Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_04-cv-05357/USCOURTS-cand-5_04-cv-05357-1/pdf.json

Nature of Suit Code: 470
Nature of Suit: Civil (Rico)
Cause of Action: 18:1962 Racketeering (RICO) Act

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

Reese M. Jones,

Plaintiff,

 v.

Deutsche Bank AG, et al.,

Defendants.

 /

NO. C 04-05357 JW 

ORDER GRANTING IN PART 

AND DENYING IN PART

DEFENDANTS' MOTIONS TO

DISMISS 

I. INTRODUCTION

Plaintiff, Reese M. Jones ("Plaintiff" or "Jones"), brings this action against Defendants

Deutsche Bank AG and Deutsche Bank Securities, Inc. (collectively "Deutsche Bank"), Chenery

Associates; Chenery Associates, Inc.; Chenery Management, Inc.; Chenery Services, Inc. & Chenery

Capital, Inc. (collectively "Chenery"), and numerous other individuals and corporations for violation

of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, or in the

alternative, for violation of the 1934 Securities and Exchange Act, Rule 10(b)(5). The case centers on

a tax shelter, the "CARDS Facility," that has become an unallowable tax transaction. 

Defendants Deutsche Bank and Chenery have filed separate motions to dismiss. A hearing on

Defendants' motions to dismiss was set for June 27, 2005. However, this Court finds it appropriate to

take the motions under submission without oral argument pursuant to Civil Local Rule 7-1(b). Based

on the arguments advanced by counsel in their papers, Defendants' Motions to Dismiss are DENIED

with regard to the RICO claim, and GRANTED with regard to the PSLRA securities fraud claim. The

Court grants Plaintiff leave to amend the PSLRA securities fraud claim. 

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II. BACKGROUND

Plaintiff brings this action against Defendants alleging a violation of RICO, 18 U.S.C. § 1962,

or in the alternative, a violation of the 1934 Securities and Exchange Act, Rule 10(b)(5) on securities

fraud. Jones claims that Defendants "entered into an arrangement to market and promote" fraudulent

tax strategies to high net worth individuals such as Jones, one of which was entitled the "CARDS

Facility." (First Amended Complaint, hereinafter "FAC," ¶ 24.) Jones paid for tax and investment

services from a company formerly known as myCFO (now Stars Holding Company), which he alleges

instructed him to participate in the CARDS Facility. (Id. at ¶ 29.) Jones alleges that Chenery created,

promoted, and facilitated the CARDS Facility. (Id. at ¶¶ 33-34.) The tax plan as alleged in Plaintiff's

complaint was as follows: A limited liability company ("LLC") would be organized in Delaware. 

Deutsche Bank would make available a loan, denominated in foreign currency, to the LLC, determined

by the amount of loss needed by the taxpayer. The taxpayer, here Jones, would purchase 15-20% of

the loan proceeds from the LLC. The taxpayer would then assume joint and several liability to the

bank for the loan's entire principal and accrued interest. All of the loan's proceeds would remain as

security at the bank, leaving the taxpayer with minimal risk. The taxpayer would then sell his portion

of the loan proceeds at cost, creating the appearance of a taxable transaction. The taxpayer could then

claim the entire loan principal as a tax basis loss, offsetting capital gains. In addition, the loan would

represent a revolving line of credit. (Id. at ¶ 31.)

Plaintiff alleges that the CARDS Facility was, in fact, a "complete sham." (Id. at ¶ 57.)

Plaintiff alleges that the law firms of LeBouef, Lamb, Greene, & MacRae, LLP ("LeBouef") and

Sidley Austin Brown & Wood LLP ("Sidley"), solely motivated by generating large fees, provided

"boilerplate letters" promoting the CARDS Facility. (Id. at ¶¶ 35-38.) Jones alleges that he relied on

these letters to enter into at least three CARDS Facility transactions on December 20, 2000, March

2001 and November 2002. (Id. at ¶ 39.) Prior to and during the time of these promotions, between

December 1999 and March 2002, the Internal Revenue Service issued notices warning that such tax

transactions generating "artificial losses" would not be allowable for federal income tax purposes. 

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(Id. at ¶¶ 47-51.) Jones filed for amnesty on April 16, 2002, and has paid over $2.4 million in taxes

and interest, for tax returns from 2000, 2001 and 2002. (Id. at ¶ 53.)

