1

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

PETER & DEBORAH AMATO, ET AL., : No. 06cv39

:

Plaintiffs : Judge Jones

:

v :

:

KPMG LLP, ET AL., :

:

Defendants :

MEMORANDUM AND ORDER

June 13, 2006

THE BACKGROUND OF THIS ORDER IS AS FOLLOWS:

We have a plethora of motions before us which will be addressed in this

Memorandum and Order. First, we have three Motions to Compel Arbitration and

Stay All Proceedings, or Alternatively, for Additional Time to Respond to

Complaint (docs. 7, 8, 10) filed by Defendants KPMG LLP (“KPMG”), Presidio

Advisors LLC and Presidio Growth LLC (collectively, “Presidio”), and Deutsche

Bank AG (“Deutsche Bank”) and Deutsche Bank Securities, Inc. (“DBSI”)

(collectively “Deutsche Bank Defendants”) on January 13, 2006. Second, pending

before the Court is a Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) (doc. 9)

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 It has been indicated to the Court that as of January 1, 2006, the name of the firm

changed from Sidley Austin Brown & Wood LLP to Sidley Austin LLP. (Rec. Doc. 9 at 3 n.1). 

We will refer to Sidley Austin LLP as Sidley Austin in this narrative.

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 Plaintiffs in this action are Peter and Deborah Amato, Joseph and Donna Amato,

Leonard and Lana Ross, and James Chebalo, individually, and as Executor of the Estate of

Rosalie Chebalo (collectively “Plaintiffs”). 

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filed by Defendant Sidley Austin Brown & Wood LLP1 (“Sidley Austin”) on

January 13, 2006. Finally, we have before us a Motion to Remand for Lack of

Subject Matter Jurisdiction (doc. 23) filed by Plaintiffs on February 6, 2006. 

For the reasons that follow, we will deny Plaintiffs’ Motion to Remand,

grant in part and deny in part Sidley Austin’s Motion to Dismiss, order Plaintiff

Mr. Chebalo to submit to arbitration his claims against the Deutsche Bank

Defendants, and stay all further proceedings in this case against all Defendants

pending the completion of the arbitration process between Plaintiff Mr. Chebalo

and the Deutsche Bank Defendants in accordance with the arbitration clause

contained in the Customer Agreement. In addition, the Court will set a telephonic

status conference for December 4, 2006, which will be initiated by Plaintiffs’

counsel, advising the Court on the progress of the arbitration procedure. 

FACTUAL BACKGROUND AND PROCEDURAL HISTORY:

On or about October 28, 2005, Plaintiffs2

 filed a complaint against

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 Defendants in this action are KPMG LLP, Sidley Austin Brown & Wood LLP, Presidio

Advisors LLC, Presidio Growth LLC, Deutsche Bank AG and Deutsche Bank Securities, Inc.

(collectively “Defendants”). 

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Defendants3 in the Court of Common Pleas of Luzerne County, Pennsylvania

alleging various misconduct relating to Plaintiffs’ participation in an investment

strategy known as Offshore Portfolio Investment Strategy (“OPIS”). By

stipulation of the parties, the time for Defendants to respond to Plaintiffs’

complaint was extended to January 6, 2006. On January 6, 2006, the Deutsche

Bank Defendants, with the consent of all Defendants, removed the action to this

Court. 

Plaintiffs’ complaint alleges that in 1998 they realized a significant capital

gain from the sale of certain companies, including Keystone Automotive

Warehouse. (Compl. ¶¶ 22-25). Plaintiffs are individuals who hoped to avoid tax

liability by investing in a tax-advantaged investment strategy, OPIS, that was

allegedly marketed to them by KPMG. Id. ¶¶ 25, 47, 48. Plaintiffs allege that they

participated in the OPIS strategy after meeting with a representative of KPMG,

who advised them that they could recognize significant tax benefits through their

participation in OPIS. Id. ¶ 25. Subsequently, Plaintiffs claimed substantial tax

losses on their tax returns. Id. ¶ 13. Plaintiff allege that the IRS and the

Commonwealth of Pennsylvania later challenged such losses. Id. ¶¶ 32, 99-101. 

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The crux of the allegations in the complaint is that the Deutsche Bank

Defendants engaged in a scheme to induce wealthy and sophisticated persons, like

Plaintiffs, to pursue the OPIS strategy when they knew or should have known that

OPIS was an abusive tax shelter that would be disallowed by the IRS. Id. ¶ 85. As

a result, Plaintiffs now claim that they were misled about the propriety and nature

of the OPIS strategy and seek damages from not only KPMG, Sidley Austin, and

Presidio, but also against the Deutsche Bank Defendants, which provided credit

and account services to Plaintiffs. Id. ¶¶ 85, 105-225.

Plaintiffs allege that “KPMG expressly represented to present plaintiffs that

KPMG and the [Sidley Austin] law firm would independently provide opinion

letters.” Id. ¶¶ 61, 108. As a result, Plaintiffs “reasonably relied to their

significant detriment on the independence of Brown & Wood in connection with

entering into the OPIS transaction and in engaging Brown & Wood.” Id. ¶ 61.

Moreover, Plaintiffs allege in the complaint that Sidley Austin wrongfully issued

alleged “independent” opinion letters to Plaintiffs that concluded it was “more

likely than not” that the tax deductions generated by OPIS would be upheld if

challenged by the IRS. Id. ¶ 67. Plaintiffs allege that Sidley Austin knew or

should have known that OPIS was not “more likely than not” to be upheld by the

IRS, since it based this opinion on facts that it knew or should have known were

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not correct and in any event, since the transaction had no economic substance other

than to reduce taxable income. Id. ¶¶ 67, 153. Plaintiffs assert that KPMG, acting

as Sidley Austin’s agent in this alleged fraudulent marketing endeavor, represented

to Plaintiffs that the promised tax opinion of Sidley Austin was “independent.” Id.

¶ 154. The Senate Subcommittee found the evidence suggested that Sidley Austin

and KPMG were “close collaborators, rather than independent actors.” Id. ¶ 60. 

Plaintiffs additionally allege that the Senate Subcommittee questioned

Sidley Austin’s compliance with American Bar Association Model Rule 1.5, which

prohibits charging of unreasonable fees. Id. ¶ 65. Sidley Austin was paid at least

$50,000 for each allegedly “independent” opinion letter and Plaintiffs allege that

the letters were in fact canned creations. Id. ¶¶ 64, 69. Plaintiffs assert that Chief

Judge Thomas F. Hogan of the United States District Court for the District of

Columbia has already stated that Sidley Austin’s tax shelter opinion letters have

“little indication” that they are “independent opinion letters that reflect any sort of

legal analysis, reasoned or otherwise. In fact, when examined as a group, the

letters appear to be nothing more than an orchestrated extension of KPMG’s

marketing machine.” Id. ¶ 69 (quoting United States v. KPMG LLP, 316 F. Supp.

2d 30, 40 (D.D.C. 2004)). 

Plaintiffs’ complaint alleges the following twenty causes of action: (1)

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misrepresentation/fraud against KPMG; (2) negligent misrepresentation against

KPMG; (3) breach of fiduciary duty against KPMG; (4) professional malpractice

against KPMG; (5) consumer fraud against KPMG; (6) aiding and abetting fraud,

aiding and abetting breaches of fiduciary duty against KPMG; (7) civil conspiracy

against all Defendants; (8) misrepresentation/fraud against Sidley Austin; (9)

negligent misrepresentation against Sidley Austin; (10) breach of fiduciary duty

against Sidley Austin; (11) professional malpractice against Sidley Austin; (12)

consumer fraud against Sidley Austin; (13) aiding and abetting fraud, aiding and

abetting breaches of fiduciary duty; (14) misrepresentation against Deutsche Bank;

(15) negligent misrepresentation against Deutsche Bank; (16) aiding and abetting

fraud, aiding and abetting breaches of fiduciary duty against Deutsche Bank; (17)

misrepresentation/fraud against Presidio; (18) negligent misrepresentation against

Presidio; (19) consumer fraud against Presidio; and (20) aiding and abetting fraud,

aiding and abetting breaches of fiduciary duties against Presidio. Plaintiffs also

seek punitive damages against all Defendants. 

The Motions pending before the Court have been fully briefed and the Court

heard oral argument on such Motions on May 24, 2006.

DISCUSSION:

A. Sidley Austin’s Motion to Dismiss

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Defendant Sidley Austin filed a Motion to Dismiss this action pursuant to

Federal Rule of Civil Procedure (“Fed.R.Civ.P.”) 12(b)(6), or, in the alternative,

pursuant to Fed.R.Civ.P. 9(b). Before elaborating upon Sidley Austin’s Motion,

we will provide the applicable standard of review for a motion to dismiss. In

considering a motion to dismiss, a court must accept the veracity of a plaintiff's

allegations. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); see also White v.

Napoleon, 897 F.2d 103, 106 (3d Cir. 1990). In Nami v. Fauver, 82 F.3d 63, 65

(3d Cir. 1996), our Court of Appeals for the Third Circuit added that in considering

a motion to dismiss based on a failure to state a claim argument, a court should

"not inquire whether the plaintiffs will ultimately prevail, only whether they are

entitled to offer evidence to support their claims." Furthermore, "a complaint

should not be dismissed for failure to state a claim 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); see also

District Council 47 v. Bradley, 795 F.2d7 310 (3d Cir. 1986). 

We initially note that in considering Defendant Sidley Austin’s Motion, we

must construe the complaint in the light most favorable to Plaintiffs, take the

allegations in the complaint as true, and draw all reasonable inferences that can be

drawn from the pleading in Plaintiffs’ favor. 

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i. Fraud, Negligent Misrepresentation, and Consumer Fraud

Claims

In its Motion, Sidley Austin argues that Plaintiffs’ claims for fraud,

negligent misrepresentation, and consumer fraud against it fail because Plaintiffs

have not and cannot plead reliance or a misrepresentation of past or present

material fact. Sidley Austin asserts that Plaintiffs cannot allege that they relied

upon any communications by Sidley Austin in entering into the transaction because

Plaintiffs themselves submit that they never spoke to anyone from Sidley Austin. 

Moreover, Sidley Austin maintains that Plaintiffs could not reasonably have relied

upon the substance of the promise made by KPMG as an agent of Sidley Austin,

that Sidley Austin, acting independently, would provide them with an opinion

letter. In that regard, Sidley Austin contends that the alleged statements by KPMG

cannot satisfy the elements of justifiable reliance. 

In response, Plaintiffs assert that they have stated viable fraud, negligent

misrepresentation, and consumer fraud claims. Plaintiffs argue that a promise can

be the basis of a fraud claim under Pennsylvania law, “reliance” cannot be decided

on a Fed.R.Civ.P. 12(b)(6) motion, and a determination as to whether Plaintiffs had

personal knowledge of the alleged misrepresented facts is not susceptible to

resolution on a Fed.R.Civ.P. 12(b)(6) motion. 

Sidley Austin accurately submits that Plaintiffs must plead in their fraud,

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negligent misrepresentation, and consumer fraud claims that Sidley Austin made a

misrepresentation of a past or present material fact and that Plaintiffs incurred

damages by justifiably relying on those same misrepresentations. See Krause v.

Great Lakes Holdings, Inc., 563 A.2d 1182, 1187 (Pa. Super. Ct. 1989); GMH

Assocs. v. Prudential Realty Group, 752 A.2d 889, 901 (Pa. Super. Ct. 2000);

Gibbs v. Ernst, 647 A.2d 882, 889 (1994)(justifiable reliance is an element of

fraud); Kramer v. Dunn, 749 A.2d 984, 991 (Pa. Super. Ct. 2000)(justifiable

reliance is an element of negligent misrepresentation); Toy v. Metro. Life Ins. Co.,

863 A.2d 1, 9 (Pa. Super. Ct. 2004)(“The Courts of this Commonwealth have

consistently held that, to establish a private right of action under the UTPCPL, a

plaintiff must demonstrate that he/she detrimentally relied upon the deceptive

practice of the defendant and that the plaintiff suffered harm as a result of this

reliance.”). 

At this early stage of the litigation and taking the allegations in the

complaint as true, as we must at this juncture, we do not agree with Sidley Austin

that Plaintiffs do not, and cannot, allege either that a material misrepresentation of

past or present fact was made, or that they relied upon such a misrepresentation. 

Plaintiffs allege that Sidley Austin, through KPMG, promised Plaintiffs an

independent “more likely than not” opinion letter. Plaintiffs allege that Sidley

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Austin failed to disclose that these opinions were not independent and that Sidley

Austin made the promise to “fraudulently induce[] plaintiffs to enter into the OPIS

transaction.” (Compl. ¶¶ 153-54). In response, Sidley Austin argues that a

promise to do something in the future, which promise is not kept, is not fraud. As

the United States District Court for the Eastern District of Pennsylvania explained

in Leonard A. Feinberg, Inc. v. Central Asia Capital Corp., 974 F. Supp. 822 (E.D.

