Theodore C. Swartz v. Kpmg Llp, and Presidio Advisory Services Inc. Deutsche Bank Ag Deutsche Bank Securities, Inc.
Docket: 05-35167
Court: Court of Appeals for the Ninth Circuit; February 12, 2007; Federal Appellate Court
The case involves Theodore C. Swartz suing KPMG LLP and other defendants, including Deutsche Bank AG, Deutsche Bank Securities, and Presidio Advisory Services, over a failed tax shelter scheme that Swartz alleges was knowingly unlawful and cost him over a million dollars. He asserted claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), Washington Consumer Protection Act (WCPA), common law fraud, and civil conspiracy, alongside separate claims against KPMG and another law firm for breach of contract, breach of fiduciary duty, and professional malpractice.
The district court dismissed all claims against Presidio and Deutsche Bank, ruling that Swartz's complaint did not adequately state any claims or establish personal jurisdiction. Swartz's request to amend the complaint to address these deficiencies was denied, leading to his appeal.
The Ninth Circuit affirmed the dismissal of the RICO and WCPA claims and the request for declaratory relief, noting these were resolved on independent grounds and amendment would be futile. However, the court reversed the denial of leave to amend the common law fraud and conspiracy claims, determining that the issue of reasonable reliance on the alleged misrepresentations was not appropriately ruled out as a matter of law. The court also found that Swartz should have been allowed to amend to satisfy jurisdictional requirements and to add claims for securities fraud.
In 1999, Swartz sold a business, realizing an $18 million gain that was potentially taxable. KPMG approached him, promoting a tax-reduction product known as BLIPS, which they claimed would allow him to offset his capital gain with a reported loss. KPMG assured Swartz that they, along with law firm B. W, would provide tax opinion letters to satisfy IRS scrutiny, despite warnings of possible audits. The complaint alleges that KPMG and B. W designed the BLIPS transactions primarily to impose excessive fees on wealthy clients, including Swartz, who had substantial capital gains. Swartz contends that Presidio and DB participated in this scheme and were aware that the BLIPS transactions were preordained to generate fictitious losses for tax benefits.
In the fall of 1999, Swartz signed an engagement letter with KPMG, which detailed their role and acknowledged that the IRS might question the BLIPS losses, though it claimed a greater than 50% likelihood of tax benefits being upheld. Despite this, Swartz relied on KPMG's assurances that BLIPS would eliminate his tax liability. The BLIPS transactions occurred between late September and mid-December 1999, involving a multi-million dollar line of credit from DB to Swartz, the formation of a limited liability company (Longs Strategic Investment Fund), and the subsequent dissolution of Longs after conducting superficial foreign currency transactions. This setup aimed to inflate Swartz's basis in Microsoft stock, allowing him to claim a purported capital loss upon selling shares. Swartz incurred significant fees for these transactions, including $550,000 to Presidio and over $800,000 to DB. On December 27, 1999, the IRS determined that BLIPS did not create legitimate tax losses, yet KPMG and B. W issued opinion letters on December 31, 1999, affirming the scheme's validity.
On August 25, 2000, the tax preparation firm Moss Adams informed Swartz of concerns regarding the legitimacy of BLIPS losses before he filed his 1999 tax return. Subsequently, the IRS reiterated its position on September 5, warning of potential criminal penalties for misuse of these losses. KPMG later advised Swartz that the tax benefits associated with BLIPS might be rejected by the IRS, prompting Swartz to seek rescission and a refund, which the defendants denied. Moss Adams resigned on October 10, and KPMG continued to assist Swartz in preparing his return, which included deductions for BLIPS losses. An IRS audit of Swartz's 1999 return ensued, but he did not amend it in the following years. On February 21, 2002, KPMG notified him of an IRS investigation into the BLIPS scheme and an amnesty initiative for tax filers. Swartz initiated a lawsuit on June 6, 2003, but the district court dismissed his claims on February 13, 2004, citing a lack of sufficient facts for relief and failure to establish personal jurisdiction over certain defendants. Following this, Swartz attempted to amend his complaint, seeking to add detail and new fraud claims, but the court denied this request, leading to his appeal. The standard of review for dismissals under Rule 12(b)(6) and for lack of personal jurisdiction is de novo, and dismissal without leave to amend is warranted only if no amendments could remedy the complaint's defects. Swartz's civil RICO claim, based on allegations of mail and wire fraud related to the BLIPS scheme, was dismissed by the district court for two reasons: it was deemed connected to the sale of Microsoft stock, which was not actionable under the PSLRA, and the complaint failed to establish 'reasonable reliance,' a critical element for fraud claims.