Jones's RICO claim alleges that all Defendants were arranged in "an on-going organization,

with an ascertainable structure." (Id. at ¶ 61.) Jones claims Defendants formed an "enterprise" for the

purpose of promoting and selling various tax schemes, knowing that the tax schemes would likely be

contrary to law. Jones alleges that Defendants engaged in two acts of mail fraud, wire fraud and

monetary transactions in property derived from specified unlawful activity. (Id. at ¶ 63.) Jones

claims that Defendants continue to engage in such "racketeering activity designed to promote illegal

tax shelters." (Id. at ¶ 67.) Finally, Jones claims proximate cause and damages from the alleged

injury in the vicinity of $25 million, to be trebled and awarded against Defendants, including Deutsche

Bank and Chenery, jointly and severally. 

Plaintiff's second claim, securities fraud under Rule 10(b)(5), is argued in the alternative. If

the CARDS Facility involved a sale of securities, Plaintiff's RICO claim would be barred by the

PSLRA. Nonetheless, Plaintiff relies on the facts above to claim that: Defendants knowingly

misrepresented the CARDS Facility motivated by the possibility of large fees; Plaintiff relied on these

material misrepresentations; and that as a proximate cause of those misrepresentations, Plaintiff was

injured in the vicinity of $25 million. (Id. at ¶¶ 75-76.) 

Plaintiff filed his suit on December 17, 2004, and a first amended complaint (at issue here) on

March 17, 2005. Defendants' Deutsche Bank and Chenery bring motions to dismiss under FED. R. CIV.

P. 12(b)(6). Deutsche Bank claims that the CARDS Facility involved the sale of securities, which, if

true, would bar Plaintiff's RICO claim. (Deutsche Bank Mot. to Dismiss at 3.) Both Defendants also

argue that Jones's RICO claim is insufficient on the merits. Finally, both Defendants argue that Jones's

securities fraud claim: 1) does not meet the heightened pleading standard for securities fraud under

FED. R. CIV. P. 9(b); 2) is time-barred by the applicable statute of limitations; and 3) fails to allege the

necessary elements for a securities fraud claim.

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III. STANDARDS

In ruling upon a motion to dismiss, this Court must accept all well plead allegations of material

fact as true and must construe said allegations in the light most favorable to the non-moving party. 

Western Reserve Oil & Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir. 1985). Any existing

ambiguities must be resolved in favor of the pleading. Walling v. Beverly Enterprises, 476 F.2d 393,

396 (9th Cir. 1973). A Rule 12(b)(6) motion to dismiss must not be granted "unless it appears beyond

doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to

relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). 

There is a heightened pleading standard for fraud pursuant to FED. R. CIV. P. 9(b). A pleading

is sufficient if it "identifies the circumstances constituting fraud so that a defendant can prepare an

adequate answer from the allegations. Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540

(9th Cir. 1989). The particularity requirements of Rule 9(b) apply to RICO claims. Id. at 541. In

addition, the Private Securities Litigation Reform Act ("PSLRA") demands a heightened pleading

standard for actionable securities fraud claims. 17 C.F.R. § 240.10b-5. 

IV. DISCUSSION

Defendants Deutsche Bank and Chenery move to dismiss Plaintiff's amended complaint for

failure to state a claim. The Court must strictly adhere to the statute’s language, "the conduct of an

enterprise through a pattern of racketeering activity," when analyzing Plaintiff’s RICO claim. 18

U.S.C. § 1962(c); see Sun Sav. & Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir. 2001). 

Plaintiff's RICO conspiracy claim must allege that Defendants "conspire[d] to violate any of the

provisions of subsection (a), (b), or (c) of [section 1962]." 18 U.S.C. § 1962(d). Plaintiff's second

claim, securities fraud, must meet the heightened PSLRA standard in pleading a misrepresentation or

omission of material fact made with scienter on which a plaintiff justifiably relied that proximately

caused the alleged loss. 17 C.F.R. § 240.10b-5; see Binder v. Gillespie, 184 F.3d 1059, 1063 (9th

Cir. 1999). Plaintiff satisfies the requisite pleading standard for his RICO claim. However,

Plaintiff's securities fraud claim is insufficient under the PSLRA's heightened pleading standard. 