Pa. 1997), while fraud claims may not rest solely upon misrepresentations of future

promises, “it is equally true that a cause of action for fraud can be predicated on

future promises if the defendant knew at the time he made the promise that he

would not carry it out.” Id. at 843 (citing Killian v. McCulloch, 850 F. Supp. 1239,

1255 (E.D. Pa. 1994)). As such, Plaintiffs’ allegations concerning the fact that

Sidley Austin promised an independent opinion and that Sidley Austin knew the

opinion was not in fact independent are not merely future promises that cannot be

the basis of a fraud claim under Pennsylvania law. 

In addition, Sidley Austin maintains that Plaintiffs cannot establish the

requisite reliance to prove their fraud, negligent misrepresentation, and consumer

fraud claims. In that regard, Sidley Austin argues that Plaintiffs could not

“justifiably have believed both that KPMG was the agent for [Sidley Austin] and

that [Sidley Austin] was independent of KPMG.” (Sidley Austin Br. Supp. Mot.

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 Sidley Austin appears to alternatively contend that the fraud, negligent

misrepresentation, and consumer fraud claims must fail “because many if not all of the

misrepresentations that Plaintiffs allege in the opinion letter were within the personal knowledge

of Plaintiffs.” (Sidley Austin Br. Supp. Mot. Dismiss at 8). We disagree with Sidley Austin’s

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Dismiss at 7). 

We are in agreement with Plaintiffs that allegations concerning the fact that

KPMG was the agent for Sidley Austin with respect to the making of the promise

of the independent opinion letter does not as a matter of logic preclude Sidley

Austin from exercising independent judgment in the provision of that opinion

letter. Moreover, Plaintiffs allege in the complaint that they reasonably relied to

their significant detriment on the independence of Sidley Austin in connection with

entering into the OPIS transaction and in engaging Sidley Austin. “Neither [Sidley

Austin] nor KPMG, both of which owed fiduciary duties to their clients (the

present plaintiffs), disclosed the collaboration, although it was a material fact and

they had a duty to do so. In fact, and to the contrary, KPMG expressly represented

to present plaintiffs that KPMG and the law firm would independently provide

opinion letters. Had plaintiffs known of the undisclosed collaboration between

[Sidley Austin] and KPMG, they would not have entered into the OPIS

transaction.” (Compl. ¶ 61). We find that contrary to Sidley Austin’s arguments,

Plaintiffs’ complaint sufficiently alleges reasonable reliance. See Compl. ¶¶ 153,

160, 178.4

 

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argument that because of the alleged misrepresentations, Plaintiffs had every opportunity to

know whether or not they were true. Moreover, Sidley Austin’s argument that the

misrepresentations that the law firm inserted into its approximately 56 page highly technical and

allegedly expert legal opinion letter were so obvious that “Plaintiffs could not have read some of

the alleged misrepresentations without immediately recognizing their falsity” is not persuasive to

the Court as Sidley Austin was the Plaintiffs’ attorney during the period in question. Id. 

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Taking Plaintiffs allegations in the complaint as true, as we must at this

juncture, Plaintiffs have stated fraud and negligent misrepresentation claims upon

which relief can be granted. Sidley Austin’s Motion is accordingly denied to that

extent. 

We must now consider Sidley Austin’s additional reason for which it argues

Plaintiffs’ consumer fraud claim fails, specifically because Plaintiffs did not enter

into the transaction for personal, family, or household purposes. Sidley Austin

contends that Plaintiffs entered into the transaction to protect funds generated by

the sale of a corporate entity that they owned, and by which they earned their

livelihood. Sidley Austin asserts that Plaintiffs were not acting as consumers, but

instead as investors and that Pennsylvania courts have rejected claims by

individuals under the Unfair Trade Practices and Consumer Protection Law

(“UTPCPL”) where the purchase was not made primarily for personal, family or

household purchases.

In response, Plaintiffs argue that Sidley Austin’s argument rests incorrectly

on the type of product purchased, and not the purpose of the purchase, which

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controls. Plaintiffs distinguish case law relied upon by Sidley Austin and assert

that they purchased the tax shelters to lessen their personal, not business, tax

liabilities. 

We initially note that, as submitted by Plaintiffs, Pennsylvania’s consumer

fraud statute, the UTPCPL, provides that “[a]ny person who purchases or leases

goods or services primarily for personal, family or household purposes and thereby

suffers any ascertainable loss of money or property, real or personal, as a result of

the use or employment by any person of a method, act or practice declared

unlawful . . . may bring a private action to recover actual damages[.]” 73 P.S. §

201-9.2(a). Although Sidley Austin argues that when Plaintiffs purchased the

alleged OPIS tax shelter they were acting as investors, not as consumers, and

therefore the tax shelters were purchased primarily for business, not personal

purposes, we reiterate that we are in agreement with Plaintiffs that Sidley Austin’s

argument incorrectly rests on the type of product purchased, as opposed to the

purpose of the purchase. In that regard, Plaintiffs citation to the Pennsylvania

Commonwealth Court case of Valley Forge Towers South Condominium v. RonIke Foam Insulators, 574 A.2d 641 (Pa. Commw. Ct. 1990), is apt. In Valley

Forge, the Pennsylvania Commonwealth Court explained that:

If a laundry business were to purchase a home-use model, department

store dryer for the primary purpose of drying clothes for the laundry

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 In David Jeffrey Ltd. v. Lucente, 7 Pa. D. & C.4th 558 (Ct. Com. Pl. 1990), the plaintiff

was a business and not an individual. The business brought a UTPCPL claim contending the

defendants fraudulently represented the extent of the coverage provided under the insurance

policy they sold to plaintiff and the trial court granted nonsuit on the UTPCPL claim because

there was “no evidence to support plaintiff’s contention that the insurance coverage was for

anything but business purposes.” Id. at 562. Similarly, in Lal v. Ameriquest Mortg. Co., 858

A.2d 119 (Pa. Super. Ct. 2004), the plaintiff was a business partnership, not an individual, that

purchased investment land for business, not personal, purposes. In McShane v. Recordex

Acquisition Corp., 2003 WL 22805233 (Ct. Com. Pl. 2003), the purchase at issue was of medical

records for use in ongoing litigation, which is not a personal, family or household occurrence,

but is instead a public and/or commercial event. Finally, in Shulick v. DeGroat, 2005 WL

1384574 (Ct. Com. Pl. 2005), the purchase in question was of a retirement plan “developed for

the workplace” and not purchased primarily for personal, family or household benefits. 

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business, such a purchase would be primarily for a business purpose,

despite the fact that the dryer may have been a typical ‘consumer

product.’ On the other hand, if the parents of twelve growing children

purchased an industrial washer and dryer from a business supplier to

be used primarily to do the family’s laundry, the purchase would be

primarily for a family purpose and come within the ambit of 73 P.S. §

201-9.2, notwithstanding the fact that industrial washers and dryers

generally might not be considered typical ‘consumer products.’

Id. at 648. 

While we agree with Plaintiffs that the cases relied upon by Sidley Austin

are factually distinguishable from the case sub judice,

5

 at this juncture we will

consider Sidley Austin’s citation to the Third Circuit Court of Appeals case of

Algrant v. Evergreen Valley Nurseries Ltd. Pshp., 126 F.3d 178, 186-88 (3d Cir.

1997), for the proposition that investment securities are not “goods” for purposes

of the UTPCPL. In Algrant, the plaintiffs alleged that the fraud was in the

valuation fixed by the issuer of the investment securities themselves and

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misrepresentations the issuer made concerning the securities. The Third Circuit

explained that only one trial court, in addition to the district court in the Algrant

case, has held that the UTPCPL does not cover the sale of investment securities. 

Id. at 187. In addition, the Third Circuit stated that Pennsylvania cases which hold

that the UTPCPL covers the purchase of securities also deal specifically with the

transaction, and not with the securities themselves. Id.

As previously noted, this case concerns individuals who hoped to avoid

personal tax liability by investing in a tax-advantaged investment strategy, OPIS,

that was allegedly marketed to them by KPMG. (Compl. ¶¶ 25, 47, 48). The crux

of the allegations in the complaint is that the Deutsche Bank Defendants engaged

in a scheme to induce wealthy and sophisticated persons, like Plaintiffs, to pursue

the OPIS strategy when they knew or should have known that OPIS was an abusive

tax shelter that would be disallowed by the IRS. Id. ¶ 85. As a result, Plaintiffs

now claim that they were misled about the propriety and nature of the OPIS

strategy and seek damages from not only KPMG, Sidley Austin, and Presidio, but

also against the Deutsche Bank Defendants, which provided credit and account

services to Plaintiffs. Id. ¶¶ 85, 105-225. Accordingly, we find that the factual

circumstances of this case are distinguishable from those in Algrant, which, as

noted, at least in part concerned fraud allegations in the valuation fixed by the

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issuer of investment securities themselves. 

Additionally, we note that Plaintiffs are individuals, and not businesses. 

Although Sidley Austin argues that Plaintiffs entered into the transaction to avoid

paying taxes on gain from the sale of the business that they owned and by which

they earned their livelihood, Plaintiffs purchased the alleged tax shelters to lessen

their personal, as opposed to their business, tax liabilities. While we express no

opinion as to the ultimate viability of Plaintiffs’ consumer fraud claims, we find

that taking all of Plaintiffs’ allegations in the complaint as true, Plaintiffs have

stated consumer fraud claims upon which relief can be granted.

ii. Breach of Fiduciary Duty Claims

In the Motion, Sidley Austin argues that Plaintiffs’ claim for breach of

fiduciary duty fails because Sidley Austin did not stand in a fiduciary relationship

to Plaintiffs at the time it entered into the transaction. Sidley Austin contends that

Plaintiffs did not seek and did not obtain legal advice from it before the OPIS

transaction, thereby precluding the existence of an attorney-client, and hence

fiduciary, relationship. In response, Plaintiffs assert that its breach of fiduciary

duty claim is not limited to events before the consummation of the OPIS

transaction. Plaintiffs maintain that part of their claim includes excessive and

inappropriate fees charged by Sidley Austin, as well the issuance of opinion letters

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to Plaintiffs which Plaintiffs allege Sidley Austin knew or should have known in

the exercise of reasonable professional care were not correct. (Compl. ¶¶ 167,

171). 

In Count X of the complaint, Plaintiffs assert a breach of fiduciary claim

against Sidley Austin in which they allege that Sidley Austin was employed in a

fiduciary capacity by Plaintiffs and owed Plaintiffs the duties of a fiduciary. 

Plaintiffs allege that Sidley Austin owed Plaintiffs fiduciary duties of care and

loyalty and that Sidley Austin “negligently or intentionally failed to act in good

faith and solely for the benefit of plaintiffs in all matters for which Sidley Austin

was employed.” (Compl. ¶¶ 163-64). Plaintiffs allege that they suffered

significant injury from Sidley Austin’s actions, which were designed to benefit

itself and which were detrimental to Plaintiffs. Moreover, Plaintiffs allege that

Sidley Austin’s actions “reflect a series of actions in which Sidley Austin failed to

act for plaintiffs’ benefit but acted, instead, for its own (financial) benefit, was a

real factor in bringing about plaintiffs’ injuries. Sidley Austin’s breaches of its

fiduciary obligations were a proximate cause of damage to plaintiffs.” Id. ¶ 166. 

Finally, Plaintiffs assert that Sidley Austin also breached its fiduciary duties by

charging excessive and inappropriate fees to Plaintiffs in connection with the OPIS

transaction. Id. ¶ 167. 

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 We agree with Sidley Austin that courts have repeatedly disallowed damages based on

the payment of back taxes, including the payment of interest. See, e.g., Rosenthal v. Klein, 1989

U.S. Dist. LEXIS 8566 at *3 (E.D. Pa. 1989)(in claim based on purchase of partnership interest

in tax shelter, lost tax benefits were not correct measure of damages); DCD Programs, Ltd. v.

Leighton, 90 F.3d 1442, 1451-52 (9th Cir. 1996)(back taxes and interest paid to IRS are not

recoverable damages); Gaslow v. KPMG LLP, 797 N.Y.S.2d 472, 473 (N.Y. App. Div.

2005)(“Defendants’ alleged inducement of plaintiff to invest in an Offshore Portfolio Investment

Strategy (OPIS) that the IRS later determined to be illegal does not warrant recovery for the

payment of taxes and interest to the taxing authorities.”). 

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A careful review of Plaintiffs’ complaint reveals that Sidley Austin has read

Plaintiffs’ allegations too narrowly. We find that as Plaintiffs assert, they have not

limited their claim to events that transpired before the consummation of the OPIS

transaction, evidenced at least in part by Plaintiffs’ allegations concerning

“excessive and inappropriate fees” charged by Sidley Austin. Although Sidley

Austin argues that Plaintiffs have not alleged any damages proximately caused by

events occurring after their entry into the transaction and that Plaintiffs have

asserted conclusory allegations of damages, we disagree. Plaintiffs have alleged

that Sidley Austin’s actions were a real factor in bringing about Plaintiffs’ injuries

and that its breaches of fiduciary obligations were a proximate cause of damages to

Plaintiffs. In addition, Plaintiffs have listed the following specific categories of

damages which they seek: compensatory damages; lost profits; punitive damages;

restitution and disgorgement of profits; recoupment of professional and other fees

paid to Sidley Austin; interest including pre-judgment interest and recoupment of

interest paid to the IRS;6

 and other relief deemed just and proper by the Court. 

