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Sunday, December 8, 2019

Software exec waited too long to sue finance pros over bad advice for $250 million investments resulting in huge tax bill

By Scott Holland | Nov 10, 2015

Bilandic building appellate

A software executive has said a group of investment bankers led him to put his money into a scheme frowned upon by federal tax collectors, but a state appellate court has found, like a trial court before them, that he ran out of time to sue his erstwhile financial advisers.

In his original complaint, R.J. Lane sued defendants Deutsche Bank and BDO Seidman over their “promotion of an illegitimate tax shelter in which Lane invested in October 2000.” However, the defendants asked the complaint to be dismissed on account of the law’s time limits for such actions. Cook County Circuit Court Judge Eileen O’Neill Burke agreed, and Lane appealed to the Illinois First District Appellate Court.

In an opinion delivered Nov. 6 upholding Burke’s ruling, Justice Mary Anne Mason wrote the majority opinion; justices Terrence Lavin and Aurelia Pucinski concurred.

The decision stems from a relationship between Lane and the investment bankers dates back to 2000 when Lane, then president and chief operating officer of a software company, “exercised stock options in that company and realized $250 million in ordinary income,” according to court documents. He consulted with his longtime accounting firm BDO Seidman to manage the money. The firm’s Tax Solutions Group partnered with Deutsche Bank to “minimize taxes on income by creating structure investment strategies.”

Michael Kerekes, Lane’s BDO Seidman contact, allegedly told Lane about the Partnership

Option Portfolio Securities, or POPS, strategy, which, he allegedly indicated, “would more than likely result in losses that could be deducted from his income for tax purposes.” Kerekes allegedly gave lane a letter from a lawyer supporting the strategy’s legality.

Lane followed through, ultimately filing a 2000 BDO-prepared tax return claiming more than $249 million in losses from the POPS transactions. The move purportedly saved him $87.5 million in tax savings and, although he lost an initial $18 million POPS investment, he had a temporary net gain of $69.5 million. In January 2002, Kerekes allegedly advised Lane not to seek amnesty with the IRS, which at that time “offered taxpayers who disclosed their involvement with certain illegal shelters the opportunity to avoid paying penalties for underpayment of taxes.”

After a decade of legal wrangling, on Jan. 31, 2013, the IRS told Lane the $250 million loss he claimed for 2000 was disallowed and that he owed back taxes, interest and a penalty. He settled with the IRS in December that year and the next month filed suit against Deutsche Bank and BDO Seidman.

In the appellate opinion, Mason noted Lane’s claims against Deutsche Bank had a five-year window and the complaint against BDO Seidman had a two-year statue of limitations, “beginning from the time plaintiff ‘knew or should reasonably have known’ of BDO Seidman's acts or omissions in performing professional services.”

She explained the key point in determining Lane’s legal standing is asserting when he was “injured” and when he was aware of “his injury.” Lane attempted to argue the clock should have begun ticking on the statute of limitations when he received notice of back taxes due from the IRS. The appellate justices, as the trial judge before them, disagreed.

Since the “knowing misrepresentations of fact and breaches of duty occurred in 2000, when (the) defendants worked to convince Lane to invest in POPS, Lane's causes of action accrued in 2000 or 2001, when he learned that his $18 million investment was lost,” the justices wrote.

Ultimately, Mason wrote Lane should have known he had just cause to sue as far back as September 2008. By waiting until January 2014, the window in which he was eligible to file suit had closed.

Lane was represented in the action by the firm of Foote Mielke Chavez & O’Neil, of Geneva.

BDO Seidman was represented by the firm of DLA Piper US, of Chicago, and Deutsche Bank was represented by Taft Stettinius Hollister, of Chicago.

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Organizations in this Story

DLA Piper US LLPDeutsche BankTaft Stettinius HollisterFoote, Mielke, Chavez & O'Neil LLC