X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Jenkens & Gilchrist wants an arbitrator to decide claims brought by four disgruntled clients who allege in a $1.4 billion federal court suit that, in 1999, the firm gave them faulty tax advice that is now at issue as the Internal Revenue Service examines the taxpayers’ returns. The 510-lawyer, Dallas-based firm and Chicago-based Jenkens shareholder Paul M. Daugerdas are among defendants in a Racketeer Influenced and Corrupt Organizations Act suit filed in December 2002 in federal court in New York by four unhappy clients from Indiana who allege they are facing IRS examinations because of their use of a tax shelter. Separately, some current and former Jenkens tax clients have hired other firms, including Dallas’ Meadows, Owens, Collier, Reed, Cousins & Blau, to represent them in connection with pending or anticipated examinations by the IRS into their use of tax shelters. Todd Welty, a partner in Meadows Owens, says he represents more than 20 current or former clients of Jenkens, some from Texas, who are subject to an examination by the IRS or anticipate one. Welty’s firm is not suing Jenkens; it is defending the tax transactions and defending against government efforts to impose penalties against the taxpayers. “One of the largest concerns that most of my clients have currently is that the IRS is aggressively pursuing penalties in cases where it is under examination. And most of my clients believe that they should not be penalized because they relied upon the tax advice of a very competent firm,” says Welty, who declines to identify his clients. He says penalties for the taxpayers could reach 40 percent of the tax due, plus interest. Jenkens stands by its advice. But the plaintiffs in Henry N. Camferdam Jr., et al. v. Ernst & Young International Inc., et al. bring causes of action against Dallas-based Jenkens — including breach of fiduciary duty, fraud, negligent misrepresentation and breach of contract — and allege the firm charged “unethical, excessive and illegal fees.” Jenkens Chairman William Durbin declines comment, but the firm says in a statement that its fees for tax work are usually fixed and represent a small portion of its clients’ investments. The plaintiffs also seek a declaratory judgment that Jenkens and other defendants are liable for any penalties and interest imposed by the IRS or state taxing authorities in connection with the tax advice, and any professional fees the plaintiffs must incur because of the examinations. The suit is pending before U.S. District Judge Barbara Jones of the Southern District of New York. The defendants include Ernst & Young, the accounting firm in New York, and three of its partners; Sidley Austin Brown & Wood, a law firm based in New York and Chicago, and one of its partners; McKee Nelson, a firm in Washington, D.C., and two of its partners; and the general counsel and associate general counsel of Ernst & Young. The plaintiffs allege in Camferdam that Jenkens, Daugerdas and other defendants participated in a “scheme” designed to diminish the capital gains tax the plaintiffs would have to pay on a $70 million profit from the sale of their business. In their complaint, the plaintiffs allege the defendants made as much as $50 million in fees from as many as 47 other clients who were persuaded to use the tax plan the plaintiffs characterize as an “illegitimate tax sham.” The plaintiffs allege that the IRS has announced that claimed tax losses from Currency Options Bring Reward Alternatives (COBRA) transactions and similar ones will not be allowed, so they may have to pay capital gains taxes to the government, as well as penalties and interest. “Defendants either knew or should have known from the outset that their COBRA tax shelter would not pass muster with the IRS or state tax authorities,” the plaintiffs allege in the complaint. “It’s the epitome of arrogance and greed by both Jenkens & Gilchrist and Ernst & Young, and in total disregard for their fiduciary duties,” alleges Blair Fensterstock of Fensterstock & Partners in New York City, the lead lawyer for the plaintiffs in Camferdam. Daugerdas, managing shareholder of the firm’s Chicago office, did not return two phone calls seeking comment before press time on March 6. Daugerdas joined Jenkens in January 1999 when the firm opened an office in Chicago staffed by Daugerdas and four other lawyers from Chicago’s Altheimer & Gray. The firm says, in a statement provided in response to questions from Texas Lawyer, that it would be “inappropriate” to comment in detail about the IRS-related matters. But the firm says in the statement that it stands behind its tax opinions, and the IRS inquiry and any related “client actions” are without merit. “For the investment strategies in question, our advice was passed on the position the IRS and the Tax Court took in 1984 when they said that these kinds of investments and related transactions do not create tax liabilities,” the firm says in the statement. Jenkens and Daugerdas, who are represented by the same defense lawyers, filed a motion on Feb. 18 seeking a stay of the suit pending arbitration they claim is required because of the plaintiffs’ agreements with Ernst & Young. Defendants Ernst & Young and Sidley Austin also have asked for stays pending arbitration, say plaintiffs’ lawyer Fensterstock and Mark Foster, a defense lawyer for the McKee Nelson defendants. Foster, a partner in Zuckerman Spaeder in Washington, D.C., says he filed a motion to dismiss on behalf of his clients and says lawyers for the Ernst & Young in-house lawyers have done the same. (The plaintiffs bring only claims of breach of contract, breach of fiduciary duty, conspiracy to commit fiduciary duty and tortious interference with contract against the McKee Nelson defendants and Ernst & Young general counsel Kathryn Oberly and associate general counsel Michael Frank. McKee Nelson is outside counsel for Ernst & Young.) The plaintiffs allege the in-house lawyers and McKee Nelson disclosed the identities of Ernst & Young clients to the IRS. A lawyer for Oberly and Frank declines comment. The lawyer, Lawrence Robbins, a partner in Washington, D.C.’s