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Plaintiffs concede in their submissions that their prayer for relief does not mention the

award of back taxes. (Pls.’ Br. Opp. Sidley Austin’s Mot. Dismiss at 11). To the extent that

Plaintiffs seek the “recoupment of interest paid to the IRS” in their prayer for relief, such

damages are inappropriate and are not a proper measure of damages. Accordingly, Plaintiffs’

claims for the recoupment of interest paid to the IRS in its complaint will be dismissed. 

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Moreover, Plaintiffs need not specifically plead how the alleged damages at issue

would have been avoided had Sidley Austin conducted itself differently after

Plaintiffs entered the transaction in which Sidley Austin’s fiduciary obligations

allegedly arose. 

Accordingly, we find that Plaintiffs have stated a breach of fiduciary claim

against Sidley Austin upon which relief can be granted in Count X of the

complaint. 

iii. Professional Malpractice Claims

In the Motion, Sidley Austin argues that Plaintiffs’ claim for professional

malpractice fails because Sidley Austin did not cause Plaintiffs’ damages in its

professional capacity. In that regard, Sidley Austin maintains that the attorneyclient relationship had not been established as of the time Plaintiffs entered into the

OPIS transaction and that Plaintiffs’ payment of back taxes was not caused by

Sidley Austin’s malpractice. 

We initially note that under Pennsylvania law, a plaintiff must prove the

following elements by a preponderance of the evidence to establish a cause of

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action for legal malpractice: “(1) the employment of the attorney or other basis for

duty; (2) the failure of the attorney to exercise ordinary skill and knowledge; and

(3) that such negligence was the proximate cause of the damage to the plaintiff.” 

Thompson v. Glenmede Trust Co., 1996 U.S. Dist. LEXIS 16248 at *13-14 (E.D.

Pa. 1996)(quoting Gans v. Mundy, 762 F.2d 338, 341 (3d Cir. 1985)). 

Count XI of Plaintiffs’ complaint asserts a professional malpractice claim

against Sidley Austin in which Plaintiffs allege that they engaged Sidley Austin as

their professional attorneys and that the engagement create a duty in Sidley Austin

toward Plaintiffs. In that regard, Plaintiffs allege that “Prior to its engagement by

plaintiffs, as already described, Sidley Austin committed various frauds and

negligent and other misrepresentations against plaintiffs, including its actions in

inducing plaintiffs to invest in OPIS. During the course of its engagement as

plaintiffs’ professional attorneys, Sidley Austin failed to exercise ordinary skill and

knowledge. It was impeded by a conflict of interest between its role as participant

as a promoter of the OPIS tax shelter and its role in providing a supposedly

‘independent’ opinion letter to plaintiffs.” (Compl. ¶¶ 169-70). Plaintiffs further

allege that among other things, Sidley Austin failed to exercise ordinary skill and

knowledge in preparing its opinion letters and that the law firm knew or should

have known that the factual bases behind its opinion were not correct. “Among

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 In Plaintiffs’ professional malpractice claim against Sidley Austin, Count XI of the

complaint, Plaintiffs request the same categories of damages as we previously noted with respect

to their breach of fiduciary duty claim in Count X of the complaint. We find that Plaintiffs have

sufficiently alleged that they sustained damages proximately caused by events during the course

of Sidley Austin’s representation of Plaintiffs. 

In addition, and as noted, Plaintiffs concede that their prayer for relief does not mention

the award of back taxes. (Pls.’ Br. Opp. Sidley Austin’s Mot. Dismiss at 11). As previously

explained, to the extent that Plaintiffs seek the “recoupment of interest paid to the IRS” in their

prayer for relief, such damages are inappropriate and are not a proper measure of damages. 

Plaintiffs’ claim for the recoupment of interest paid to the IRS will therefore be dismissed. 

21

other things, Sidley Austin failed to exercise the skill and knowledge of an expert

in tax planning strategies, a standard to which it held itself out to plaintiffs.” Id. ¶

173. Plaintiffs assert that each action delineated in the complaint and taken by

Sidley Austin was negligent and proximately caused actual damage and losses to

Plaintiffs. Id. ¶ 175. 

Again, we find that Sidley Austin has read Plaintiffs’ complaint too

narrowly and find that Plaintiffs’ professional malpractice claim against Sidley

Austin seeks damages for events following the OPIS transaction. Although

Plaintiffs admit that they entered into the OPIS transaction prior to their

engagement of Sidley Austin, Plaintiffs’ complaint reflects that it is the events that

occurred during the course of the engagement with Sidley Austin that are subject to

Plaintiffs’ professional malpractice claims. See Compl. ¶ 170 (“During the course

of its engagement as plaintiffs’ professional attorneys, Sidley Austin failed to

exercise ordinary skill and knowledge . . . ).7

 Taking all of Plaintiffs’ professional

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22

malpractice allegations as true, as we must at this juncture, we find that Plaintiffs

have stated a professional malpractice claim against Sidley Austin upon which

relief can be granted. 

iv. Aiding and Abetting Claims

In the Motion, Sidley Austin argues that Plaintiffs’ claim for aiding and

abetting fails because Pennsylvania does not recognize a claim for aiding and

abetting fraud and Plaintiffs have not alleged that Sidley Austin’s aiding and

abetting was the cause of their damages. In that regard, Sidley Austin maintains

that Plaintiffs have failed to allege that any assistance or encouragement by the law

firm caused damage to Plaintiffs and that Plaintiffs did not have any

communication with Sidley Austin before they entered the transaction.

In response, Plaintiffs assert that they have stated viable aiding and abetting

claims and that Pennsylvania law does not reject aiding and abetting liability for

fraud. In addition, Plaintiffs maintain that they have adequately alleged that Sidley

Austin’s aiding and abetting was a cause of their damage.

In Count XIII of the complaint, Plaintiffs have asserted claims against Sidley

Austin for aiding and abetting fraud and breaches of fiduciary duty. Plaintiffs

allege that Sidley Austin aiding and abetted a fraud perpetuated against Plaintiffs

by KPMG and Presidio. “Specifically, Sidley Austin knowingly permitted and

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23

encouraged its name to be invoked by KPMG as an independent and reliable

source that would provide corroboration for the bona fide nature of OPIS. Sidley

Austin knew that KPMG and Presidio owed fiduciary duties to plaintiffs. Sidley

Austin also lent credence to KPMG’s opinion letter and other representations about

OPIS by reiterating those conclusions and representations in its own, supposedly

independent opinion letter. However, Sidley Austin knew that KPMG and Presidio

were aware that Sidley Austin was not independent.” (Compl. ¶ 184). In addition,

Plaintiffs allege that Sidley Austin “knowingly and willfully provided substantial

assistance and encouragement to KPMG and Presidio in connection with their

fraudulent activities and their breaches of fiduciary duties.” Id. ¶ 185. Finally,

Plaintiffs assert that Sidley Austin’s actions in aiding and abetting such breaches of

fiduciary duties and fraudulent activities proximately caused damage to Plaintiffs. 

Id. ¶ 186. 

 It appears that both parties concede that the Pennsylvania Supreme Court

has not made a direct pronouncement concerning whether Pennsylvania recognizes

a private cause of action for aiding and abetting fraud. Therefore, we must predict

how the Pennsylvania Supreme Court would rule on the issue if it were presented

to them. Carrasquilla v. Mazda Motor Corp., 197 F. Supp. 2d 169, 172 (M.D. Pa.

2002)(citing Nationwide Mut. Ins. Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir.

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24

2000)). The following standard applies to a federal court that must predict how a

state’s highest court would rule on an issue:

[T]he federal court must look to decisions of any intermediate state

appellate court, other federal courts interpreting the law of the state,

and other state supreme courts that have decided the issue, as well as

analogous decisions, dicta, scholarly works, and any other reliable

data which would tend to show convincingly how the state’s highest

court would rule.

Id. (quoting Walsh, 63 F. Supp. 2d at 551). In considering these factors,

intermediate state court appellate decisions should be given “significant weight” by

the federal court, if there is no indication that the state’s highest court would rule

otherwise. Id.; see also Polselli v. Nationwide Mut. Fire Ins. Co., 126 F.3d 524,

528 n.3 (3d Cir. 1997).

In their submission, Plaintiffs state that having not been adopted by the

Pennsylvania Supreme Court “is qualitatively different” from having been rejected

by the Pennsylvania Supreme Court and cite to Thompson v. Glenmede Trust Co.,

1996 WL 529696 at *2 n.6 (E.D. Pa. Sept. 16, 1996), a 1996 United States District

Court for the Eastern District of Pennsylvania case in which the court refused to

dismiss an aiding and abetting fraud claim noting it to be an “unsettled question of

law[.]” In Thompson, the court held that an aiding and abetting fraud claim may

exist under Pennsylvania law, and thus did not dismiss such a claim. Id. 

Although Plaintiffs accurately submit that Sidley Austin did not point to any

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25

Third Circuit Court of Appeals, Pennsylvania Supreme Court, or intermediate state

appellate case holding that claims for aiding and abetting fraud are not viable under

Pennsylvania law, nor did the Court locate any such case, we are in agreement with

Sidley Austin that the majority of Pennsylvania federal courts considering this

issue have found that Pennsylvania law does not allow for claims of aiding and

abetting fraud and have declined to expand Pennsylvania law to include such

claims. WM High Yield Fund v. O’Hanlon, 2005 U.S. Dist. LEXIS 12064 at *49-

50 (E.D. Pa. May 13, 2005)(Despite the plaintiffs’ argument that their aiding and

abetting fraud claim should go forward because the claim is substantially similar to

a cause of action for aiding and abetting a breach of fiduciary duty, which has been

recognized by several Pennsylvania lower courts, the court “follow[ed] the lead of

the majority of other courts in this district, in declining to expand Pennsylvania

law, and [held] that the Pennsylvania Supreme Court would not permit such an

action.”); Waslow v. Grant Thornton LLP (In re Jack Greenberg, Inc.), 240 B.R.

486 (Bankr. E.D. Pa. 1999); Klein v. Boyd, 1996 U.S. Dist. LEXIS 17153 (E.D.

Pa. 1996)(“The Pennsylvania Supreme Court has never recognized a cause of

action for aiding and abetting common law fraud.”), aff’d in part and rev’d in part,

1998 U.S. App. LEXIS 2004 (3d Cir. 1998), rehearing en banc granted and

judgment vacated, 1998 U.S. App. LEXIS 4121 (Mar. 9, 1998); S. Kane & Son

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8

 We note that there are four elements to a claim of aiding and abetting a breach of

fiduciary duty: (1) the existence of a fiduciary relationship; (2) a breach of the fiduciary’s duty;

(3) knowing participation in that breach by the defendant; and (4) damages proximately caused

by the breach. See Damage Recovery Sys. v. Tucker, 2004 U.S. Dist. LEXIS 19821 at *14-15

(D. Del. 2004)(citing Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001)). 

26

Profit Sharing Trust v. Marine Midland Bank, 1996 U.S. Dist. LEXIS 8023 at *30

(E.D. Pa. June 13, 1996)(granting summary judgment on claim for aiding and

abetting since “Pennsylvania has not adopted this cause of action.”). We will

accordingly follow the majority of Pennsylvania federal courts that have

considered this issue and find that Pennsylvania law does not allow for claims of

aiding and abetting fraud. Sidley Austin’s Motion is granted to the extent that

Plaintiffs’ aiding and abetting fraud claims will be dismissed.

Plaintiffs accurately submit, however, that Sidley Austin’s Motion does not

address the portion of Count XIII that asserts an aiding and abetting breach of

fiduciary claim against Sidley Austin. Claims for aiding and abetting a breach of

fiduciary duty have been recognized by several Pennsylvania lower courts,

including the Pennsylvania Commonwealth Court in Koken v. Steinberg, 825 A.2d

723, 731 (Pa. Commw. Ct. 2003), as submitted by Plaintiffs.8

 See also WM High

Yield Fund, 2005 U.S. Dist. LEXIS 12064 at *49-50 (lists cases that indicate

Pennsylvania lower courts recognize claims for aiding and abetting a breach of

fiduciary duty). Even assuming arguendo that we were to construe Sidley Austin’s

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27

submissions as addressing Plaintiffs’ aiding and abetting a breach of fiduciary duty

claim in Count XIII of the complaint, we find that taking all of Plaintiffs’

allegations as true, as we must, that Plaintiffs have stated such a claim upon which

relief can be granted based upon the Plaintiffs’ following allegations: that Sidley

Austin, a fiduciary, knowingly permitted and encouraged its name to be invoked by

KPMG as an independent and reliable source that would provide corroboration for

the bona fide nature of OPIS; that Sidley Austin was cognizant that KPMG and

Presidio owed fiduciary duties to Plaintiffs; that Sidley Austin lent credence to

KPMG’s opinion letter and other representations about OPIS by reiterating such

conclusions in its own allegedly independent opinion letter; that Sidley Austin

knowingly and willfully provided substantial assistance and encouragement to

KPMG and Presidio in connection with their alleged breaches of fiduciary duties;

and that Sidley Austin’s actions in aiding and abetting such breaches of fiduciary

duties proximately caused damage to Plaintiffs. 

v. Civil Conspiracy Claims

Sidley Austin argues in the Motion that Plaintiffs’ claim for civil conspiracy

fails because they have not and cannot plead intent to injure. Sidley Austin

maintains that Pennsylvania courts require more than allegations of apparently

purposeless harm. Moreover, Sidley Austin asserts that Plaintiffs’ claim for civil

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28

conspiracy fails as the sole purpose of the conspiracy cannot have been to injure

Plaintiffs. 

