Fraud Claims Over COBRA Tax Shelter Can Proceed, Rules New York Judge

by Glen Shapiro, for LawAndTax-News.com, New York

02 September 2004

Ruling in Manhattan's district court in the case of Seippel v. Jenkens and Gilchrist, Southern District Judge Shira A. Scheindlin allowed fraud and recission claims against the Sidley Austin Brown & Wood law firm to proceed.

Telecommunications executive, William Seippel participated in a tax sheltering arrangement known as COBRA (Currency Options Bring Reward Alternatives), which was developed by Jenkens & Gilchrist in conjunction with Brown & Wood, prior to the latter's merger with Sidley & Austin in 2001.

Following an Internal Revenue Service investigation into the shelter which led to Mr Seippel and his wife paying more than $5 million in taxes, penalties and fees, the couple sued the law firms in question alleging fraud, infringement of the Racketeer Influenced and Corrupt Organizations (RICO) Act, legal malpractice, breach of contract, negligent misrepresentation, and breach of fiduciary duty.

Although Judge Scheindlin dismissed the RICO, malpractice, breach of contract, negligent misrepresentation and breach of fiduciary duty claims, she allowed the fraud and recission of fees actions to continue, observing that:

"The fact that the Seippels may not ultimately owe the tax authorities additional taxes does not mean that their action is not ripe. The Seippels allege that they have been damaged, and continue to be damaged, as a result of the defendants' conduct."

She continued:

"Their damages include the fees paid to defendants, losses incurred in the transactions, expenses paid to accountants and attorneys that are assisting the Seippels in defending the audits, losses caused as a result of being forced to sell assets at distressed prices to meet tax obligations, and tax penalties already assessed and paid."

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