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A Manhattan federal judge has allowed fraud and recision claims to proceed against the law firm Sidley Austin Brown & Wood and other defendants for their role in promoting a tax shelter. In sustaining some of the claims brought by William Seippel, a Virginia telecommunications executive, and his wife, Sharon, Southern District Judge Shira A. Scheindlin departed from other federal district courts that have dismissed tax shelter cases for lack of ripeness and on other grounds. “The fact that the Seippels may not ultimately owe the tax authorities additional taxes does not mean that their action is not ripe,” the judge wrote in Seippel v. Jenkens & Gilchrist, 03-6942. “The Seippels allege that they have been damaged, and continue to be damaged, as a result of defendants’ conduct. “Their damages include the fees paid to defendants, losses incurred in the transactions, expenses paid to accountants and attorneys that are dismissing the Seippels in defending the audits, losses caused as a result of being forced to sell assets at distressed prices to meet tax obligations, and tax penalties already assessed and paid.” The Seippels participated in a tax shelter known as Currency Options Bring Reward Alternatives, or COBRA, which they were told would give them a loss of $12 million to offset the tax liability on Seippel’s exercise of a large block of stock options. New York-based Brown & Wood, with which Chicago’s Sidley & Austin merged in 2001, developed and marketed the shelter in conjunction with law firm Jenkens & Gilchrist, the accounting firm Ernst & Young and Deutsche Bank. The two law firms provided opinion letters stating that the Seippels could properly and legally claim $12 million in losses. The Seippels claim the firms depicted themselves as objective, concealing the fact that their lawyers had developed the COBRA shelter. Dallas-based Jenkens & Gilchrist and Paul Daugerdas, the leading tax shelter partner at the firm, were named in the Seippels’ suit, but claims against them have been stayed because Jenkens & Gilchrist has agreed to pay $75 million to settle tax shelter claims. The Seippels have also sued R.J. Ruble, the leading tax shelter lawyer at Sidley Austin, who is no longer with the firm. Ruble was fired this year for what the firm called a violation of its partnership agreement. Deutsche Bank is also a defendant. Jenkens & Gilchrist received $338,880 from the Seippels for the opinion letter and other advice. Sidley Austin received $21,180 for the other opinion letter. The Seippels were advised the COBRA shelter was being investigated by the Internal Revenue Service in March 2002. They claim they have since paid more than $5 million in taxes, penalties and fees. While some of the plaintiffs’ claims were sustained, Judge Scheindlin dismissed others. In addition to fraud, the Seippels filed claims under the civil Racketeer Influenced and Corrupt Organizations (RICO) Act. They also sued for legal malpractice, breach of fiduciary duty, negligent misrepresentation and breach of contract claims. Scheindlin dismissed the RICO claims, on the grounds that the 1995 Private Securities Litigation Act bars plaintiffs from asserting conduct actionable as securities fraud as a predicate act in a RICO claim. She said Seippel’s sale of stock based on the firm’s representation could be the basis for a securities fraud claim and she gave the Seippels leave to file such a claim. She also dismissed malpractice, fiduciary duty, negligent misrepresentation and breach of contract claims, saying they were barred by the statute of limitations in New York. She gave the Seippels leave to refile several of the claims in Virginia where the statute of limitations for legal malpractice, for instance, is five years rather than three. In upholding the fraud claim, Scheindlin looked not to the opinion letters but to statements that Charles Paul, an Ernst & Young representative, allegedly made to Seippel. The Seippels claim they were told the shelter had been developed by Ernst & Young, the accounting firm used by Seippel’s company, rather than the law firms. OPINION LETTERS Paul allegedly also told the couple that the COBRA shelter was a “conservative” tax-reduction transaction and was “100 percent legitimate and backed by two blue chip law firms.” Sidley Austin argued that the Seippels could not have reasonably relied on Paul’s representations because the firms’ opinion letters state that they were not binding on the IRS and stated only that there was a “greater than 50 percent likelihood” that the transaction would be upheld if challenged by the IRS. But Judge Scheindlin noted that the opinion letters had not been delivered to the Seippels until they had already been induced by Paul to participate in the tax shelter. “Even if the letter clearly contradicted Paul’s statements, the Seippels would still have a claim for the losses incurred in participating in COBRA,” the judge wrote. The judge also upheld the Seippels’ action to seek recision of fees from Sidley Austin. The couple has alleged that the fee the firm charged for its opinion letter was excessive and unethical under state professional responsibility rules. The judge said the question of excessiveness needs to be determined by a fact-finder. Moreover, she said, the alleged misrepresentations by Paul may make any agreement between the Seippels and Sidley Austin unenforceable. Scheindlin also denied a motion by Sidley Austin seeking to strike damages allegations relating to back taxes, interests and professional fees. Citing Alpert v. Shea Gould, 160 A.D.2d 67, the firm argued that taxes and interest paid to the government were not recoverable as a matter of law. But the judge ruled that Virginia law governed the Seippels’ fraud claim. Under Virginia law, she said, a plaintiff may recover for gains prevented by fraud. Scheindlin’s decision is a blow to Sidley Austin and the accounting firms and banks currently involved in tax shelter litigation. Other courts had ruled more favorably in recent cases. Last September, a federal court in Miami dismissed most of the claims against Sidley Austin, KPMG and other tax shelter promoters for lack of ripeness, noting that the plaintiff had not reached a final resolution with federal and state tax authorities. In February a federal court in Seattle dismissed several claims against Sidley Austin and other parties saying the plaintiff could not have reasonably relied on the representations of the tax shelter promoters, including Sidley Austin’s opinion letter, which stated the shelter strategy was aggressive and might be subject to IRS challenge. Blair Fensterstock, the lawyer for Seippel and dozens of other plaintiffs in tax shelter cases, hailed Scheindlin’s decision Tuesday. “This will have overriding significance in the numerous tax shelter cases that are pending,” he said. Aaron Marcu of Covington & Burling represented Sidley Austin. He declined to comment on the case. Deutsche Bank is represented by Laurence Hill of Dewey Ballantine.

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