In response, Plaintiffs assert that the civil conspiracy claim pleads the

requisite intent to injure. In that regard, Plaintiffs submit that Sidley Austin has

quoted Plaintiffs’ allegation concerning Sidley Austin acting for its own financial

benefit out of context and that whether Sidley Austin was or was not acting “for its

own (financial) benefit” cannot, as a matter of law, defeat Plaintiffs’ conspiracy

claim. (Pls.’ Br. Opp. Sidley Austin’s Mot. Dismiss at 18-19). 

To state a cause of action for civil conspiracy, a plaintiff must allege that

two or more persons combined or agreed with intent to do an unlawful act or to do

an otherwise lawful act by unlawful means. Thompson Coal Co. v. Pike Coal Co.,

412 A.2d 466, 472 (Pa. 1979); Skipworth by Williams v. Lead Indus. Ass’n, 690

A.2d 169, 174 (Pa. 1997); WM High Yield Fund, 2005 U.S. Dist. LEXIS 12064 at

*45. In addition, a claim for civil conspiracy requires “[p]roof of malice, i.e., an

intent to injure.” Grose v. P&G Paper Prods., 866 A.2d 437, 440-41 (Pa. Super.

Ct. 2005); Skipworth by Williams, 690 A.2d at 174. As accurately submitted by

the parties, Thompson has been consistently interpreted as requiring that the sole

purpose of the conspiracy be an intent to injure or to cause harm to the party who

has been injured. WM High Yield Fund, 2005 U.S. Dist. LEXIS 12064 at *46-49;

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29

Becker v. Chicago Title Ins. Co., 2004 WL 228672 at *13 (E.D. Pa. Feb. 4, 2004). 

Sidley Austin directs the Court’s attention to an allegation in the complaint

stating that Sidley Austin’s actions reflect that it failed to act for Plaintiffs’ benefit

but acted, instead, “for its own (financial) benefit[.]” (Compl. ¶ 166). Sidley

Austin then submits that the above-referenced allegation goes to Sidley Austin’s

purpose in allegedly participating in the transaction and it indicates that Sidley

Austin participated in the alleged conspiracy to benefit itself financially, rather

than with the requisite intent to harm or injure Plaintiffs. 

First, we are in agreement with Plaintiffs that Sidley Austin did not pull the

allegation that it acted “for its own (financial) benefit” out of Plaintiffs’ civil

conspiracy claim, but rather it appears in Plaintiffs’ breach of fiduciary duty claim

against Sidley Austin. A technical reading of the complaint reveals that although

Plaintiffs incorporated by reference all “foregoing allegations” into their civil

conspiracy claim, Count VII of the complaint, they did not incorporate by

reference their breach of fiduciary claim, Count X of the complaint, as such

allegations appear subsequent in time to the civil conspiracy count. Accordingly,

Plaintiffs’ allegation concerning Sidley Austin acting “for its own (financial)

benefit” was not incorporated by reference into the civil conspiracy claim against

Sidley Austin. Moreover, we find that Plaintiffs’ civil conspiracy allegations that

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9

 Federal Rule 9(b) requires that “[i]n all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with particularity.” 

30

appear in Count VII of the complaint state a cause of action for civil conspiracy

upon which relief can be granted as they fulfill the requisite aforereferenced

elements. 

vi. Fraud Claims

 Sidley Austin alternatively argues that Plaintiffs should be required to

amend the complaint in order to plead their fraud claim with greater specificity

pursuant to Fed.R.Civ.P. 9(b).9

 Sidley Austin maintains that Plaintiffs never allege

with specificity when they met with representatives from KPMG, when the

misrepresentations alleged were made to them, when Plaintiffs entered into the

transaction in question, when Plaintiffs filed their tax returns, or what Plaintiffs

filed on their tax returns. 

We find that Sidley Austin’s argument lacks merit. As now pled and for the

reasons cited herein, Plaintiffs’ 225 paragraph complaint with attachments of the

full-text reports of the Senate Subcommittee contain sufficient specificity to put

Sidley Austin on notice of the conduct of which it is charged. We find that

Fed.R.Civ.P. 9(b)’s pleading requirements have been satisfied. 

To summarize, Defendant Sidley Austin’s Motion is granted only with

respect to Plaintiffs’ request for recoupment of interest paid to the IRS and

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31

Plaintiffs’ aiding and abetting fraud claims. Sidley Austin’s Motion is denied in all

other respects. 

B. Plaintiffs’ Motion to Remand

In the Motion, Plaintiffs argue that the case sub judice should be remanded

to the Court of Common Pleas of Luzerne County as this Court lacks subject

matter jurisdiction. Plaintiffs assert that they bring solely state law claims against

Defendants and that complete diversity is lacking, as is federal question

jurisdiction. “No defendant contends otherwise. No defendant removed this case

within the 30-day window created by 28 U.S.C. § 1446(b) . . . The Deutsche Bank

Defendants invoke a single ground for removal, namely, 9 U.S.C. § 205, alleging

that this action ‘relates to an arbitration agreement falling under the Convention on

the Recognition and Enforcement of Foreign Arbitral Awards’ (‘the Convention’).” 

(Pls.’ Br. Supp. Mot. Remand at 2-3). Plaintiffs maintain that this matter must be

remanded to state court as it does not fall under the Convention. 

Deutsche Bank Defendants’ responsive submissions, to which Presidio and

KPMG join, assert that the action was removed pursuant to 9 U.S.C. § 205 because

it “relates to” an arbitration agreement falling under the Convention. Defendants

contend that removal is proper under the Convention because Plaintiff Mr.

Chebalo’s claims fall under a Customer Agreement that he signed, thereby binding

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 31 of 72
10 “An action or proceeding falling under the Convention shall be deemed to arise under

the laws and treaties of the United States. The district courts of the United States . . . shall have

original jurisdiction over such an action or proceeding, regardless of the amount in controversy.” 

9 U.S.C. § 203. 

32

himself to an arbitration clause that requires him to arbitration this dispute under

the National Association of Securities Dealers, Inc. (“NASD”) rules. Defendants

argue that the arbitration agreement falls under the Convention because the

relationship between Plaintiffs and Defendants involved property located abroad,

envisaged performance abroad, and had a reasonable relationship to a foreign state. 

District courts have original jurisdiction over any “action or proceeding

falling under the Convention[.]”10 Removal from state court is accordingly

appropriate whenever “the subject matter of an action or proceeding pending in a

state court relates to an arbitration agreement or award falling under the

Convention.” 9 U.S.C. § 205. In that regard, we note that this action was removed

pursuant to 9 U.S.C. § 205, which provides, in pertinent part, as follows:

Where the subject matter of an action or proceeding pending in a State

court relates to an arbitration agreement or award falling under the

Convention, the defendant or the defendants may, at any time before

the trial thereof, remove such action or proceeding to the district court

of the United States for the district and division embracing the place

where the action or proceeding is pending. 

9 U.S.C. § 205 (emphasis added). 

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33

As the Deutsche Bank Defendants aptly submit, the standard for

demonstrating removal jurisdiction under the Convention is a lenient one. As the

Fifth Circuit Court of Appeals has explained:

whenever an arbitration agreement falling under the Convention could

conceivably affect the outcome of the plaintiff’s case, the agreement

‘relates to’ the plaintiff’s suit. Thus, the district court will have

jurisdiction under § 205 over just about any suit in which a defendant

contends that an arbitration clause falling under the Convention

provides a defense. As long as the defendant’s assertion is not

completely absurd or impossible, it is at least conceivable that the

arbitration clause will impact the disposition of the case. This is all

that is required to meet the low bar of ‘relates to.’

Beiser v. Weyler, 284 F.3d 665, 669 (5th Cir. 2002). The phrase “‘relates to’

generally conveys a sense of breadth.” Id. (citing Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 96-97 (1983)). Moreover, this “easy” removal standard differs from

the general rule of strict construction of statutes conferring removal jurisdiction. 

As the Fifth Circuit has also stated,

[i]n allowing removal whenever the arbitration clause could

conceivable impact the disposition of the case, we make it easy, not

hard, for defendants to remove. But we conclude that easy removal is

exactly what Congress intended in § 205. 

Beiser, 284 F.3d at 674. 

Against that backdrop, we note that Plaintiffs seek remand of the case sub

judice on the ground that the arbitration agreement at issue is not a “foreign”

arbitration agreement and accordingly does not fall under the Convention. 

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 33 of 72
11 Section 202 of Title 9 of the United States Code, provides in pertinent part, as follows:

An arbitration agreement or arbitral award arising out of a legal relationship,

whether contractual or not, which is considered as commercial, including a

transaction, contract, or agreement described in section 2 of this title [9 U.S.C. §

2], falls under the Convention. An agreement or award arising out of such

relationship which is entirely between citizens of the United States shall be

deemed not to fall under the Convention unless that relationship involves property

located abroad, envisages performance or enforcement abroad, or has some other

reasonable relation with one or more foreign states. 

34

Plaintiffs argue that a relationship with a foreign corporation cannot override the

“repeated statements in the Customer’s Agreement that it will be enforced under

the laws of the state of New York.” (Pls.’ Br. Supp. Mot. Remand at 3, 5). We are

in agreement with Defendants that such an argument contradicts the express

language of the Convention, which provides that an arbitration agreement falls

under the Convention where the “relationship [out of which the agreement arises]

involves property located abroad, envisages performance or enforcement abroad or

has some reasonable relation with one or more foreign states.” See 9 U.S.C. §

202;11 Freudensprung v. Offshore Technical Servs., Inc., 379 F.3d 327, 340 (5th

Cir. 2004) (the Convention applies to an arbitration agreement between two United

States citizens “provided that there is a ‘reasonable relation’ between the parties’

commercial relationship and some ‘important foreign element.’”); Lander Co. v.

MMP Investments, Inc., 107 F.3d 476 (7th Cir. 1997) (Convention applied to

arbitration agreement between two United States companies where only link to

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35

foreign nation was that one party to agreement would be distributing United States

manufactured products in Poland); Beiser, 284 F.3d at 666-69. For the reasons that

follow, we find that the relationship out of which the Customer Agreement arose

involved property located abroad, envisaged performance in a foreign state, and

otherwise related to a foreign state pursuant to 9 U.S.C. § 202. 

We must first determine whether the parties’ commercial relationship

involved property located abroad under 9 U.S.C. § 202. To execute the alleged

OPIS strategy, Plaintiffs purchased certain Deutsche Bank AG securities and the

terms of such securities, which Plaintiff Mr. Chebalo confirmed in writing,

required the resale of Deutsche Bank AG stock on one of two German exchanges,

the Frankfurt Stock Exchange or Xetra, a German electronic exchange. (Rec. Doc.

27, Ex. A). Moreover, as submitted by the Deutsche Bank Defendants, Mr.

Chebalo and the other Plaintiffs acknowledged in writing that the “Transactions”

included not only the purchase of Deutsche Bank AG stock, which was to be

effected through his DBSI account, but also a loan made by Deutsche Bank AG. 

Id. at Ex. C. We accordingly find that the relationship between the parties clearly

involved property located abroad. 

With regard to whether the parties’ commercial relationship envisaged

performance abroad pursuant to 9 U.S.C. § 202, the relevant jurisdictional inquiry

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36

is not whether an arbitration agreement itself envisages performance abroad, but

whether the relationship out of which the agreement arose envisages performance

abroad. See 9 U.S.C. § 202. Although Plaintiffs seek to focus the Court on the

choice of law clause in the Customer Agreement, entitled “Place of Performance –

Governing Law,” which provides that the enforcement of the Customer’s

Agreement is governed by New York law and that DBSI would perform its

services in New York, we find that the parties envisaged that certain steps in

Plaintiffs’ OPIS investment strategy would involve performance abroad. Consider,

in that regard, that Mr. Chebalo signed a trade confirmation for the purchase of a

call option which identifies “Deutsche Bank AG acting through its Frankfurt

branch” as the counterparty. In addition, the Confirmation provides for notice to

be given to Deutsche Bank AG in Frankfurt, Germany, calls for payments to be

directed to Deutsche Bank AG in Frankfurt, Germany, and requires the resale of

the shares of common stock of Deutsche Bank AG only on German stock

exchanges. (Rec. Doc. 27, Ex. A). Moreover, Plaintiffs signed agreements stating

in pertinent part that they agree to resell the securities only through the Frankfurt

Stock Exchange in a transaction complying with Rule 904 under the Securities Act. 

