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Leff v. Deutsche Bank AG

May 14, 2009

LESLIE J. LEFF AND RONNIE H. LEFF, PLAINTIFFS,
v.
DEUTSCHE BANK AG, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

Defendants Deutsche Bank AG and Deutsche Bank Securities Inc. have moved for a stay of this action pending arbitration [49]. The motion presents a challenging issue on which the parties have provided comprehensive briefing that very ably sets forth their positions. For the following reasons, the Court grants Defendants'motion.

I. Background

Plaintiffs Leslie and Ronnie Leff sought to avoid tax liability over the course of several years by engaging in a series of tax strategies. According to the complaint, after Plaintiffs were approached by a financial advisor in Atlanta, they entered into a series of transactions that resulted in claimed tax losses for the 1998 tax year. The following year, the law firm of Jenkens & Gilchrist contacted Plaintiffs regarding another tax strategy involving foreign currency digital options (the "Currency Options Brings Rewards Alternative" or "COBRA" strategy).*fn1 Plaintiffs allege that Jenkens & Gilchrist, along with Deutsche Bank, represented to Plaintiffs that COBRA involved legitimate transactions that had a substantial economic purpose as well as potential tax benefits. Plaintiffs implemented the COBRA strategy in late 1999 and, after receiving opinion letters from Jenkens & Gilchrist confirming the propriety of the strategy, claimed losses generated from engaging in that strategy on their tax returns for the 1999 tax year.

In 2000, Plaintiffs again sought to reduce their tax obligations. Bricolage Capital LLC, Deutsche Bank, and Counterpoint Capital, LLC and Delta Currency Trading (affiliates of Bricolage) presented Plaintiffs with the Personal Investment Corporation strategy (the "PICO" strategy), in which Plaintiffs agreed to participate. The IRS eventually audited Plaintiffs and assessed taxes, interest, and penalties resulting from the losses claimed related to the COBRA and PICO strategies.

In February 2008, Plaintiffs filed this lawsuit against the Deutsche Bank Defendants. Plaintiffs allege that Deutsche Bank, along with Jenkens & Gilchrist, Bricolage, Counterpoint, and Delta, developed, marketed, and implemented the COBRA and PICO strategies for Plaintiffs and other taxpayers in order to generate fees. See Compl. ¶ 81 ("Deutsche Bank recruited other entities to assist in marketing tax shelters generally, and COBRA and PICO specifically, to wealthy clients and others (in return for a substantial volume of tax preparation business and undisclosed fees). In turn, other entities recruited others in marketing the tax shelters to other clients. As a result of these arrangements, Defendants, along with the other entities, generated millions of dollars.").

Plaintiffs claim that they were induced by Deutsche Bank and others into entering several agreements with Counterpoint and Delta as part of the PICO strategy. Plaintiffs each executed a Strategic Consulting and Investment Advisory Agreement with Counterpoint ("Counterpoint Consulting Agreement"), an Investment Management Agreement with Counterpoint ("Counterpoint Investment Management Agreement"), a Currency Consulting and U.S. Government and Agency Securities Trading Agreement with Delta ("Delta Consulting Agreement"), and a Currency Management and U.S. Government Agency Securities Trading Authorization Agreement with Delta ("Delta Currency Management Agreement"). Pursuant to these agreements, Plaintiffs authorized Counterpoint and Delta to provide the services necessary to implement the PICO strategy.

As set forth by Plaintiffs in the complaint, "Deutsche Bank' s responsibility was to execute trades and maintain accounts [and] was engaged to hold the custodial account for the S corporation." Compl. ¶ 76. Some of the agreements make reference to Deutsche Bank's role in implementing Plaintiffs' PICO strategies. For example, the Counterpoint Investment Management Agreement states that "the Client desires to retain the services of the Manager to provide currency and securities management and trading services in respect of all cash, securities, currencies and over the counter forward, swap and option contracts in the account ('Account') established by the Client in the custody of a broker-dealer or bank custodian selected by the Client." Similarly, the Delta Currency Management Agreement states that "the Client desires to retain the services of the Manager to provide currency, U.S. government and agency securities management and trading services in respect of all cash, securities, currencies and over-the-counter forward, swap and options contracts in the account ("Account") established by the Client in the custody of a broker-dealer or bank custodian selected by the Client."

The agreements into which Plaintiffs entered with Counterpoint and Delta contain the following arbitration provision:

Any controversy arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration conducted in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association.

Any arbitration hereunder shall be before at least three arbitrators and a decision of a majority of them shall be final and binding. Any judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction.

Counterpoint Consulting Agreements ¶ 8.7; Counterpoint Investment Management Agreements ¶ 17; Delta Consulting Agreements ¶ 7.8; Delta Currency Management Agreements ¶ 17. Deutsche Bank is not a party to these agreements.

On February 4, 2008, Plaintiffs brought their Complaint against Deutsche Bank in this Court. On April 28, 2008, Deutsche Bank filed a motion to dismiss Plaintiffs' complaint. After the parties exchanged initial disclosures pursuant to Rule 26(a) of the Federal Rules of Civil Procedure, Plaintiffs produced the Counterpoint and Delta agreements with the relevant arbitration provisions. According to Plaintiffs, they produced the agreements containing the ...


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