Case Studies

Epstein Becker Green Wins Dismissal of Lawsuit Seeking Millions in Reimbursement of IRS Penalties, Interest, and Investment Losses

On February 25, 2013, the Supreme Court of the State of New York, New York County, dismissed on summary judgment a complaint brought by an individual whose $35 million deduction for tax shelter losses was disallowed and who sought reimbursement of more than $5 million in Internal Revenue Service ("IRS") penalties, interest on unpaid income tax, and investment losses against an Epstein Becker Green client, a trust company. The plaintiff claimed that our client, among other things, committed a fraud, breached fiduciary duties, and negligently handled his accounts by participating in the tax shelter.

The plaintiff had founded a highly successful video game company and had income of $35 million in 2001 that he wanted to shelter from taxes. He engaged accountants and advisors, and a lawyer from a prominent law firm, who together devised a complex investment structure to create paper losses that involved, among other things, engaging a trust company (Epstein Becker Green's client) simply to administer a pooled investment trust and to handle related paperwork. The structure involved borrowing $35 million from a foreign bank. After the IRS determined the loan to be a sham and the investment losses artificial, it disallowed the loss deductions, and the plaintiff had to pay $13 million in back taxes, $2 million in interest, and $1.3 million in penalties. The lawyer was jailed for tax fraud and the foreign bank entered into a deferred prosecution agreement and paid fines. Having settled with the law firm and several other participants in the shelter, the plaintiff sued our client and the foreign bank that made the "sham" loans.

After extensive discovery of all the sponsors and participants in the tax shelter scheme, the court dismissed the complaint. It held that, because the plaintiff knew or should have known that the tax shelter was risky and because he was complicit in the scheme, he could not have reasonably relied on any alleged fraudulent statements by any of the defendants. Moreover, the proximate cause of the disallowance and the penalties was not the bank's or trust company's actions, but the plaintiff's own participation in a transaction of "doubtful illegality." Hence, all of the plaintiff's breach of contract and fiduciary duty theories were rejected. The court appropriately placed the loss on the plaintiff who stood to benefit from the shelter, and not on anyone else.

Epstein Becker Green attorneys Kenneth J. Kelly and Lori A. Jordan were on the litigation team in New York. Salt Aire Trading LLC v. Enterprise Bank and Trust Corp., S.Ct., N.Y. Co. Index No. 603798/07 (2/25/13).

Epstein Becker Green Achieves Twin Victories in Investment Banking Bonus Arbitrations

Epstein Becker Green obtained awards dismissing the claims of nine investment bankers in two arbitrations for bonuses totaling more than $10 million in January and April 2013. Our client, an investment banking firm, had decided as a result of the 2008 crash to award "provisional" bonuses in December 2008 that were subject to adjustment, depending on the firm's then-undetermined audited year-end financial results. Because the firm lost several billion dollars and had to borrow TARP-like funds from the government to maintain its capital requirements, the directors reduced the provisional awards by 90 percent across the board.

The bankers commenced two arbitrations before FINRA for the unpaid balances, claiming breaches of contract and detrimental reliance, on the basis that their particular business units did not contribute to the firm's loss. The firm defended by arguing that, because the bonuses were discretionary, it could properly place decisive weight on its overall performance. Further, the firm argued that the bankers' reliance argument was undermined by layoffs and hiring freezes globally in the financial services industry—a fact confirmed in the bankers' internal emails.

The two panels independently awarded "zero" to the two groups of bankers and dismissed all of the claims. Kenneth J. Kelly and Diana C. Gomprecht led the Epstein Becker Green defense team in both cases.