Steven Menzies v. Seyfarth Shaw LLP, 18-3232

Background

In 2002–2006 Steven Menzies followed a tax‑shelter plan (the “Euram Oak Strategy”) marketed by Northern Trust, Christiana Bank, attorney Graham Taylor and Seyfarth Shaw; he sold AUI stock to Berkshire Hathaway in 2006 for >$64 million and did not report capital gains.
The IRS audited, found the strategy abusive, and Menzies settled in 2013, paying over $10 million in back taxes, penalties, and interest.
Menzies sued in 2015 (RICO and multiple Illinois common‑law claims) against Taylor, Seyfarth Shaw, Northern Trust, and Christiana; the district court dismissed, allowed amendments and a year of discovery, then dismissed the second amended complaint for failure to state RICO and state claims.
On appeal the court first held the PSLRA amendment to RICO (§1964(c)) did not bar Menzies’s RICO claim because his alleged fraud targeted tax treatment rather than the securities transaction itself.
The court affirmed dismissal of the RICO claim: Menzies pleaded detailed fraud against himself and his partner Ferenc, but failed Rule 9(b) particularity for two other investors and did not plausibly allege closed‑ or open‑ended continuity (threat of ongoing racketeering).
For state claims the court held the Illinois securities statute of repose did not bar Menzies’s claims, but Illinois’s attorney malpractice statute (2‑year limitations / 6‑year repose) bars claims against Taylor and Seyfarth; claims against Northern Trust and Christiana survive and are remanded.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether PSLRA’s amendment to RICO (bar for fraud "in the purchase or sale of securities") prevents this RICO claim	Menzies: alleged scheme was tax‑shelter fraud, not securities fraud tied to the stock sale	Defendants: tax shelter was devised to avoid tax on the sale, so fraud was "in connection with" sale and barred	PSLRA bar does not apply; alleged fraud focused on tax consequences and would not be actionable under §10(b)/Rule 10b‑5
Whether RICO’s “pattern” element (continuity + relationship) is adequately pleaded	Menzies: defendants marketed the same/similar shelter to multiple investors and operated a repeatable product, showing continuity	Defendants: allegations lack particularity as to other victims and show no threat of continued activity (Taylor’s indictment/conviction, winding down)	Dismissed for failure to plead pattern; only Menzies and Ferenc adequately alleged predicate acts, but not the qualitative continuity required
Whether mail/wire fraud predicates satisfy Rule 9(b) particularity for other alleged victims	Menzies: alleged communications, opinion letters, and on‑information‑and‑belief facts show similar marketing to Arizona and North Carolina investors	Defendants: complaint is conclusory re: other investors, lacks who/what/when/where/how	Allegations about Arizona and NC investors fail Rule 9(b); only Ferenc pleaded with sufficient particularity
Whether Illinois law time bars state claims (Illinois Securities Law repose; attorney‑malpractice statute)	Menzies: his claims are common‑law fraud and not securities claims for repose purposes; also sued within discoverable periods	Defendants: claims fall within scope of securities statute or are time‑barred under attorney statute	Illinois securities repose did not bar the claims; but claims against Taylor and Seyfarth are barred by Illinois 2‑year limitations / 6‑year repose for attorney professional services; claims vs Northern Trust and Christiana survive and are remanded

Key Cases Cited

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (defining RICO civil elements)
H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229 (announcing continuity‑plus‑relationship test for RICO pattern)
SEC v. Zandford, 535 U.S. 813 (flexible "in connection with" test for securities fraud under §10(b)/Rule 10b‑5)
Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (each mailing/wire in furtherance of scheme can be a predicate act)
Koen v. United States, 982 F.2d 1101 (7th Cir.) (mail fraud requires scheme and use of mail; success not required)
Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771 (7th Cir.) (factors for closed‑ended continuity and relation of predicate acts)
Emery v. American Gen. Fin., Inc., 134 F.3d 1321 (7th Cir.) (Rule 9(b) requires particularity about communications to other victims when pleading pattern)
Roger Whitmore’s Auto Servs., Inc. v. Lake County, Ill., 424 F.3d 659 (7th Cir.) (distinguishing closed‑ vs open‑ended continuity)
DeGuelle v. Camilli, 664 F.3d 192 (7th Cir.) (application of continuity‑plus‑relationship test)
Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 568 U.S. 455 (discussing PSLRA’s role and securities‑fraud pleading reforms)