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A. Jones Has Sufficiently Plead A RICO Claim Against Both Defendants

1. The Court Declines To Decide Whether The CARDS Facility Is A Security

As a preliminary matter, Defendant Deutsche Bank argues that the PSLRA bars Jones's RICO

claim because the CARDS Facility involves the purchase or sale of securities. (Deutsche Bank Mot.

to Dismiss at 3.) The PSLRA, as Jones recognizes, prevents a plaintiff from asserting "any conduct

that would have been actionable as fraud in the purchase or sale of securities to establish a violation

of section 1962." See 18 U.S.C. § 1964(c). 

Relying solely on the face of the complaint in this 12(b)(6) motion, Plaintiff does mention the

use of "promissory notes" by Deutsche Bank. (FAC ¶ 32.) Deutsche Bank claims that "notes are

securities." See 15 U.S.C. § 78c(a)(10) (defining a "security" as, among other things, "any note"). 

The problem with Deutsche Bank's argument is that Plaintiff's complaint explicitly rejects the notion

that the CARDS Facility involved a sale of securities. (FAC ¶ 74.) Taking the well plead facts of the

complaint as true, the Court must accept Plaintiff's claim, at this stage of the litigation, that the CARDS

Facility did not involve the sale of securities. See Reves v. Ernst & Young, 496 U.S. 56, 63 (1990)

(interpreting the phrase "any note" in 15 U.S.C. § 78c as not literally meaning "any note," but

depending on Congress's goal in enacting the Securities Acts). Moreover, the complex nature of the

tax shelter transaction and the limited facts before the Court make the issue more appropriately

addressed in a summary judgment motion.

2. Jones's First Claim Sufficiently Pleads The Requisite Elements Under § 1962(c)

Plaintiff has plead facts sufficient to satisfy Rule 9(b) for the first element of a § 1962(c) RICO

claim, "conduct." RICO requires that the defendant, directly or indirectly, conduct or participate in

acts by an enterprise through a pattern of racketeering activity. Sun Savings, 825 F.2d at 194. 

However, RICO only requires a "nexus" between the enterprise and the racketeering activity. Id.

Jones alleges that Deutsche Bank helped develop the CARDS Facility, identified potential purchasers,

acted as a lender for a line of credit, and knowingly concealed the illegality of the scheme to Jones. 

(FAC ¶¶ 24, 32, 40, 50.) Jones further names six Deutsche Bank personnel, and describes in detail

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Deutsche Bank's role in the transaction he calls a "sham." (Id. at ¶ 32.) Plaintiff also alleges that

Chenery created and promoted the CARDS Facility and provided "kickback fees" to an attorney that

helped provide letters claiming the transaction's legitimacy. (Id. at ¶ 37.) Both Defendants are

alleged to have "some part in directing" the enterprise's affairs: Chenery, as creator and promoter of

the transaction, and Deutsche Bank as promoter, lender and concealer of the transaction's illegality. 

Thus, the "conduct" element is clearly met for both Defendants. See Reves v. Ernst & Young, 507

U.S. 170, 179 (1993) (requiring a defendant to have some part in directing the enterprise's affairs). 

Plaintiff's allegations regarding the second element, "an enterprise," are also sufficient to

withstand this 12(b)(6) motion. An enterprise is "... any union or group of individuals associated in

fact although not a legal entity." 18 U.S.C. § 1961(4). An enterprise must have "an on-going

organization, formal or informal" and must exhibit "some sort of structure for the making of decisions,

whether it be hierarchical or consensual." United States v. Turkette, 452 U.S. 576, 583 (1981); see

also Chang v. Chen, 80 F.3d 1293, 1299 (9th Cir. 1996). Jones alleges that Defendants, including

Deutsche Bank and Chenery, formed in 1999, functioned as a continuing unit, engaged in activities

affecting interstate commerce, met to plan ways to sell the tax strategies to make large fees, and still

pose a threat because of continued engagement in such activities. (FAC ¶¶ 20, 62-70.) In addition, the

Defendants alleged to be a part of the enterprise, Deutsche Bank and Chenery, each had legal existence

of their own, separate from the racketeering activity. This is enough to satisfy the enterprise element's

requirement of a separate structure for this 12(b)(6) motion. See United States v. Feldman, 853 F.2d

648, 660 (9th Cir. 1988); see also Chang, 80 F.3d at 1301. 

