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Donald F. Moorehead, Shelley B. Moorehead, Dgs, LLC, Dgs Planning v. Deutsche Bank Ag and Deutsche Bank Securities

September 26, 2011


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:


Donald F. Moorehead, Shelley B. Moorehead, and several associated business entities have sued Deutsche Bank AG and Deutsche Bank Securities, Inc. for their alleged role in inducing plaintiffs to pursue faulty tax-reducing investment strategies. They have brought claims for violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962(c) & (d), breach of fiduciary duty, negligence, negligent misrepresentation, fraud, violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2, and civil conspiracy. Defendants have moved to dismiss all of plaintiffs' claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, the Court grants defendants' motion.


The Court draws the following facts from the allegations in plaintiff's complaint and accepts them as true for purposes of the motion to dismiss. See Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009).

In early 1998, a partner in the accounting firm KPMG, LLC arranged a meeting with Donald Moorehead. Moorehead was expecting a capital gain from sales of stock. According to the partner, KPMG "had developed a tax-reducing investment strategy that could provide Plaintiffs with an opportunity for a substantial profit on the investments as well as legally reduce Plaintiffs' anticipated taxes." Compl. ¶ 48. The firm "would work closely with other highly reputable firms, including Deutsche Bank and [the law firm of] Sidley Austin" in the implementation of the strategy. Id. The KPMG partner insisted that the strategy, known as "OPIS" (Offshore Portfolio Investment Strategy), was perfectly legal. He indicated that an independent legal opinion letter from Sidley Austin would establish the strategy's legitimacy and that Deutsche Bank and the financial services firm Presidio "would handle all aspects of the investment component." Id. Other KPMG and Presidio representatives later reiterated these assertions. Plaintiffs allege that the firms' representatives touted a well-established working relationship between KPMG, Deutsche Bank, Sidley Austin, and Presidio and that Deutsche Bank and Sidley Austin had specifically "authorized KPMG and Presidio to use their names and reputations . . . to convince Plaintiffs to execute the OPIS strategy." Id. ¶ 51.

Based on these representations, Moorehead and plaintiff Shelley Moorehead, chose to engage in the OPIS strategy for the 1998 tax year. The OPIS strategy involved entering a purported investment transaction with a Cayman Islands entity by purchasing a warrant or entering into a swap. The Cayman Islands entity then makes a pre-arranged series of investments, including the purchase of stock from a bank using money loaned by the bank at a pre-arranged price. The Cayman Islands entity is then redeemed out of the stock a short time later. Because the basis of the Cayman Islands entity purportedly cannot be used in the redemption, the basis is purportedly shifted to stock held by the taxpayer thereby creating a significant loss.

Id. ¶ 54. The Mooreheads formed plaintiff DGS Planning, LLC, eighty percent of which was owned by plaintiff D. Moorehead Revocable Trust, in order to implement the strategy, which included the purchase and resale of Deutsche Bank stock. After plaintiffs had completed the pre-arranged steps, KPMG prepared their 1998 tax returns.

In 1999, plaintiffs went through a similar series of meetings and received a similar set of assurances, this time focused on the "BLIPS strategy" (Bond Linked Premium Issue Structure). BLIPS purportedly generated a tax loss through a series of steps that involved the taxpayer borrowing money from a bank in order to purchase certain foreign currency investments through a joint venture. The bank involved in the loan would also serve as the counterparty on the foreign currency transactions. The joint venture would then sell the foreign currency back to the bank purportedly creating a tax loss for the taxpayer through increased basis.

Id. ¶ 73. The Mooreheads formed plaintiff Snowy Ventures, LLC to carry out the BLIPS strategy. KPMG then prepared the plaintiffs' 1999 tax returns.

The IRS ultimately determined that the purported losses created by these transactions were not properly allowable for federal income tax purposes. The IRS notified the public of this fact in a series of published notices. On December 27, 1999, it issued a notice stating that losses arising from the OPIS and BLIPS strategies were not allowable. On August 11, 2000, it published a notice stating that the transactions were fraudulent and illegal. On July 26, 2001, the IRS published a notice stating that the type of transaction used by the OPIS strategy could be subject to disallowance. The IRS also advertised a "Tax Amnesty Program" in 2001-2002, through which it agreed to forego assessing penalties against taxpayers who had entered tax-shelter transactions in return for information regarding the transactions. Finally, the IRS issued global settlement offers on October 4, 2002 for participants in the OPIS strategy, and on May 5, 2004 for participants in the BLIPS strategy, allowing the participants to avoid penalties and recognize a portion of their claimed capital losses. Plaintiffs did not participate in the amnesty program or take advantage of the settlement offers. The IRS audited plaintiffs' tax returns, and, on February 5, 2009, it issued a notice of deficiency to plaintiffs regarding the 1998 tax year. The IRS has also "indicated it will disallow the losses purportedly created by the 1999 BLIPS Strategy and assess plaintiffs with back taxes and substantial penalties and interest." Id. ¶ 94.