Robbins, Russell, Englert, Orseck & Untereiner, says he never comments publicly on pending litigation. Foster says his clients gave no tax advice to the plaintiffs. A lawyer defending Sidley Austin in the suit, Brad Brian, a partner in Munger, Tolles & Olson in Los Angeles, did not return a phone call seeking comment before press time. Neither did William Conlon, a litigation partner in Chicago who is Sidley Austin’s general counsel. Michael Pope, a partner in McDermott, Will & Emery in Chicago who is a defense lawyer for Jenkens and Daugerdas, also did not return a call seeking comment. Emmet Flood, a partner in Williams & Connolly in Washington, D.C., and a defense lawyer for Ernst & Young, refers questions to Les Zuke, a spokesman for Ernst & Young, who says, “We believe the allegations are groundless, and we intend to vigorously defend ourselves.” OPINION LETTERS As alleged in the Camferdam complaint, plaintiffs Henry N. Camferdam Jr., Jeffrey M. Adams, Jay Michener and Carol Trigilio claim Ernst & Young approached them in 1999, suggesting a strategy to reduce the taxes they would have to pay on $70 million in capital gains from the sale of their business, a distributor of computer systems and equipment. They allege Ernst & Young “lured” them into the COBRA plan by promising they would not have to pay tax on the $70 million profit, and promising they would secure opinion letters from Jenkens and Brown & Wood (now Sidley Austin Brown & Wood) saying the tax shelter was legitimate. The COBRA plan, as described in the complaint, allegedly creates a paper loss through the use of currency options that would offset a capital gain, thereby reducing tax bills. But Camferdam and the other plaintiffs allege in the complaint that the tax shelter is specifically disallowed in 2000-44, an IRS notice issued in September 2000 titled “Tax Avoidance Using Artificially High Basis.” A message left with the IRS press office in Washington, D.C., on March 6 was not returned before press time. The plaintiffs allege that before Ernst & Young would discuss details of the tax plan with them in the fall of 1999, they had to pay a nonrefundable fee of $1.056 million and sign a nondisclosure agreement. They allege in the suit they were told by Ernst & Young in November 1999 that the tax plan would create a large capital loss for tax purposes, allowing the plaintiffs to largely or entirely offset their capital gains profit. As alleged in the complaint, the plaintiffs learned from Ernst & Young that their total fee for the COBRA plan and the Jenkens opinion letter would be 4.5 percent of the total amount of the capital losses created, and two-thirds of it would go to Jenkens and one-third to the accounting firm. Ernst & Young also advised the plaintiffs, as alleged in their complaint, that a second opinion letter from Brown & Wood would cost $75,000. The plaintiffs claim they were able to report capital losses of $70.4 million in 1999 because of the COBRA transactions. The plaintiffs allege that they retained Jenkens in December 1999 to provide advice on the tax implications of the COBRA transactions, paid invoices from the firm of $2.012 million and $25,000, and received opinion letters in return in 2000. They allege they also paid $75,000 to Brown & Wood for a second opinion letter in 2000. They further allege in their complaint that Jenkens and Daugerdas, and the Ernst & Young and Sidley Austin (Brown & Wood) defendants, failed to inform them about IRS notice 2000-44, and they first learned of potential problems in June 2002, when a partner in Ernst & Young notified them the IRS was looking into the use of COBRA transactions and related transactions at several accounting firms, including Ernst & Young; the IRS sought paperwork about the transactions. The Jenkens defendants may have violated lawyer disciplinary rules in Illinois and Indiana because of a relationship with Ernst & Young to solicit each other’s clients, the plaintiffs allege; the plaintiffs also allege in their complaint the Jenkens defendants may have violated Illinois lawyer disciplinary rules through the fee-splitting arrangement. But in its statement, Jenkens says it simply provided its clients with legal advice on the tax implications of their investments. “Jenkens & Gilchrist was paid directly by our clients [the Camferdam plaintiffs] for this work and had no independent financial relationship with any accounting practice,” the firm says. “Our fees are generally fixed and represent a small portion of our clients’ investments.” (In the past, Jenkens has represented Texas Lawyer in unrelated matters.) Jenkens and Daugerdas want Jones to grant a stay to allow the claims against them in Camferdam to be determined through arbitration or to grant a stay pending arbitration of claims against other defendants. They allege, in their memorandum of law supporting their motion to stay proceedings pending arbitration, that arbitration is required because the plaintiffs signed agreements with Ernst & Young calling for arbitration to resolve any controversy or claim arising out of or relating to the accounting firm’s tax services. “In this case … the conspiracy and fraud claims alleged against Jenkens and Gilchrist are too intertwined with plaintiffs’ claims against Ernst & Young and its obligations under the Letter Agreements [between the plaintiffs and Ernst & Young] to permit Plaintiffs to pursue them independently in Litigation,” lawyers representing Jenkens argue in the motion seeking a stay. Jenkens and Daugerdas also argue in the motion that the opinion letters, dated March 13, 2000, clearly state they were based on current law, and the firm could not guarantee that either the IRS or courts would not adopt a contrary position in the future. Welty, the Meadows Owens lawyer representing some former and current Jenkens clients in IRS proceedings, says his priority is defending the legitimacy of the firm’s opinion about the tax shelter. He says Jenkens lawyers are “providing support” to his firm, but are not working directly on the IRS examinations. He says the clients with the tax troubles have not been referred to him by Jenkens.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.