Seyfarth Shaw, Financial Firms Beat RICO Claims Over Tax Shelter

An insurance executive who failed to report capital gains on the sale of $65 million of his company’s stock can’t proceed with federal racketeering claims against Seyfarth Shaw LLP and two financial services firms that allegedly advised him on the creation of a failed tax shelter, the Seventh Circuit ruled.

Steven Menzies didn’t show a pattern of racketeering that would allow his claims to proceed under the Racketeer Influenced and Corrupt Organizations Act, the U.S. Court of Appeals for the Seventh Circuit said Nov. 12.

The RICO claims fail because Menzies didn’t plead the particulars of how the defendants marketed the same, or a similar, tax shelter to others, or show that the alleged racketeering activity would continue, the court said.

Menzies may proceed with state law fraud claims against the financial services firms Northern Trust Corp., and Wilmington Savings Fund Society, FSB, as successor-in-interest to Christiana Bank & Trust Co., the court said.

But common law claims against the specific lawyer involved, and the law firm, are barred by the statute of limitations, the court said.

Menzies is the co-founder and president of an insurance company called Applied Underwriters, Inc.

In 2002, advisers from Northern Trust Corp. allegedly pitched Menzies on a tax planning strategy to shield from federal tax liability capital gains on major stock sales.

Operating on that advice, Menzies alleges, he conducted a series of transactions using trusts that created an artificial tax loss used to offset the capital gains he realized when he sold his Applied Underwriters stock.

Christiana Bank & Trust Co. served as trustee for some of Menzies’s trusts while tax attorney Graham Taylor and his law firm, Seyfarth Shaw, provided legal advice.

Following a three-year audit, the IRS found that the primary purpose of the strategy was tax evasion.

Menzies, in October 2013, agreed to settle with the IRS, paying more than $10 million in back taxes, penalties and interest.

In a dissenting opinion, Judge David F. Hamilton said Menzies’s allegations of a pattern of racketeering were sufficient to proceed with RICO claims.

Menzies alleged in detail how the defendants created an off-the-shelf, tax-shelter scam that was “easily replicable for other, similarly situated taxpayers facing substantial tax bills on large capital gains,” Hamilton said.

The defendants also marketed the scam to others, and were positioned to keep the fraud going unless and until they were stopped, he said.

Judge Michael Y. Scudder Jr. wrote the majority opinion, joined by Judge Amy J. St. Eve.

Harris Winick Harris LLP represents Menzies.

Perkins Coie LLP represents Seyfarth Shaw LLP, and Northern Trust Corp.

Shook, Hardy & Bacon LLP represents Wilmington Savings Fund Society, FSB, as successor-in-interest to Christiana Bank & Trust Co.

The case is Menzies v. Seyfarth Shaw LLP, 2019 BL 433948, 7th Cir., No. 18-3232, 11/12/19.