Antitrust Law Daily Wrap Up, RICO—EDLa: Bank Not Liable for Allegedly Fraudulent Investment Plan, (Mar 12, 2013)

By Jody Coultas, J.D.

The Royal Bank of Canada (RBC) was not liable for creating a fraudulent financial scheme that resulted in the conviction of investors for attempted tax evasion and fraud, according to the federal district court in New Orleans (2002 JBO Trust No. 1 v. Royal Bank of Canada, March 8, 2013, Vance, S.). Claims brought under federal RICO law and Louisiana and Illinois unfair trade practices laws were barred by the statute of limitations.

A limited liability company and trust entered into a transaction with RBC that the bank described as a tax-advantaged investment in which clients would make a small investment in a portfolio structured to exploit the price movement of foreign currencies. After entering into the transaction, the Internal Revenue Service (IRS) issued Information Disclosure Requests to the company’s founder regarding its activities with the RBC investment structure. The founder was convicted of conspiracy to defraud an agency of the United States, specifically the IRS, and two counts of attempted tax evasion.

After being convicted, the founder, his company, and his trust filed suit against RBC under the Racketeer Influenced and Corrupt Organizations (RICO) statute, federal and Louisiana securities law, the Louisiana Unfair Trade Practices Act (UTPA), and the Illinois Consumer Fraud and Deceptive Business Practices Act claiming that they set up fraudulent financial schemes.

The court had jurisdiction over the claims against RBC’s employee that provided the plaintiffs with RBC materials indicating that the investments would produce a sizeable return and an employee of RBC’s subsidiary that assisted in the marketing and design of the RBC transaction. The employees engaged in transactions with and provided materials to the trust, which was domiciled in Louisiana, and purposely directed their activities towards the state. The alleged injuries were felt in Louisiana and arose out of the actions taken by the employees.

Although the company founder was collaterally estopped from asserting that he was unaware that the RBC tax structure constituted tax evasion, the court held that the defendant failed to demonstrate that the complaint was barred as a result. The defendants argued that the plaintiffs were collaterally estopped from litigating the claims based on court materials and judgments from the founder’s criminal conviction. Collateral estoppel bars a party from relitigating issues of fact or law that were actually determined in a prior action and were necessary to the court's judgment.

The founder was convicted of conspiracies involving a scheme to defraud the IRS and tax evasion. The founder’s knowledge that the RBC shelter was fraudulent was made clear through the jury instructions given for the tax evasion charge. RBC could not argue that collateral estoppel barred all of the claims because it failed to discuss the elements of those claims and why they cannot be maintained if the plaintiffs may not litigate the issue of knowledge as to the fraudulent nature of the RBC transaction.

Because the claims were filed after the expiration of the relevant statute of limitations, the court dismissed the claim. The RICO statute of limitations is four years and begins to run at the time that a plaintiff knew or should have known of his injury. The UTPA has a one-year limitations period that runs from the time of the transaction giving rise to the cause of action. Because the RBC transaction was executed in 2002, the allegedly fraudulent representations concerning the tax shelter must have occurred around this time as well. The notice from the IRS stating that the transactions constituted tax avoidance measures put the plaintiffs on notice that the transactions were of a different nature than was allegedly advertised.

The case is No. 12-1344.

Attorneys: Edward J. Castaing, Jr. (Crull, Castaing & Lilly) for Royal Bank of Canada.

Companies: Royal Bank of Canada

Cases: RICO StateUnfairTradePractices LouisianaNews