Id.; see also Rec. Doc. 27 at Ex. C. 

We find that Plaintiffs’ reliance upon the choice of law clause in the

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37

Customer Agreement focuses the Court far too narrowly on a single provision of

one agreement, as opposed to the whole commercial relationship between the

parties. We are in agreement with Defendants that such a narrow focus cannot

defeat jurisdiction under the Convention, which directs a court to analyze the

totality of the commercial relationship out of which the Customer Agreement

arose. 

We must now consider whether the commercial relationship between the

parties had a reasonable relationship to a foreign state. More specifically, in

ascertaining whether Plaintiffs’ commercial relationship with Deutsche Bank

Defendants bears some “reasonable relation” to a foreign state, Germany, it is

notable that Plaintiffs’ OPIS strategy involved loans from Deutsche Bank AG and

trading in foreign markets. Moreover, in the Customer Agreement, Mr. Chebalo

agreed to arbitrate with “you,” which is a term defined to include, among other

things, “affiliates” and “affiliates of Deutsche Bank” is defined to include Deutsche

Bank AG, a German corporation. (Rec. Doc. 27, Ex. B). 

Although Plaintiffs argue that their participation in the OPIS Strategy was

purely a domestic affair, they appear to gloss over the fact that the execution of

each such strategy necessarily involved several foreign participants. (Compl. ¶¶

39-40; Compl. at Ex. C). Exhibit C to Plaintiffs’ complaint, which the complaint

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38

incorporates by reference, is the opinion provided by Defendant KPMG to Plaintiff

Mr. Amato and which Plaintiffs allege is representative of the opinion letters

received by all Plaintiffs. (Compl. ¶ 37). The opinion letter provides as follows in

describing the OPIS strategy:

The basic design of the investment strategy was premised upon the

expectation that a highly leveraged position in Foreign Bank securities

would provide Investor [defined as Peter Amato] with the opportunity

for capital appreciation. In order to maximize the utilization of

foreign capital market credit facilities, Investor entered into a swap

transaction. The other participant in the swap was a foreign (nonU.S.) taxpayer, Hyde Street, LLC (“Limited Partner”), a limited

liability company, that had a 99% limited partnership interest in a

Cayman Islands limited partnership, Cayuga L.P. (“Foreign LP”)

which invested in Foreign Bank securities. Investor further increased

its investment position in Foreign Bank by making a direct purchase

of Foreign Bank stock and options. 

Compl. at Ex. C. We agree with Defendants that given the level of involvement of

foreign entities, foreign stock, and options in Plaintiffs’ OPIS strategy, Plaintiffs’

contention that the strategy has no “foreign element” is disingenuous. 

As we find there to be a “foreign element” to the parties’ relationship, Jones

v. Sea Tow Services Freeport NY Inc., 30 F.3d 360 (2d Cir. 1994), is clearly

factually distinguishable from the case sub judice as we will detail. In Jones,

United States citizens hired another United States citizen to rescue their yacht off

the cost of Long Island, New York. Id. at 366. Apart from the language in the

agreement between the parties which provided for arbitration in England under

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39

English law, no other foreign element existed. Id. The Second Circuit Court of

Appeals held that, absent a connection with England independent of the agreement

itself, the relationship between the parties was insufficient to confer jurisdiction

under the Convention. Id. In Jones, the Second Circuit reiterated the proposition

that “any case concerning an agreement or award solely between U.S. citizens is

excluded [from the Convention] unless there is some important foreign element

involved, such as property located abroad, the performance of a contract in a

foreign county [sic], or a similarly reasonable relation with one or more foreign

states.” Id. at 365 (emphasis added) (quoting S. Rep. 702, 91st Cong., 2d Sess.

App. at 6 (1970)). The Second Circuit based its conclusion that the relationship

between the parties was insufficient to confer jurisdiction under the Convention

based upon the fact that the parties were United States citizens engaged in a purely

domestic salvage dispute. Accordingly, the relation with a foreign state required to

invoke the Convention was lacking. 

Although the court in Jones remanded the case after finding that neither the

relationship between the parties, two United States citizens, nor their agreement

had any reasonable relation with a foreign state, id. at 365-66, the facts of the

instant case are readily distinguishable. Here, the relationship between the parties

involved property located abroad and envisaged performance abroad, as we

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40

previously explained and in contrast to the Jones case. Moreover, the commercial

relationship between the parties had a reasonable relation with a foreign country,

Germany, at least in part based upon the involvement of Plaintiffs’ OPIS strategy

with loans from Deutsche Bank AG and trading in foreign markets. Therefore, the

Jones case is factually distinguishable from the instant action.

At this juncture, we will address letters submitted to the Court by the parties

regarding recent case law. In that regard, Plaintiffs rely upon a recent United

States District Court for the Western District of North Carolina case, Green v.

KPMG LLP, Civ. Nos. 3:05-CV-79-C, 3:05-CV-80-C, 3:05-CV-87-C, and 3:05-

CV-88-C (W.D.N.C. Feb. 27, 2006) (the “Green Order”), in support of their

Motion to Remand and Deutsche Bank Defendants analyze both the Green Order

as well as a recent United States District Court for New Jersey case, Sullivan v.

KPMG, LLP, Civ. No. 3:05-CV-817-SRC-TJB (D.N.J. Apr. 4, 2005) (the

“Sullivan Transcript”). 

In Green, which concerned a Foreign Leveraged Investment Program

(“FLIP”) tax shelter, the defendants removed each of the cases at issue to the

United States District Court for the Western District of North Carolina under the

Convention and the Edge Act, 12 U.S.C. § 632, on the theory that the plaintiffs’

claims were subject to an arbitration clause contained in several warrant contracts

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41

(the “Warrants”). The Warrants containing the arbitration provision were between

the plaintiffs and several non-party Cayman Island corporations. In granting the

plaintiffs’ motion to remand, the court relied, among other things, upon KPMG’s

admission, pursuant to a deferred prosecution agreement with the United States

Attorney’s Office for the Southern District of New York that the money paid for

the Warrants “in truth and in fact . . . constituted fees paid to KPMG, the Law

Firm, the bank participant, the nominee foreign person, and other participants.” 

Green Order at 4. Based upon this admission by KPMG, the court concluded that

the warrants were shams and declined to rely upon them as a basis to create federal

subject matter jurisdiction under the Convention. Id. at 7. 

In Sullivan, which was relied upon in Green as further support for remand,

the United States District Court for New Jersey granted the plaintiff’s motion to

remand where: (1) neither removing party was a signatory to the warrant that

contained the arbitration clause; (2) neither removing party was involved in the

performance of the terms of the warrant; and (3) the terms, interpretation, and

execution of the warrant were not placed into dispute in the complaint. 

A careful review of the above-referenced cases reveals that they are

distinguishable from the instant action. As accurately submitted by the Deutsche

Bank Defendants, first, the arbitration clauses upon which KPMG sought to rely

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 41 of 72
42

were in warrants, documents intended to cover only a single transaction between

the parties. In contrast, the arbitration clause in this case is contained in Plaintiff

Mr. Chebalo’s Customer Agreement with DBSI, which covers the use of his

securities account generally and all matters related to or arising out of that account

agreement. Plaintiff Mr. Chebalo used an account at DBSI to buy and sell

Deutsche Bank securities which were only available in markets outside of the

United States. Such transactions are at the heart of Plaintiffs’ claims. This dispute

falls under a valid and enforceable arbitration clause, as we will discuss in more

detail below, and the agreement could affect the outcome of this case. As noted by

the court in Sullivan, “[a]s long as the defendant’s assertion is not completely

absurd or impossible, it is at least conceivable that the arbitration clause will

impact the disposition of the case. That is all that is required to meet the low bar of

‘relates to.’” Sullivan Transcript at 30-31 (citing Beiser, 284 F.3d at 669). Second,

it would be improper for us to invalidate the Customer Agreement between DBSI

and Plaintiff Mr. Chebalo, or discard the arbitration clause contained therein, based

upon admissions made by KPMG in its deferred prosecution agreement, which

binds only KPMG. 

Accordingly, after having determined that the relationship out of which the

Customer Agreement arose involved property located abroad, envisaged

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 42 of 72
43

performance in a foreign state, and otherwise related to a foreign state pursuant to

9 U.S.C. § 202, we will now ascertain whether this action relates to the arbitration

agreement and satisfies the “easy” removal standard under 9 U.S.C. § 205, which

differs from the general rule of strict construction of statutes conferring removal

jurisdiction. See Beiser, 284 F.3d at 674. The securities transactions that were an

integral part of the OPIS strategy were implemented through Plaintiffs’ DBSI

brokerage accounts that are covered by the Customer Agreement. Where, as here,

the Customer Agreement enabled Plaintiffs to implement the strategy at the crux of

the complaint, we find it to be not just “conceivable,” but in fact likely that the

arbitration clause will impact the outcome of the case, thus satisfying the

jurisdictional inquiry at issue. See id. at 669 (“whenever an arbitration agreement

falling under the Convention could conceivably affect the outcome of the

plaintiff’s case, the agreement ‘relates to’ the plaintiff’s suit”). As the relationship

out of which the Customer Agreement and thus the arbitration agreement arose,

falls squarely within the parameters of the Convention, and as the arbitration

agreement “relates to” the suit, we find that removal of this action is proper under 9

U.S.C. § 205. See, e.g., Keeter v. KPMG LLP, No. 1:04-CV-3759-WSD, slip op.

at 4-5 (N.D. Ga. May 16, 2005), Hansen v. KPMG LLP, SA CV 04-010525-GLT

(MANx), slip op. at 2-4 (C.D. Cal. Mar. 29, 2005); Chew v. KPMG LLP, No.

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 43 of 72
44

3:04-CV-748BN, slip op. at 11-12 (S.D. Miss. Jan. 6, 2005); Wilson v. Deutsche

Bank AG, No. 05-C-3474, slip op. at 8 (N.D. Ill. Nov. 30, 2005); Palmer Ventures,

LLC v. KPMG LLP, No. 04-706-JJB-DLD, slip op. at 1-2 (M.D. La. Dec. 5, 2005). 

C. Motions to Compel Arbitration and Stay These Proceedings

In their Motions, the Deutsche Bank Defendants, KPMG, and Presidio direct

the Court’s attention to a Customer Agreement with Deutsche Bank that includes

an arbitration clause, which was signed by Plaintiff Mr. Chebalo. DBSI has moved

the Court to compel arbitration against Mr. Chebalo and to stay the claims of the

other Plaintiffs against DBSI pending that arbitration. Defendants Deutsche Bank

and KPMG, although not signatories to the Customer Agreement, seek to compel

arbitration with Mr. Chebalo and seek a stay with regard to all other Plaintiffs. 

Defendant Presidio has moved for a stay based upon the potential DBS/Chebalo

arbitration. 

In response, Plaintiffs assert that New York law governs the Customer

Agreement, as opposed to the Federal Arbitration Act. Plaintiffs argue that under

New York law, Defendants KPMG and the Deutsche Bank have no basis to compel

arbitration. Moreover, Plaintiffs contend that neither KPMG nor the Deutsche

Bank can compel arbitration under the NASD. Finally, Plaintiffs assert that the

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45

claims between Mr. Chebalo and DBSI are not arbitrable as Mr. Chebalo’s claims

fall outside the parameters of the arbitration clause. 

On or about June 29, 1998 and as noted, Plaintiff Mr. Chebalo executed a

Customer Agreement as part of his participation in the OPIS transaction. (Rec.

Doc. 18, Ex. A). As part of carrying out the investment strategy through Deutsche

Bank accounts, Deutsche Bank required Mr. Chebalo to enter into the Customer

Agreement “[i]n consideration of [Deutsche Bank] accepting one or more of the

accounts [of the Plaintiff Mr. Chebalo] . . . and agreeing to act as brokers[.]” See

id. Accordingly, when he opened his brokerage account, Mr. Chebalo signed a

Customer Agreement, dated June 29, 1998. We find that the Customer Agreement

was an integral part of the challenged investment transactions as Mr. Chebalo

could not have engaged in the challenged transaction through Deutsche Bank

without entering into the Agreement. 

The Customer Agreement with Deutsche Bank includes an arbitration

clause, which provides, in pertinent part, as follows:

14. Arbitration:

(i) Arbitration is final and binding on the parties. 

(ii) The parties are waiving their right to seek remedies in court,

including the right to jury trial.

. . .