Jones's allegations regarding elements three and four, a "pattern" of "racketeering activity," are

less detailed, but are still sufficient to overcome Defendants' motions to dismiss. These elements

require a "pattern of at least two racketeering acts," and that the complaint allege that the "racketeering

predicates are related, and that they amount to a or pose a threat of continued criminal activity." H.J.

Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239 (1989). Plaintiff alleges that his particular

CARDS Facility transactions involved two acts of mail fraud, wire fraud and monetary transactions in

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property derived from specified unlawful activity." (FAC ¶ 63.) The mail and wire fraud allegations

are plead with highly specific detail, satisfying the fraud pleading standard under FED. R. CIV. P. 9(b). 

The "predicate acts" seem to be part of the single "scheme" at issue in this case, and may amount to a

"pattern" on their own. See Sun Savings, 825 F.2d at 193 (agreeing that it is not necessary to show

more than one fraudulent scheme or criminal episode to establish a pattern). The FAC goes further,

alleging that Defendants sold multiple fraudulent CARDS Facility transactions to Plaintiff, and sold

other questionable tax shelter transactions beginning in 1999 and continuing past 2002. (FAC ¶¶ 64-

67.) These multiple transactions certainly constitute a "pattern" for the RICO claim, as they are both

"related" in purpose and "continuous" in that Plaintiff alleges Defendants continue to engage in such

racketeering activity. Finally, Plaintiff alleges a direct causal link between his injury and the alleged

violation since his claimed damages result primarily from the CARDS Facility being found an illegal

tax shelter by the IRS. (FAC ¶ 70.) 

 In sum, Plaintiff has sufficiently plead the time, place and specific conduct of

misrepresentation necessary for a § 1962(c) claim against both Defendants Deutsche Bank and

Chenery. See Moore, 885 F.2d at 541 (Rule 9(b) requires the RICO claim to state the time, place and

specific conduct of the false representations as well as the identities of the parties to the

misrepresentation). Moreover, because the Court finds that Plaintiff has sufficiently plead the

predicate acts and pattern of activity for a § 1962(c) RICO claim, Plaintiff's § 1962(d) RICO claim

(conspiracy) is also satisfied. Jones has sufficiently alleged that Defendants "agreed to commit, or

participated in, a violation of the two predicate offenses." See Howard v. America Online, Inc., 208

F.3d 741, 751 (9th Cir. 2000) (footnotes omitted); see also United States v. Fernandez, 388 F.3d

1199, 1230 (9th Cir. 2004) ("A defendant may be held liable for conspiracy to violate 1962(c) by

knowingly agreeing to facilitate a scheme which includes the operation or management of a RICO

enterprise."). 

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B. Jones Has Failed To Meet The Heightened Pleading Standard For Securities Fraud

The Court, at this stage of the litigation, declines to rule on Deutsche Bank's argument that the

Cards Facility involves a security, which would make the PSLRA preclude Plaintiff's RICO claim. 

However, assuming the action involves a security, Plaintiff's complaint fails to meet the pleading

requirements under the PSLRA. Securities fraud pleadings under the PSLRA must specify: 

...each statement alleged to have been misleading, the reason or reasons 

why the statement is misleading, and, if an allegation regarding the 

statement or omission is made on information and belief, the complaint

shall state with particularity all facts on which that belief is formed.

(2) ... the complaint shall ... state with particularity facts giving rise to a 

strong inference that the defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b)(1), (2). The Ninth Circuit has interpreted the PSLRA to require a private

plaintiff "to plead particular facts giving rise to a strong inference of deliberate recklessness," in

which the averred facts must strongly suggest actual intent to commit fraud. In Re Silicon Graphics

Inc. Securities Litigation, 183 F.3d 970, 977-979 (9th Cir. 1999). Pleading "motive and opportunity"

or mere recklessness, without more, is insufficient. Id. at 979. 

Jones's complaint fails to meet this heightened pleading standard for securities fraud. Jones

alleges that Deutsche Bank and Chenery were part of a fraudulent tax scheme, motivated by gaining

large fees from each transaction. (FAC ¶ 24.) But this "motive and opportunity" does not rise to the

level of deliberate recklessness on the part of either Defendant. Plaintiff fails to allege any misleading

statements specifically made by either Deutsche Bank or Chenery to Plaintiff, let alone a statement that

strongly suggests deliberate recklessness. The five paragraphs in Jones's securities fraud claim lump

all Defendants together and merely lay out the elements of a securities fraud claim without much, if

any, factual support. (FAC ¶¶ 73-77.) 

