that the 2d 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.”

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