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 45 of 72
46

The UNDERSIGNED AGREES, and by carrying an Account of the

Undersigned you agree, that . . . all controversies which may arise

between us concerning any transaction of construction, performance,

or breach of this or any other agreement between us, whether entered

into prior, on or subsequent to the date hereof, shall be determined by

arbitration. Any arbitration under this agreement shall be determined

pursuant to the rules then in effect of the National Association of

Securities Dealers, Inc. as the undersigned you may elect. If the

undersigned fails to make such election, then you may make such

election. The award of the arbitrators or the majority of them, shall be

final, and judgment upon the award rendered may be entered in any

court, state, or federal, having jurisdiction.

Id. ¶ 14. Moreover, directly above Plaintiff Mr. Chebalo’s signature, the

Agreement states that, “An Arbitration clause is contained in this Agreement on

page 3, item 14. ‘Arbitration.’” Id. at 4. 

We initially note that Defendants accurately submit that federal policy, as

embodied in the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., strongly

favors arbitration. E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 289 (2002);

Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983);

Sandvik AB v. Advent Int’l Corp., 220 F.3d 99, 104-5 (3d Cir. 2000). Pursuant to

the FAA, a court must compel arbitration if it is satisfied that the claim at issue is

within the scope of a valid, enforceable agreement to arbitrate. See 9 U.S.C. §§ 3,

4; Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985) (“By its own

terms, the Act leaves no place for the exercise of discretion by a district court, but

instead mandates that district courts shall direct the parties to proceed to arbitration

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 46 of 72
47

on issues as to which an arbitration agreement has been signed.”). Additionally,

the preference for arbitration is so strong that any doubts about the arbitrability of a

dispute should be resolved in favor of arbitration. See Moses H. Cone Mem’l

Hosp., 460 U.S. at 25; Bannet v. Hankin, 331 F. Supp. 2d 354, 360 (E.D. Pa. 2004)

(internal citations omitted). Moreover, the United States Supreme Court has held

that a presumption of arbitrability exists where a contract contains an arbitration

clause, and that an order to arbitrate should not be denied “unless it may be said

with positive assurance that the arbitration clause is not susceptible of an

interpretation that covers the asserted dispute.” Miron v. BDO Seidman, 342 F.

Supp. 2d 324, 328 (E.D. Pa. 2004) (quoting AT&T Tech., Inc. v. Communications

Workers of America, 475 U.S. 643, 650 (1986)); First Liberty Inv. Group v.

Nicholsberg, 145 F.3d 647, 653 (3d Cir. 1998). 

At this juncture, we will address Plaintiffs’ contention that the applicable

law is that of New York arbitration law, as opposed to the FAA, on the basis of the

Customer Agreement’s express choice of New York law. For the reasons that

follow, we find that the FAA, not New York law, governs. 

We initially note that as submitted by the Deutsche Bank Defendants, in

Roadway Package Sys. v. Kayser, 257 F.3d 287, 296 (3d Cir. 2001), cert. denied,

534 U.S. 1020 (2001), the Third Circuit Court of Appeals established a bright-line

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48

rule, “that a generic choice-of-law clause, standing alone, is insufficient to support

a finding that contracting parties intended to opt out of the FAA’s default

standards.” Id. at 296. In Roadway Package Systems, the Third Circuit made clear

that parties must expressly include a state’s arbitration rules in a choice of law

clause if they intend to contract out of the FAA. Id. at 296-97; see also Port Erie

Plastics, Inc. v. Uptown Nails LLC, 350 F. Supp. 2d 659, 664 (W.D. Pa.

2004)(“the mere presence of a generic choice-of-law provision does not, by itself,

evidence an intent by the parties to incorporate into the Operating Agreement New

York rules of arbitration”); Wolsey, Ltd. v. Foodmaker, Inc., 144 F.3d 1205 (9th

Cir. 1998)(compelling arbitration under FAA rather than California law, despite

choice of law clause specifying California law). In the case sub judice, the choice

of law provision in the Customer Agreement to which Plaintiffs direct the Court’s

attention, does not appear in the arbitration provision of the Customer Agreement

and does not expressly incorporate New York’s arbitration laws, nor does it opt out

of the FAA. Therefore, we find that the FAA governs. 

Plaintiffs ask the Court to disregard the FAA and apply New York law

because the “Governing Law” section of the Customer Agreement, ¶ 16, states that

“this Agreement and its enforcement shall be governed by the laws of the State of

New York.” Plaintiffs rely upon Smith Barney, Harris Upham & Co. v. Luckie, 85

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49

N.Y.2d 193 (N.Y. 1995), which is not binding precedent upon this Court and

which is of no import to this case, for the reasons that follow. 

Luckie involved the application of a specific arbitration rule, N.Y. CPLR §

7502(b), which states in pertinent part that where arbitration has been demanded,

“a party may assert the limitation [of time] as a bar to the arbitration on an

application to the court.” Id. at 197-98. Therefore, New York law permits a party

to petition a court to stay arbitration on the ground that the arbitration demand was

untimely. At the time that Luckie was decided, the year 1995, the law was

unsettled under the FAA as to whether the court had the authority to address

timeliness issues prior to compelling arbitration. The question before the court in

Luckie was whether CPLR § 7502(b) “conflicts with the FAA on the question of

the arbitrability of these Statute of Limitations disputes.” Id. at 200. The Court of

Appeals of New York ruled that a choice of law clause specifying that New York

law would govern the “agreement and its enforcement” provided evidence that the

parties intended for CPLR § 7502(b) to apply. Id. The court reasoned that since

the parties did not specifically exclude New York’s arbitration rules from their

choice of law clause, they must have intended to include them. Id. at 202. The

court further held that CPLR § 7502(b) did not conflict with the FAA and thus

upheld the application of CPLR § 7502(b) in cases governed by the FAA. We are

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 49 of 72
12 In addition, as submitted by the Deutsche Bank Defendants, subsequent authority has

abrogated Luckie as explained by the Second Circuit Court of Appeals in PaineWebber, Inc. v.

Bybyk, 81 F.3d 1193, 1200 (2d Cir. 1996); see also Cowen & Co. v. Tecnoconsult Holdings

Ltd., 1996 WL 391884 at *3 (S.D.N.Y. July 11, 1996)(explaining how Bybyk abrogated Luckie). 

Following Bybyk, the New York Court of Appeals reexamined this body of law and explained

that, to the extent that Luckie has any vitality after Mastrobuono v. Shearson Lehman Hutton, 20

F.3d 713 (7th Cir. 1994), it stands for the narrow proposition that “[a] choice of law provision,

which states that New York law shall govern both ‘the agreement and its enforcement,’ adopts as

‘binding New York’s rule that threshold Statute of Limitations questions are for the courts.’”

Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 253 (N.Y.

2005)(quoting Luckie, 85 N.Y.2d at 201). 

50

accordingly in agreement with the Deutsche Bank Defendants that Luckie is of no

import to the above-captioned case as it was limited to the application of CPLR §

7502(b), the judicial division of labor between the court and arbitrator with respect

to timeliness issues.12 Therefore, as noted, we find that the FAA, not New York

law, governs this case.

We now turn to the fact that district courts analyze two issues in determining

whether a party must submit its claims to arbitration: (1) whether there is a valid

agreement to arbitrate between the parties; and (2) whether the arbitration

agreement applies to the dispute at hand, i.e., whether the dispute falls within the

scope of the arbitration agreement. See John Hancock Mut. Life Ins. Co. v. Olick,

151 F.3d 132, 137 (3d Cir. 1998); In re Prudential Ins. Co. of Am. Sales Practice

Litig., 133 F.3d 225, 228 (3d Cir. 1998). 

We will initially consider the Deutsche Bank Defendants’ Motion and

ascertain whether a valid agreement to arbitrate exists between Plaintiff Mr.

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51

Chebalo and Deutsche Bank Defendants and whether the claims in this case fall

within the scope of the arbitration agreement. For the reasons that follow, we find

that there is a valid agreement to arbitrate between these parties and that Mr.

Chebalo’s claims asserted in this action against the Deutsche Bank Defendants fall

within the scope of the broad arbitration agreement that he executed with DBSI. 

As previously noted, the arbitration agreement at issue is applicable to “all

controversies which may arise between us concerning any transaction of

construction, performance, or breach of this or any other agreement between us,

whether entered into prior, on or subsequent to the date hereof, shall be determined

by arbitration.” (Rec. Doc. 18, Ex. A). We are in agreement with the Deutsche

Bank Defendants that such a broad provision should be interpreted accordingly,

particularly given the fact that the provision must be interpreted in the context of a

strong judicial presumption favoring arbitration so that “any doubt concerning the

scope of arbitrable issues should be resolved in favor of arbitration . . .” Moses H.

Cone Mem’l Hosp., 460 U.S. at 24-25. Moreover, in similar circumstances, courts

have found that equally broad arbitration clauses encompass all claims asserted by

the plaintiff. See, e.g., Chew, No. 3:04-CV-748BN, slip op. at 24 (noting that the

broad language of an identical arbitration clause encompassed all disputes arising

between the signatories); Galtney v. KPMG LLP, Case No. H-05-583 (S.D. Tex.

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 51 of 72
13 Moreover, we note that Plaintiffs do not deny that Mr. Chebalo has a written agreement

with DBSI that contains a broad arbitration clause encompassing the claims asserted in this

action. Plaintiffs, however, contend that Mr. Chebalo cannot be compelled to arbitrate because

there is a class action pending against DBSI and the Customer Agreement contains an exception

that does not require arbitration when the customer is a member of a putative class. However, as

accurately pointed out by Deutsche Bank Defendants, on December 12, 2005, approximately one

and a half months after the complaint was filed in this action, Mr. Chebalo opted out of the class

action. (Rec. Doc. 33, Ex. 1)(“Please be advised that Peter Amato, James Chebalo, and Leonard

Ross have timely requested exclusion from the proposed class in Marvin Simon, et al. v. KPMG

52

May 19, 2005), slip op. at 13-14 (noting that “any doubt is resolved in favor of

arbitration” and finding that an identical arbitration clause encompassed plaintiff’s

claim for aiding and abetting breach of fiduciary duty relating to a similar tax

strategy transaction); see also Millar v. Reliastar Life Ins. Co., 157 F. Supp. 2d

645, 647-49 (W.D.N.C. 2000)(finding that language of a similarly worded

arbitration clause – which covered “any disputes or controversies that may arise

between myself and [WSSI] or a registered representative of [WSSI] concerning

any order or transaction, or the continuation, performance or breach of this or any

other agreement between us, whether entered into before, on, or after the date this

account is open” – “leaves nothing to the imagination and is clearly intended to be

broad and inclusive in scope”). Accordingly, in light of the plain language of the

broad arbitration provision in the Customer Agreement signed by Mr. Chebalo, we

find that a valid agreement to arbitrate between the parties exists and that all of Mr.

Chebalo’s claims asserted against the Deutsche Bank Defendants fall within the

scope of the arbitration agreement that he executed with DBSI.13 Moreover, the

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 52 of 72
LLP, et al., Civ. 05-cv-03189 DMC (D.N.J.).”). We therefore do not find the existence of the

class action to bar enforcement of the Customer Agreement at issue.

53

plain language of the arbitration clause of the Customer Agreement requires, at a

minimum, for Mr. Chebalo to submit to arbitration his claims against DBSI. 

Deutsche Bank contends in its Motion that even though it was not a

signatory to the Customer Agreement, it may nevertheless enforce the arbitration

agreement because DBSI was acting as its agent at all relevant times. Deutsche

Bank asserts that it is the parent of DBSI and can accordingly enforce the

arbitration agreement between DBSI and Mr. Chebalo. 

As accurately submitted by the Deutsche Bank Defendants, non-signatories

to an arbitration agreement may compel arbitration where principles of agency

apply. See Pritzker v. Merril Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110,

1121-22 (3d Cir. 1993)(“Because a principal is bound under the terms of a valid

arbitration clause, its agents, employees, and representatives are also covered under

the terms of such agreements.”); E.I. Dupont De Nemours and Co. v. Rhone

Poulenc Fiber and Resin Intermediates, 269 F.3d 187, 199-201 (3d Cir. 2001). 

We are in agreement with Deutsche Bank that although it is itself not a

signatory to the Customer Agreement, DBSI was acting as Deutsche Bank’s agent

in carrying out the transactions, which is a fact acknowledged by Mr. Chebalo. 

Consider, in that regard, that on June 25, 1998, before implementing the OPIS

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 53 of 72
14 “Transactions” is defined as the Borrower’s intent (i) “to borrow funds from . . .

Deutsche Bank AG” and (ii) to “execute with or through us [DBSI], transactions involving

shares of common stock of Deutsche Bank AG.” (Rec. Doc. 27, Ex. C). 

54

strategy, Mr. Chebalo countersigned a letter sent by DBSI, Deutsche Bank’s

subsidiary, identifying Deutsche Bank as DBSI’s “parent company” and advising

Mr. Chebalo that DBSI was “act[ing] as agent” for its affiliates (including

Deutsche Bank) in connection with the financial transactions Mr. Chebalo was

executing in connection with his OPIS strategy. (Rec. Doc. 27, Ex. C). By

countersigning that June 25, 1998 letter agreement between DBSI and Mr.

