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Third strike: Judge tosses racketeering suit vs Seyfarth Shaw, Northern Trust over tax shelters


By DM Herra | Sep 25, 2018


Prominent Chicago law firm Seyfarth Shaw, financial services company Northern Trust, and others have sidestepped a racketeering claim brought by a financial services provider who claimed he was misled into investing in an illegal tax shelter that eventually cost him more than $10 million in back taxes, fees, interest and penalties.

The ruling from U.S. District Judge John R. Blakey ended the third attempt from plaintiff Steven Menzies, president of financial services company Applied Underwriters Inc., to sue Seyfarth Shaw, attorney Graham Taylor, Northern Trust Corporation and Christiana Bank and Trust Company in the legal action dating back to 2015.

Menzies had been allowed to amend the lawsuit after it was dismissed on two previous occasions. This time, however, Judge Blakey dismissed the action with prejudice.

In his most recent complaint, Menzies alleged violations of the Racketeer Influenced and Corrupt Organizations Act, conspiracy to violate the RICO Act, and violations of Illinois state law regarding fraudulent misrepresentation, civil conspiracy, joint enterprise liability, negligent misrepresentation, breach of fiduciary duty and unjust enrichment.

According to the complaint, Menzies was enticed in the early 2000s to invest in a tax avoidance scheme. The purpose of the plan, which involved complex transactions including sales of stock and investment in trusts, was for Menzies to avoid paying capital gains tax. He claimed Seyfarth Shaw, through Taylor, assured him the transactions were legal.

In his second amended complaint, Menzies attempted to fix one of Blakey’s concerns about the first complaint – that his allegations all involved a single scheme with a single victim, himself. This failure to show “closed-ended” scheming disqualified the racketeering complaint.

In the new complaint, Menzies mentioned three other investors he claims also fell victim to the scheme. Unfortunately, Blakey wrote, including these additional victims did not address the core problem.

“The complaint must set forth, with particularity, facts indicating that other victims were actually deceived by the same alleged pattern of racketeering activity by the same alleged enterprise,” Blakey wrote. “Plaintiff adds new allegations concerning three other investors who were allegedly lured by defendants into entering into illegal tax avoidance schemes. These allegations, however … fail to plausibly state that the investors were victims of fraud.”

The investors may have entered into the illegal tax shelters on the advice of Seyfarth and Taylor, Blakey said, but there is no evidence they were deceived into doing so, rather than entering into the tax evasion with eyes wide open.

“Failure to plead such facts is particularly problematic in a case like this one, where the purported victims knowingly entered into tax shelters, which by their nature are designed to avoid taxes,” the judge wrote.

Menzies also failed to argue “open-ended” continuity, that the defendants were likely to run the scheme again on new victims. There is not evidence that fraud is business as usual for the defendants, the court wrote. And as Taylor, the attorney who drafted the legal opinions assuring investors of the legality of the tax plans, was convicted in 2008 of tax fraud, the chances of the scheme continuing are even lower.

Blakey said Menzies pleaded his state-law claims well. But the judge said he pleaded them at least four years too late.

The court noted that the second amended complaint “is rife with allegations” that fall under the purview of the Illinois Securities Law. The law is broadly written, forbidding practices “in connection with” the sale or purchase of securities that may deceive a buyer or seller. Menzies’ stock sales as part of the tax shelter plan fall squarely under this law, Blakey wrote. However, the claims must have been brought before May 2011, five years after the stock sale. Menzies did not bring the claims until 2015.

“Because (1) it does not appear that plaintiff would be able to amend his complaint to successfully state RICO claims, (2) his state-law claims are time-barred, and (3) this is already plaintiff’s third complaint … plaintiff’s second amended complaint is dismissed in its entirety, with prejudice,” the court wrote.

Menzies is represented in the action by attorneys with the firm of Harris Winick LLP, of Chicago.

Seyfarth Shaw is represented by attorneys with the firm of Perkins Coie LLP, of Chicago.

Northern Trust is represented by attorneys with the firm of Neal, Gerber & Eisenberg, of Chicago.

Christiana is represented by the firm of Shook, Hardy & Bacon LLP, of Chicago.

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Organizations in this Story

Perkins CoieNorthern Trust CorporationShook Hardy & Bacon LLPU.S. District Court for the Northern District of IllinoisSeyfarth Shaw, LLPHarris Winick LLCNeal, Gerber & Eisenberg LLC

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