Jones does make some specific allegations, on information and belief, against both Defendants

Deutsche Bank and Chenery. Jones alleges that Deutsche Bank acted as "third party purchaser" to

create the appearance of a taxable transaction, created fictitious loans, knew that the "opinion letters"

by the law firms were not disinterested, and provided a "facade of financial substance" to obscure a

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transaction it knew was a sham. (FAC ¶¶ 31, 35-37, 57.) These allegations, though specific to

Deutsche Bank, do not provide sufficiently detailed facts to "constitute strong circumstantial evidence

of deliberately reckless or conscious misconduct." See Silicon Graphics, 183 F.3d at 970. Deutsche

Bank, possibly, should have known that the CARDS Facility was of questionable legality; but the

"deliberately reckless" standard requires more facts and greater detail. Jones's pleading is insufficient

to show that Deutsche Bank knew of the CARDS Facility's illegality at the time of the transaction, and

consciously disregarded that knowledge for the sake of large fees.

Jones's pleading also fails to meet the scienter requirement with respect to Chenery. Jones

alleges that Chenery created and promoted the transaction, charged a flat fee based on the size of the

transaction, funneled kickback fees to the personal trust of a lawyer who provided "boilerplate

letters," and continued to promote the CARDS Facility even after being advised that it had no

"economic substance." (FAC ¶¶ 32, 34, 37, 49-50.) While Jones's complaint makes Chenery's

conduct appear questionable, the underlying facts in the allegations do not sufficiently suggest a

deliberately reckless state of mind on the part of Chenery. Even if the transaction was thought to have

no "economic substance," Chenery could still have thought it to be a good enough deal to make. 

Jones's allegations do not seem to add up to recklessness, let alone the deliberately reckless state of

mind required under the PSLRA in the Ninth Circuit. See Silicon Graphics, 183 F.3d at 970. 

Defendants argue, in addition, that Plaintiff's PSLRA claim would be barred by the applicable

statute of limitations. See 15 U.S.C. § 78i(e); 28 U.S.C. § 1658(b) (defining statute of limitations as

the earlier of two years after the discovery of the facts constituting the violation or five years after

such violation). The Court declines to address this argument at this stage of the litigation since it is

not clear that Plaintiff can prove no set of facts that would prove the timeliness of the claim. See

Supermail Cargo, Inc. v. United States, 68 F.3d 1204, 1207 (9th Cir. 1995) ("A complaint cannot be

dismissed [based on the running of the statute of limitations period] unless it appears beyond doubt

that the plaintiff can prove no set of facts that would establish the timeliness of the claim."). 

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V. CONCLUSION

For the foregoing reasons, this Court DENIES Deutsche Bank’s and Chenery's Motions to

Dismiss the RICO claim, and GRANTS Defendants Motion to Dismiss the PSLRA claim with leave to

amend. Plaintiff shall file its amended complaint within ten (10) days of the issuance of this Order. 

Dated: July 18, 2005

04cv5357dis

 /s/ James Ware 

JAMES WARE

United States District Judge

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THIS IS TO CERTIFY THAT COPIES OF THIS ORDER HAVE BEEN DELIVERED TO:

Amy Lynn Rice arice@gwwe.com

Arturo Esteban Sandoval asandoval@mwe.com

Christine Chi cchi@dbllp.com

Christopher Kliefoth ckliefoth@mwe.com

David S. McLeod dmcleod@dbllp.com

Jason A. Carey jacarey@mwe.com

Jeffrey R. Witham jwitham@dbllp.com

Jennifer L. Jonak jenny@jonak.com

Jill M. Kastner jkastner@mwe.com

Megan Christine Roth mroth@watsonlawgroup.com

Sarah E. Hancur shancur@mwe.com

Stephen Allen Watson swatson@watsonlawgroup.com

William M. Lukens wlukens@lukenslaw.com

Dated: July 19, 2005 Richard W. Wieking, Clerk

By:/jwchambers/ 

Ronald L. Davis

Courtroom Deputy

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