Chebalo, Mr. Chebalo accordingly acknowledged the relationship between DBSI

and Deutsche Bank in connection with the services being delivered. The letter

provides as follows:

In consideration of our execution of the Transactions,14 you hereby

represent, warrant and acknowledge to us and to our affiliates for

which we act as agent in connection with the Transactions

(collectively, “Deutsche Bank”) that:

i. Deutsche Bank [defined as DBSI and its affiliates] has had no

involvement in, and accepts no responsibility for, the

establishment or promotion of the Strategy; and

ii. Deutsche Bank makes no guarantee or representation

whatsoever as to the expected performance or results of the

Strategy or any Transaction (including the tax, financial or

accounting consequences thereof), and you have not engaged in

the Strategy or entered into the Transactions in reliance upon

any such guarantee or representation.

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55

 iii. [Mr. Chebalo] [has] been independently advised by [his] own

legal counsel and will comply with all Internal Revenue Laws

of the United States.

iv. [Mr. Chebalo] [was] not approached by Deutsche Bank, to enter

into the Strategy or any Transaction but, indeed, you were

approached by Presidio Advisors, LLC to enter into the

Strategy and the Transactions. 

Id. (emphasis added). As submitted by the Deutsche Bank Defendants, Mr.

Chebalo used the DBSI account to implement the OPIS transaction, in part, by

purchasing securities on the Frankfurt Stock Exchange and engaging in swaps. In

connection with such transactions, Mr. Chebalo countersigned a confirmation from

Deutsche Bank, that provided in bold-face type capital letters that:

DEUTSCHE BANK AG IS NOT REGISTERED AS A BROKERDEALER UNDER THE U.S. SECURITIES EXCHANGE ACT

OF 1934. DEUTSCHE BANK SECURITIES INC. HAS ACTED

AS DEUTSCHE BANK AG’S AGENT IN CONNECTION WITH

THIS TRANSACTION.

Rec. Doc. 27, Ex. A.

As a non-signatory may invoke an arbitration clause under ordinary state law

principles of agency, and DBSI was Deutsche Bank’s agent, Deutsche Bank can

compel Mr. Chebalo to arbitrate his claims. Moreover, the claims against Deutsche

Bank relate to services performed by DBSI as agent for Deutsche Bank and,

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 55 of 72
15 As aptly submitted by the Deutsche Bank Defendants, throughout the complaint,

Plaintiffs refer to Deutsche Bank and DBSI as “Deutsche Bank” and draw no substantive

difference between the conduct of the two entities. (Compl. ¶ 18). 

16 The Deutsche Bank Defendants accurately submit that Plaintiffs have not addressed the

numerous cases cited by such Defendants establishing that Mr. Chebalo, as a signatory to the

Customer Agreement, can be compelled to arbitrate against Deutsche Bank on agency grounds. 

56

consequently, are founded upon and arise out of the same Customer Agreement.15

In addition, Plaintiffs allege in the complaint that Deutsche Bank and DBSI were

co-conspirators. (Compl. ¶¶ 147-151). We therefore find that Mr. Chebalo has

agreed to arbitrate any claims he may have against DBSI and acknowledged in

writing that DBSI was acting as Deutsche Bank’s agent in carrying out various

transactions underlying the OPIS strategy. Stated another way, Deutsche Bank

may properly enforce the arbitration agreement against Mr. Chebalo

notwithstanding the fact that it is not a signatory, as courts have recognized in

similar cases involving Deutsche Bank and other non-signatory defendants. See

Chew, No. 3:04-CV-748BN, slip op. at 17 (non-signatory Deutsche Bank AG

could enforce similar agreement against plaintiff because signatory Deutsche Bank

Securities, Inc. was acting as its agent); Hansen, No. 04-010525-GLT (MANx),

slip op. at 5-7 (non-signatory Deutsche Bank AG could enforce similar agreement

against plaintiff because plaintiff alleged interdependent and concerted misconduct

between signatory Deutsche Bank Securities, Inc. and Deutsche Bank AG);

Galtney, No. H-05-583, slip op. at 15-17 (same).16

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 56 of 72
As we have determined that Deutsche Bank may properly enforce the arbitration agreement

against Mr. Chebalo notwithstanding the fact that it is a non-signatory on the basis of agency

principles, we need not address the Deutsche Bank Defendants’ further argument concerning

estoppel.

57

Therefore, the Court has found that Plaintiff Mr. Chebalo must submit to

arbitration his claims against the Deutsche Bank Defendants pursuant to the broad

arbitration clause contained in the Customer Agreement and agency principles. 

We will now consider Defendant KPMG’s Motion to Compel Arbitration

and Stay All Proceedings, or, Alternatively, for an Extension of Time to Respond

to Plaintiffs’ Complaint. In the Motion, KPMG argues that even as a nonsignatory, it is entitled to enforce the arbitration agreement pursuant to principles

of estoppel, which is one of the several theories arising out of the common law that

provide a basis for non-signatories to enforce arbitration agreements. See, e.g.,

Miron, 342 F. Supp. 2d at 332; Amkor Tech., Inc. v. Alcatel Bus. Sys., 278 F.

Supp. 2d 519, 521 (E.D. Pa. 2003). 

KPMG accurately submits that Third Circuit case law instructs that equitable

estoppel principles allow a non-signatory to compel arbitration where there is a

close relationship between the entities involved and where the claims against the

non-signatory are closely intertwined with the arbitration agreement:

[A]lternative estoppel . . . will bind a signatory to arbitrate at a nonsignatory’s insistence where there is an obvious and close nexus

between the non-signatories and the contract or the contracting

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parties. . . The two-part test for alternative estoppel requires a court to

determine whether there is a close relationship between the entities

involved, and examine the relationship of the alleged wrongs to the

nonsignatory’s obligations and duties in the contract. . . To satisfy the

second part of the test, the non-signatory seeking enforcement of an

arbitration agreement must show that the claims against them are

intimately founded in and intertwined with the underlying obligations

of the contract to which they were not a party.

Miron, 342 F. Supp. 2d at 333 (internal citations omitted); see also e.g., E.I.

DuPont Nemours and Co., 269 F.3d at 199.

KPMG argues in the Motion that Plaintiffs’ allegations equitably estop

Plaintiff Mr. Chebalo from avoiding arbitration with KPMG as the complaint

alleges a “close relationship between the entities involved” and because the claims

asserted against KPMG are “intimately founded in and intertwined with the

underlying obligations of the contract.” (KPMG Br. Supp. Mot. Compel Arb. at 8-

10). 

At oral argument held before the Court on May 24, 2006, Plaintiffs’ counsel

directed the Court’s attention to a Deferred Prosecution Agreement (“DPA”)

entered into by Defendant KPMG with the Government arising from KPMG’s

FLIP, OPIS, Bond Linked Issue Premium Structure (“BLIPS”), and Short Option

Strategy (“SOS”) and entered into by KPMG to cooperate with the Government’s

investigation into criminal wrongdoing associated with the development,

promotion, and implementation of tax shelters. (Oral Argument, May 24, 2006,

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59

Pls’ Ex. 1). The DPA is subdivided into the following sections: “Statement of

Facts” (“SOF”); “The Fraudulent Tax Shelter Activities;” “Steps Taken to Avoid

IRS Scrutiny of the Tax Shelters;” “KPMG’s Responses to IRS and Senate

Investigations of its Fraudulent Tax Shelter Activities,” and “KPMG’s

Cooperation.” In the DPA, KPMG stipulated to a SOF. In the SOF, KPMG

admits that “[f]rom 1996 until 2002, KPMG, through its tax partners, it assisted

high net worth United States citizens to evade United States individual income

taxes on billions of dollars in capital gain and ordinary income by developing,

promoting and implementing unregistered and fraudulent tax shelters.” Id. ¶ 2. In

the DPA, KPMG details the unlawful and fraudulent conduct performed at the

hands of a number of KPMG tax partners, KPMG tax management, and other

personnel. In the “Fraudulent Tax Shelter Activities” portion of the DPA, KPMG

admits that its tax partners helped design or sell tax shelters to high net worth

United States citizens during the period in question, as noted. With regard to

OPIS, the tax shelter at issue in this case, KPMG admits that it was marketed and

sold by KPMG between 1998 and 2000 to at least 170 high net worth individual

clients, it generated at least $2.3 billion in bogus tax losses, and KPMG’s gross

fees from OPIS transactions were at least $28 billion. Id. ¶ 6. 

Moreover, and as raised by Plaintiffs’ counsel before the Court on May 24,

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2006, KPMG admits in the DPA that OPIS opinions signed by KPMG tax partners

and the representations drafted by KPMG tax partners and knowingly adopted by

the high net worth individual clients, falsely stated that:

(a) the client requested KPMG’s opinion ‘regarding the U.S. federal

income tax consequences of certain investment portfolio transactions,’

when in truth and in fact there were tax shelter transactions designed

to generate bogus tax losses; (b) the ‘investment strategy’ was based

on the expectation that a leveraged position in the foreign bank

securities would provide the ‘investor’ with the opportunity for capital

appreciation, when in truth and in fact the strategy was based on the

expected bogus tax benefits to be generated; and (c) certain money

was paid as part of an investment (i.e., for a warrant or a swap), when

in truth and in fact the money constituted fees due to promoters and

other facilitators of the transaction. All of these opinion letters were

substantially identical, save for the names of the clients and entities

involved, the dates, and the dollar amounts involved in the

transactions.

Id. ¶ 9. 

After a careful review of the DPA and applicable case law, we are in

agreement with Plaintiffs’ compelling argument that KPMG cannot avail itself of

the equitable doctrine of estoppel in the case sub judice as the DPA reflects in

particular detail that KPMG lacks clean hands in transactions underlying the

above-captioned case, specifically OPIS transactions. As aptly stated by the

United States District Court for the Southern District of Texas in Galtney, “[t]he

lynchpin for equitable estoppel is equity and the point of applying it to compel

arbitration is to prevent a situation that would fly in the face of fairness.” Galtney,

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 60 of 72
17 Moreover, we find the cases relied upon by KPMG to be factually distinguishable from

the instant case as they did not involve KPMG’s entry into a DPA with the Government. 

61

No. H-05-583, slip op. at 12 (citing Hill v. Gen. Elec. Power Sys., Inc., 282 F.3d

343, 349 (5th Cir. 2002)). Counsel for KPMG conceded at oral argument that the

language of the DPA specifically refers to certain OPIS strategies; however,

notwithstanding that fact, KPMG’s counsel asserted that the DPA failed to refer

directly to the Plaintiffs in this action. We find it unduly onerous and completely

unnecessary for the DPA to list the name of each and every client who participated

in transactions with KPMG that ultimately resulted in the filing of the DPA at

issue. In fact, as noted, the plain language of the DPA directly speaks to that issue

and states that “All of these opinion letters were substantially identical, save for the

names of the clients and entities involved, the dates, and the dollar amounts

involved in the transaction.” Id. ¶ 9. The DPA specifically includes OPIS

transactions, which form the underlying basis for the instant suit. While we are

cognizant of KPMG’s strenuous argument that the Court has discretion to enforce

the arbitration agreement against a non-signatory based upon principles of

equitable estoppel, it would be entirely inequitable and “fly in the face of fairness”

to permit KPMG to avail itself of such doctrine when it lacks clean hands, as

evidenced by its entry into the aforereferenced DPA.17 We will therefore deny

KPMG’s Motion to Compel Arbitration to the extent that KPMG is not entitled to

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62

enforce the arbitration agreement; however, as will be discussed in more detail

below, KPMG’s Motion is granted to the extent that the proceeding will be stayed

pending resolution of the arbitration between Plaintiff Mr. Chebalo and the

Deutsche Bank Defendants. 

Presidio has filed a Motion to Stay Proceedings Pending Arbitration, or

Alternatively, for Additional Time to Respond to Complaint in which it argues that

this Court should stay this case as to all parties if we grant the Deutsche Bank

Defendants’ Motion to Compel Arbitration. “Because of the strong federal interest

favoring arbitration, Presidio submits that should an arbitration involving Deutsche

Bank and certain Plaintiffs be ordered, this action should be stayed against all other

parties.” (Presidio Br. Supp. Mot. Stay at 2-3). In the Motion, Defendant Presidio

argues that Plaintiffs’ claims revolve around allegations that all Defendants joined

in a conspiracy to defraud Plaintiffs by making a particular investment available to

Plaintiffs. Presidio asserts that if the Court and jury will be required to make

findings on numerous issues of fact and law that will also be the subject of the

arbitration between Plaintiffs and Deutsche Bank Defendants, inherent risks of

inconsistent rulings and inefficiencies will occur, if the matters proceed

simultaneously. Presidio additionally asserts that the imposition of a stay will

present no significant prejudice to Plaintiffs as they waited several years to bring

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63

this lawsuit arising out of investments that occurred in 1998. “In short, given the

poverty of the allegations of causation and damages, there is no basis to conclude

that a stay pending arbitration would unfairly prejudice Plaintiffs in any way.” Id.

at 6. Moreover, we note that the Deutsche Bank Defendants also maintain that the

Court should stay the proceedings in their entirety pending arbitration in the

interest of judicial efficiency and based upon the Court’s inherent authority to

grant a stay in order to conserve judicial resources. (Deutsche Bank Defs.’ Br.

