Executive files RICO suit vs. Seyfarth Shaw, Northern Trust for roles in alleged tax avoidance scheme

The president of a company specializing in underwriting workers compensation coverage has filed a federal racketeering suit against Chicago-based international law firm Seyfarth Shaw, Chicago-based financial services firm Northern Trust Co. and trust, tax and investment services company Christiana Bank, arguing the companies should be held responsible for the acts of a former Seyfarth lawyer and representatives of the financial firms, who allegedly deceived the executive into setting up an abusive tax shelter, for which he lost millions of dollars when it was uncovered by the IRS.

On April 17, Steven Menzies, co-founder, president and chief operating officer of San Francisco-based Applied Underwriters Inc. (AUI), filed suit in federal court in Chicago against the law firm and financial services companies.

In the nine-count complaint, Menzies, of Nebraska, alleges the companies and their representatives violated the federal Racketeer Influenced and Corrupt Organization (RICO) Act when they, in the early 2000s, “targeted” and induced Menzies into participating in a complicated scheme to shield a large stock transaction from federal capital gains taxes.

Menzies is being represented in the action by attorneys Jeffrey B. Charkow and Daniel A. Dorfman, of the firm of Harris Winick Harris, of Chicago.

The complaint centers on money Menzies earned when his company was purchased by Berkshire Hathaway in 2006.

As part of that transaction, Menzies sold stock in AUI to Berkshire Hathaway for more than $64 million and did not fully report the income as taxable on his federal income tax return.

In his complaint, Menzies said he did so because, in 2003, at the guidance of former lawyer Graham Taylor, who at the time worked at Seyfarth Shaw’s San Francisco office, and at the alleged urging of representatives of Northern Trust, he had entered into an arrangement in which he funneled tens of millions of dollars into trust funds, using a complex series of loans and associated transactions through Christiana Bank.

Menzies said the financiers assured him the transactions would allow him to reduce his tax burden when he later sold his company stock. Those assurances were reinforced, he said, in correspondence with Taylor, to whom the financial advisers referred Menzies because Taylor was “up to speed” and could process documents quickly.

Later, Taylor produced letters purportedly from Seyfarth Menzies said he was assured could be used to respond to inquiries from the IRS.

Through the process, Menzies said he was led to believe Taylor was acting independently. Yet, Menzies’ complaint asserts Taylor and the financial advisers were working together as part of a scheme to extract fees from Menzies in exchange for work to move Menzies’ money using an “abusive tax avoidance scheme” he alleges they knew was illegal.

Following the sale of AUI, the IRS audited Menzies’ tax returns. In 2012, the IRS determined he owed unpaid taxes on more than $44 million in capital gains.

In a settlement deal, Menzies agreed to pay $10.4 million in taxes, penalties and interest.

Menzies’ complaint alleges the firms engaged in a pattern of racketeering, as demonstrated by their use of “a common plan and system to market and promote the tax shelters to participants such as Menzies.”

In his complaint, Menzies accuses the firms of violations of RICO, fraud, conspiracy, breach of fiduciary duty and unjust enrichment, among other counts.

“Defendants had a duty to disclose to Menzies the truth about the tax shelters,” the complaint states.  “Such disclosure was necessary so that their representations about the 2003 tax shelter and 2004 tax shelter would not be false or misleading.

“The defendants, however, never disclosed to Menzies that their representations to him were false or misleading (and) were intended for the sole purpose of generating fees.”

The complaint demands unspecified damages, and a jury trial.