Plaintiffs filed this suit on January 7, 2011. In addition to Deutsche Bank AG and Deutsche Bank Securities, Inc., plaintiffs originally sued Sidley Austin, which is headquartered in Illinois. Before defendants filed their motion to dismiss, however, plaintiffs voluntarily dismissed Sidley Austin from the case pursuant to Fed. R. Civ. P. 41(a).


In addressing a motion to dismiss, the Court accepts the plaintiffs' allegations as true and draws reasonable inferences in their favor. Parish v. City of Elkhart, 614 F.3d 677, 679 (7th Cir. 2010); Johnson v. Apna Ghar, Inc., 330 F.3d 999, 1001 (7th Cir. 2003). Federal Rule of Civil Procedure 8(a)(2) requires the plaintiffs to provide "a short and plain statement" showing that they are entitled to relief. Though a complaint need not contain "detailed factual allegations, . . . a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Rather, the plaintiffs must provide "enough facts to state a claim to relief that is plausible on its face." Id. at 570.

Defendants have moved to dismiss based in part on their contention that plaintiffs' claims are time-barred. The statute of limitations, of course, is an affirmative defense. "While complaints typically do not address affirmative defenses, the statute of limitations may be raised in a motion to dismiss if the allegations of the complaint itself set forth everything necessary to satisfy the affirmative defense." Brooks v. Ross, 578 F.3d 574, 579 (7th Cir. 2009) (internal quotation marks and citation omitted). Plaintiffs have agreed with defendants that their claims for violations of the Illinois Consumer Fraud Act should be dismissed and have also withdrawn their claim for disgorgement.*fn1 Accordingly, the Court dismisses Counts 6 and 8 of plaintiffs' complaint with prejudice. In this decision, the Court first addresses plaintiffs' remaining state law claims and then discusses their RICO claims.

A. State Common Law Claims

1. The applicable statutes of limitations

A federal court applies the forum state's choice-of-law rules in determine the law that governs a state-law claim. Demitropoulos v. Bank One Milwaukee, N.A., 915 F. Supp. 1399, 1413 (N.D. Ill. 1996) (citing Mastrobuono v. Shearson Lehman Hutton, Inc., 20 F.3d 713, 718-19 (7th Cir. 1994), rev'd on other grounds, 514 U.S. 52 (1995)). For procedural matters, including the statute of limitations, Illinois applies the law of the forum. Newell Co. v. Petersen, 325 Ill. App. 3d 661, 669, 758 N.E.2d 903, 908 (2001) (citing Marchlik v. Coronet Ins. Co., 40 Ill. 2d 327, 329, 239 N.E.2d 799, 801 (1968)).

An Illinois statute provides that "[w]hen a cause of action has arisen in a state or territory out of this State, or in a foreign country, and, by the laws thereof, an action thereon cannot be maintained by reason of the lapse of time, an action thereon shall not be maintained in this State." 735 ILCS 5/13-210. The parties agree that plaintiffs' causes of action arose in Texas, because that was their state of residence and the state where the transactions occurred. Thus if the Illinois borrowing statute applies to this case, Texas statutes of limitation govern if they are shorter than those of Illinois.

The Illinois Supreme Court has held that the borrowing statute requires "that all parties be non-Illinois residents at the time the action accrued . . . ." Employers Ins. of Wausau v. Ehlco Liquidating Trust, 309 Ill. App. 3d 730, 737, 723 N.E.2d 687, 693 (1999) (citing Miller v. Lockett, 98 Ill. 2d 478, 481-83, 457 N.E.2d 14, 16-17 (1983)). Some Illinois courts have held that the statute also requires the parties to retain their non-residency throughout the foreign limitation period. Compare Ehlco, 309 Ill. App. 3d at 737, 723 N.E.2d at 693 (non-residency must be continuous), with Newell, 325 Ill. App. 3d at 670, 758 N.E.2d at 909 (non-residency requirement only applies to accrual). Plaintiffs argue that because Sidley Austin, an Illinois resident, was a party to the case when plaintiffs filed it, the borrowing statute does not apply. Defendants respond that the Court should not take the residence of dismissed parties into account.

The Court has not found a definitive determination from Illinois or federal courts regarding this issue, which turns more on the meaning of the word "parties" than anything else. Sidley Austin was an Illinois resident both when the cause of action accrued and when the case was filed. The plaintiffs and the defendants who remain in the case were not Illinois residents at either time. Thus, if "all parties" does not include dismissed parties, the borrowing statute applies.

The Court concludes that the borrowing statute does not take into account the residence of dismissed parties and that it therefore applies in this case. A rule that depends on the identity of the "parties" logically concerns only the parties who are in the suit when the rule is applied. A contrary rule would allow a plaintiff to avoid application of the borrowing statute by suing a sham Illinois defendant here along with the real, non-Illinois defendants. This would be contrary to the ...

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