Supp. Mot. Compel Arbitration at 17-21). 

Before this Court can decide the issue of whether the nonarbitrable claims

should be stayed pending final resolution of the arbitrable claims, we must

ascertain whether the nonarbitrable claims should be severed and remanded to state

court. Plaintiffs argue that if the Court determines that it has subject matter

jurisdiction over Mr. Chebalo’s claims against Deutsche Bank, it should

nevertheless exercise its discretion to remand the remaining claims of the other

Plaintiffs. 

A district court may exercise supplemental jurisdiction over claims for

which it has no original jurisdiction if those claims “are so related to claims in the

action within such original jurisdiction that they form part of the same case or

controversy . . .” 28 U.S.C. § 1367(a); see Growth Horizon, Inc. v. Delaware

Case 4:06-cv-00039-JEJ Document 84 Filed 06/13/06 Page 63 of 72
18 As the United States District Court for the Southern District of Mississippi aptly noted

in Chew, an argument can be made that original federal jurisdiction exists over the nonarbitrable

claims because they are asserted in a cause of action which contains arbitrable claims under the

FAA, and in particular under the Convention. A ruling on such issue is not made however in this

Memorandum and Order because, to the extent that original jurisdiction does not exist for those

claims under the FAA, the Court will exercise supplemental jurisdiction over the claims under

28 U.S.C. § 1367(a). 3:04-CV-748BN, slip op. at 25-26 n.14. 

64

County, Pa., 983 F.2d 1277, 1285 n.14 (3d Cir. 1993)(section 1367(a) “states that

federal courts shall exercise supplemental jurisdiction over pendent claims arising

out of the same case or controversy”). Moreover, this Court has held that

supplemental jurisdiction applies not only to claims brought by a single plaintiff,

but also where different plaintiffs’ claims “derive from a ‘common nucleus of

operative fact’ and are such that a plaintiff ‘would ordinarily be expected to try

them in one judicial proceeding.’” Arnold v. Kimberly Quality Care Nursing Serv.,

762 F. Supp. 1182, 1186 (M.D. Pa. 1991)(internal citations omitted). 

Under the facts of this case, we find that the arbitrable claims over which we

have original jurisdiction and the nonarbitrable claims “form part of the same case

or controversy.” See Chew, 3:04-CV-748BN, slip op. at 25. In addition, the

complaint makes clear that Plaintiffs’ claims all derive from a “common nucleus of

operative fact.” (Compl. ¶¶ 25, 47, 101). Accordingly, the Court will exercise

supplemental jurisdiction over the nonarbitrable claims and no claims in the case

sub judice will be severed and remanded to state court.18 

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Regarding the Defendants’ request for a stay of the nonarbitrable claims, the

Deutsche Bank Defendants rely upon 9 U.S.C. § 3, which states in relevant part:

If any suit or proceeding be brought in any of the courts of the United

States upon any issue referable to arbitration under an agreement in

writing for such arbitration, the court in which such suit is pending,

upon being satisfied that the issue involved in such suit or proceeding

is referable to arbitration under such an agreement, shall on

application of one of the parties stay the trial of the action until such

arbitration has been had in accordance with the terms of the agreement

. . . 

The Third Circuit Court of Appeals has instructed that “[a] party to a valid and

enforceable arbitration agreement is entitled to a stay of federal court proceedings

pending arbitration as well as an order compelling such arbitration.” Alexander v.

Anthony Int’l L.P., 341 F.3d 256, 263 (3d Cir. 2003)(citing Seus v. John Nuveen &

Co., Inc., 146 F.3d 175, 179 (3d Cir. 1998)); see also Shaffer v. Graybill, 68 Fed.

Appx. 374, 376 (3d Cir. 2003)(“Under the FAA, a court, on application of one of

the parties to an agreement to arbitrate, must stay a judicial action commenced in

that court which is the subject of an arbitration clause or, in the alternative, must

dismiss any arbitrable claims.”). Accordingly, on the basis of the plain language of

9 U.S.C. § 3 and applicable case law, DBSI, as a signatory to the Customer

Agreement, is clearly entitled to a stay of all nonarbitrable claims against it in this

action. 

Regarding the right to a stay requested by Deutsche Bank and Presidio, as

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non-signatories to the Customer Agreement, the Court has discretion to stay

proceedings against parties and non-parties to an arbitration when the resolution of

the civil proceeding would involve a common question of law or fact within the

scope of the arbitration agreement. Consider, for example, that in Berkery v. Cross

Country Bank, 256 F. Supp. 2d 359 (E.D. Pa. 2003), the court stayed proceedings

against several non-arbitrating parties pending arbitration between the plaintiff and

the arbitrating defendant. Id. at 370. In Berkery, the court noted that “[t]he Third

Circuit has found decisions to stay arbitration proper in circumstances where nonparties to an arbitration agreement ‘have related and congruent interests with [those

of the parties who were also] principals to the litigation.” Id. at 370 n.11 (citing

Barrowclough v. Kider, Peabody & Co., 725 F.2d 923, 938 (3d Cir. 1985),

overruled on other grounds, Pritzker v. Merrill Lynch, Pierce, Fennder & Smith, 7

F.3d 1110 (3d Cir. 1993)); see also Cost Brothers, Inc. v. The Travelers Indem.

Co., 760 F.2d 58, 60 (3d Cir. 1985)(“[T]he decision whether to grant a stay in this

case is committed to the district court’s discretion, since it is a matter of the court’s

inherent power to conserve judicial resources by controlling its own docket.”). 

As accurately submitted by Defendants, the claims asserted in the complaint

are brought by Plaintiffs jointly and are grounded in identical facts and legal

theories. Moreover, Plaintiffs’ twenty causes of action against six Defendants

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67

revolve around Plaintiffs’ allegations that all of the Defendants joined in a

conspiracy to defraud Plaintiffs by making a particular investment available to

Plaintiffs. See, e.g., Compl. ¶¶ 146-151. Therefore, we find that simultaneous

prosecution of the claims in arbitration, with respect to Plaintiff Mr. Chebalo, and

this litigation with respect to the other Plaintiffs, would clearly be a waste of

judicial resources. In addition, given the interdependence of Plaintiffs’ claims,

simultaneous litigation of such claims in separate forums would likely lead to a

duplication of effort, as well as the risk of inconsistent decisions and inefficiencies. 

As aptly submitted by the Deutsche Bank Defendants and Presidio, for such

reasons, numerous other district courts have granted discretionary stays in

analogous or exact situations in litigation involving plaintiffs’ participation in an

investment strategy similar to the investment strategy at issue in this case. See,

e.g., GM Johnson Family Ltd. P’ship v. Deutsche Bank, et al., Civ. No. 03-5240

(W.D. Ark. Mar. 16, 2004)(staying plaintiffs’ claims against Deutsche Bank’s codefendant pending the arbitration of the plaintiffs’ claims against Deutsche Bank

due to existence of common issues); Whipple Family Ltd. P’ship v. Deutsche

Bank, et al., Civil No. 03-6115 (W.D. Ark. Mar. 16, 2004); Reddam v. KPMG, et

al., Civil No. SA CV 04-1227-GLT (MANx) (C.D. Cal. Dec. 14, 2004); Galtney,

Case No. H-05-583, slip op. at 17-18; Keeter, No. 1:04-CV-3759-WSD, slip op. at

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68

17-19; Chew, 3:04-CV-748BN, slip op. at 27 (finding that “the nonarbitrable

claims asserted against [Deutsche Bank AG and Deutsche Bank Securities, Inc.]

should be stayed”); Heller v. Deutsche Bank AG, 2005 WL 665052 at *6 (E.D. Pa.

Mar. 17, 2005)(noting that courts “typically grant stays when there are both

arbitrable and non-arbitrable claims in the same action and significant overlap

exists between the parties and issues”); Miron, 342 F. Supp. 2d at 334 (“[T]he

FAA’s requirement that a court stay ‘the trial of the action’ suggests that the

proceedings must be stayed in their entirety, even when the action encompasses

both arbitrable and non-arbitrable claims.”). In several of the aforereferenced

cases, the courts granted Presidio’s Motions to Stay Pending Arbitration, finding

that the civil proceedings against Presidio would involve “common questions of act

that are within the scope of the arbitration agreement.” We find the reasoning

contained in these cases to be compelling. 

Although Plaintiffs briefly assert that there is no appropriate reason to stay

these proceedings, we find that they have not established that they would be

prejudiced by a stay pending resolution of the arbitration between the Deutsche

Bank Defendants and Mr. Chebalo. We are in agreement with Presidio that the

imposition of a stay will present no significant prejudice to Plaintiffs as they

waited several years to bring this lawsuit arising out of investments that occurred

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69

in 1998. In addition and as previously noted, because Plaintiffs allege concerted

conduct and a joint conspiracy to defraud, it would be inefficient and risk

inconsistent findings and rulings to permit this case to proceed against the nonarbitrable Defendants after compelling arbitration against the Deutsche Bank

Defendants. Accordingly, this case is stayed pending resolution of the arbitration. 

NOW, THEREFORE, IT IS ORDERED THAT:

1. Sidley Austin’s Motion to Dismiss Plaintiffs’ Complaint pursuant to

Fed.R.Civ.P. 12(b)(6) (doc. 9) is granted in part and denied in part to

the following extent:

A. Plaintiffs’ claims for the recoupment of interest paid to the IRS

in all applicable counts of their complaint are dismissed.

B. Plaintiffs’ aiding and abetting fraud claims in all applicable

counts of their complaint are dismissed.

C. Sidley Austin’s Motion is denied in all other respects. 

2. Plaintiffs’ Motion to Remand for Lack of Subject Matter Jurisdiction

(doc. 23) is DENIED.

3. Defendant KPMG’s Motion to Compel Arbitration and Stay All

Proceedings, or, Alternatively, for an Extension of Time to Respond

to Plaintiffs’ Complaint (doc. 7) is granted in part and denied in part

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70

to the following extent:

A. KPMG’s Motion is granted to the extent that all further

proceedings in this case are STAYED against KPMG pending

the outcome of the arbitration between Plaintiff Mr. Chebalo

and Defendants Deutsche Bank AG and Deutsche Bank

Securities, Inc., in accordance with the arbitration clause

contained in the Customer Agreement. 

B. The Motion is denied in all other respects. 

4. Defendant Deutsche Bank Defendants’ Motion to Compel Arbitration

and Stay These Proceedings, or, Alternatively, for an Extension of

Time to Respond to Plaintiffs’ Complaint (doc. 10) is granted in part

and denied in part to the following extent:

A. Deutsche Bank Defendants’ Motion is granted to the extent that

Plaintiff Mr. Chebalo shall submit his claims against Deutsche

Bank AG and Deutsche Bank Securities, Inc. to arbitration in

accordance with the arbitration clause contained in the

Customer Agreement. All further proceedings in this case are

STAYED pending the outcome of the arbitration between

Plaintiff Mr. Chebalo and Defendants Deutsche Bank AG and

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71

Deutsche Bank Securities, Inc.

B. Deutsche Bank Defendants’ Motion is denied in all other

respects. 

5. Presidio Defendants’ Motion to Stay Proceedings Pending Arbitration,

or, Alternatively, for Additional Time to Respond to Complaint (doc.

8) is granted in part and denied in part to the following extent: 

A. Presidio’s Motion is granted to the extent that all further

proceedings in this case are STAYED against Presidio pending

the outcome of the arbitration between Plaintiff Mr. Chebalo

and Defendants Deutsche Bank AG and Deutsche Bank

Securities, Inc., in accordance with the arbitration clause

contained in the Customer Agreement. 

B. Presidio’s Motion is denied in all other respects. 

6. Based on the foregoing, Plaintiff Mr. Chebalo must submit to

arbitration his claims against Defendants Deutsche Bank AG and

Deutsche Bank Securities, Inc. The arbitration must be in accordance

with the applicable provisions of the Customer Agreement signed by

Plaintiff Mr. Chebalo.

7. All further proceedings in this case are STAYED against all

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Defendants pending the completion of the arbitration process between

Plaintiff Mr. Chebalo and Defendants Deutsche Bank AG and

Deutsche Bank Securities, Inc., in accordance with the arbitration

clause contained in the Customer Agreement. 

8. The remaining Plaintiffs are not required to submit to arbitration any

of their claims against any of the Defendants. 

9. The Court will schedule a telephonic status conference for December

4, 2006, at 9:30 a.m., which will be initiated by Plaintiffs’ counsel,

advising the Court on the progress of the arbitration procedure. The

Chambers’ telephone number is (570) 601-1497. The parties are

encouraged to complete the arbitration process by that date. 

s/ John E. Jones III 

 John E. Jones III

United States District Judge

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