The PSLRA precludes Swartz's claim, affirming the district court’s findings in Swartz I regarding the impact of the Private Securities Litigation Reform Act, specifically noting that allegations of fraud related to the sale of securities were central to the case. The BLIPS transactions were not merely incidental; the sale of Microsoft stock was critical to the fraudulent scheme, as it allowed Swartz to inflate his asset basis artificially. Hence, amending the RICO claim would be futile, justifying its dismissal with prejudice.
The district court’s dismissal of the Washington Consumer Protection Act (WCPA) claim was also upheld, as the scheme was targeted at a limited audience rather than the general public, rendering the claim incapable of deception on a broader scale. The potential for amendment was deemed futile.
For the common-law fraud claim under Washington law, the requirement that plaintiffs demonstrate justifiable reliance on misrepresentations was emphasized. The court noted that determining reasonable reliance involves a factual analysis of surrounding circumstances, including the plaintiff’s education and experience. The district court found that Swartz could not establish reasonable reliance due to a letter from KPMG indicating the aggressive nature of BLIPS and the risk of IRS audits, which undermined his claims of reliance on any oral representations.
The engagement letter in question does not clearly contradict the alleged oral misrepresentations made by the defendants regarding the effectiveness of the BLIPS tax-avoidance strategy, despite acknowledging potential IRS audits. Swartz's complaint focuses on the defendants' claims about BLIPS' efficacy and the collection of substantial fees, suggesting they were aware of its likely failure. The engagement letter's assurances about IRS challenges do not necessarily negate the oral representations, and the case should not be dismissed with prejudice at this stage.
Swartz's argument that the district court improperly considered the engagement letter is rejected, as this claim was not raised at the district court level and was thus waived. Courts can consider documents referenced in a complaint if their authenticity is undisputed and they are essential to the claims.
The district court noted that circumstances beyond the engagement letter indicated a lack of reasonable reliance, citing prior warnings from Moss Adams and KPMG regarding BLIPS' viability, along with Swartz's continued claims on his tax return despite these warnings. However, these factors do not meet the stringent requirements for dismissal under Rule 12(b)(6).
Additionally, Swartz claims two distinct injuries: first, the substantial fees paid in 1999 based on KPMG's representations, and second, the financial repercussions from claiming BLIPS losses on his tax return in 2000. The increasing warnings about BLIPS' legality do not necessarily relate to the reasonableness of reliance on the initial representations made in 1999.
Swartz's proposed amended complaint includes new allegations that could support a finding of reasonable reliance regarding the second set of harms. Specifically, he claims KPMG assured him that Moss Adams did not grasp the complexities of the BLIPS scheme and that KPMG remained committed to the scheme's viability after issuing a warning in fall 2000. Presidio and DB contend that Swartz's fraud claim dismissal can be affirmed because he failed to adequately plead any misrepresentations by them. Under Rule 12(b)(6), a complaint must meet minimal notice pleading requirements per Federal Rule 8(a)(2), but allegations of fraud must adhere to the heightened specificity required by Rule 9(b), outlining the time, place, content of false representations, and identities of the parties involved.
Swartz's initial complaint sufficiently detailed the misrepresentations made by KPMG and B.W., a point not contested. However, Presidio and DB argue that the complaint does not specify any false statements they made, asserting it does not meet the Rule 9(b) standard. Swartz counters that since DB and Presidio are liable for the misrepresentations of their co-conspirators, the allegations related to KPMG and B.W. should suffice.
