Affco Investments 2001, LLC v. Proskauer Rose, L.L.P.
2010 U.S. App. LEXIS 22105
| 5th Cir. | 2010Background
- Plaintiffs invested in a tax-avoidance scheme using LLCs, where profits were claimed as tax losses through offsetting digital options.
- KPMG allegedly solicited Plaintiffs and promised independent opinions from major national law firms to validate the scheme.
- Proskauer Rose allegedly helped prepare model opinions and advised that the scheme would likely pass IRS scrutiny if opinions were correct.
- After IRS notices and back taxes, Plaintiffs reported losses but did not disclose participation; IRS subsequently pursued back taxes, interest, and penalties.
- District court held investors’ LLC interests were securities (investment contracts) and dismissed the RICO claim under PSLRA, and dismissed the 10(b) claim for lack of reliance and scienter; state-law claims were declined.
- On appeal, court affirmed dismissal, holding the 10(b) claim failed due to lack of explicit attribution and reliance on Proskauer.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LLC interests are securities under Howey | Plaintiffs argue LLC interests were securities via investment contracts. | Defendant contends LLC interests were not securities because profits depended on promoters' efforts. | LLC interests are securities under Howey; PSLRA bar applies. |
| Whether PSLRA bars RICO claim based on securities fraud | Plaintiffs contend RICO predicated on securities fraud remains actionable. | Defendant asserts PSLRA bars civil RICO based on securities fraud. | PSLRA bar applies; RICO claim affirmed as barred. |
| Whether plaintiffs adequately pleaded reliance for §10(b) claim against Proskauer | Plaintiffs relied on broad independent opinions from major firms including Proskauer. | Defendant argues no explicit attribution to Proskauer during investment decision, thus no reliance. | Explicit attribution required; failure to attribute Proskauer undermines reliance. |
| Whether secondary-actor scheme liability is available in private §10(b) action | Plaintiffs argue Proskauer aided and abetted by creating misleading opinions. | Defendant contends private liability requires attribution to the speaker at time of dissemination. | Stoneridge/Pacific standard requires attribution; not satisfied here. |
Key Cases Cited
- SEC v. Howey Co., 328 U.S. 293 (1946) (investment contract test for 'security')
- SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.1974) (Howey third prong; substance over form)
- Williamson v. Tucker, 645 F.2d 404 (5th Cir.1981) (economic reality governs; mere formal power not decisive)
- Long v. Shultz Cattle Co., 881 F.2d 129 (5th Cir.1989) (investor profits depend on others' efforts; passive investors)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) (aiding-and-abetting liability under §10(b) is limited; reliance required)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) (rejects scheme liability; required reliance on defendant's deceptive acts)
- Pacific Investment Management Co. v. Mayer Brown LLP, 603 F.3d 144 (2d Cir.2010) (necessity of attribution to show reliance for private §10(b) claims)
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey test elements; investment contract standard)