There is no strict requirement for each defendant in a fraudulent scheme to be identified with specific false statements, as each may fulfill different roles in the conspiracy. Nevertheless, Rule 9(b) prohibits lumping defendants together and requires differentiation in allegations. Swartz's original complaint fails to comply with this rule regarding Presidio and DB, as it contains generalized allegations of fraud without specific misconduct attributed to them. Conclusory statements about their knowledge of KPMG and B.W.'s falsehoods lack a factual basis and are legally insufficient.
Despite this lack of specificity providing grounds for affirming the dismissal of Swartz's fraud claims, it is noted that the issues may be curable. Swartz's proposed amended complaint includes detailed accounts of alleged agreements and roles in the conspiracy. Therefore, while the dismissal is justified, it should be without prejudice, allowing Swartz the opportunity to amend his claims, as dismissals under Rule 9(b) are treated similarly to those under Rule 12(b)(6) and typically allow for corrections.
The district court's denial of leave to amend Swartz's fraud claim is reversed, allowing him the opportunity to replead. The civil conspiracy claim was dismissed as derivative of the other claims, which have also been dismissed; however, since Swartz can replead the fraud claim, the denial of leave to amend the civil conspiracy claim is similarly reversed. Although the defendants argue that the civil conspiracy claim lacks specificity as required by Rule 9(b) due to insufficient detail in the alleged roles of the defendants, the court finds that these defects may be curable.
The district court's dismissal of Swartz's request for declaratory judgment is upheld, as the claims for future penalties are not ripe, and those for liability related to other claims are duplicative. Regarding personal jurisdiction, Swartz must provide more than conclusory allegations to establish a prima facie case. The court points out that his original complaint does not meet the due process requirements for personal jurisdiction over the defendants. The district court dismissed Presidio and DB, indicating no need to allow amendments since the claims against them were dismissed with prejudice. However, with the reversal of the denial regarding the fraud and civil conspiracy claims, Swartz may also address jurisdictional deficiencies in his amended complaint, which contains detailed allegations of the defendants' contacts with Washington.
Lastly, the district court's refusal to allow Swartz to add securities fraud claims is reversed, as the previous ruling on reasonable reliance is also overturned, permitting the addition of these claims.
The court acknowledged B.W.'s argument regarding the potential timeliness issue of Swartz's federal securities fraud claim but did not address it, as it was not raised on appeal. The district court had objected to Swartz's attempt to separate the fraud claim from the sale of securities in relation to his restated RICO claim, asserting that simultaneous pleading was not permissible. However, the court clarified that Federal Rule of Civil Procedure 8(e)(2) allows a party to present multiple separate claims regardless of consistency, deeming the denial of leave to add the securities fraud claims improper. Ultimately, the court affirmed the district court's dismissal with prejudice of the RICO, WCPA, and declaratory judgment claims, partially adopted the district court's opinion from Swartz I, reversed the denial of leave to amend common law fraud and civil conspiracy claims, and allowed the addition of statutory securities fraud claims. The case was remanded for further proceedings consistent with this opinion, with the appellant entitled to recover costs on appeal.
The legal document notes that Judge Edward Rafeedie is presiding over the case concerning Swartz's claims against Presidio and DB. The district court dismissed multiple claims against other defendants but allowed some claims to proceed. Swartz raised a new argument on appeal regarding the judicial notice of documents not previously presented to the district court, which the court declined to address due to a lack of exceptional circumstances. The court emphasized the focus on the sufficiency of Swartz's pleadings and took his allegations as true for the appeal.
At the time of filing, the IRS had initiated an audit but had not disallowed Swartz's claimed losses. However, a declaration from his tax attorney indicated that a significant loss from 1999 had been disallowed, and Swartz had paid back taxes, though no penalties were mentioned. The district court dismissed Swartz's original claims with prejudice and treated a subsequent motion as untimely for reconsideration. Swartz argued for the right to amend despite the dismissal, but the district court's rationale for dismissal was upheld.
Additionally, the document discusses the relevance of non-Washington cases cited by the district court, which did not establish a clear rule regarding reliance claims. DB's suggestion to affirm the dismissal based on a separate non-reliance contract was rejected since it was not part of Swartz's complaint. Finally, the court clarified that it only adopted the district court's reasons for dismissing the declaratory judgment claim with prejudice and not the dismissal of fraud and conspiracy claims.
