Antitrust Law Daily Wrap Up, RICO—N.D. Cal.: Investor’s RICO, UCL claims proceed against tax shelter organizers, (Apr 8, 2015)

By Michael Menzhuber, J.D., LL.M.

An investor’s Racketeer Influenced and Corrupt Organizations Act (RICO) and California Unfair Competition Law (UCL) claims against tax shelter organizers survived a motion to dismiss and motion for summary judgment, respectively, the federal district court in San Francisco has ruled (Rezner v. HVB America, Inc., April 6, 2015, Chhabria, V.).

John Rezner (investor) paid over $4 million in fees to enter into a Custom Adjustable Rate Debt Structure (CARDs) transaction that was later determined to be unlawful. The investor’s RICO claim was initially denied when the court determined that the fraudulent activities of the tax shelter organizers and their co-conspirators (tax shelter organizers) toward the United States did not cause his injury (Rezner v. Bayerische Hypo-Und Vereinsbank AG, 9th Cir. 2010, Rezner I). However, the court clarified that its holding in Rezner I did not preclude the investor from pursuing a RICO claim under an alternate theory of proximate causation (Rezner v. Unicredit Bank, 9th Cir. 2014, Rezner II).

RICO claims. The investor alleged that (1) false representations were made to him regarding the nature of the CARDs transaction; (2) the misrepresentations were made with an intent to induce him to enter into the transaction and the tax shelter organizers could collect the fees associated with the transaction; and (3) he would not have entered in the transaction if these misrepresentations had not been made. These allegations, however, rested on distinct fraudulent conduct directed at him, rather than towards the United States.

The tax shelter organizers argued that the investor was barred from pursuing his fraud theory because the “alternate theory of proximate causation,” permitted by Rezner II, required that the claim be based on some “new evidence” or “new theory.” The court disagreed because the tax organizers filed a motion to dismiss the RICO claim, rather than filing a motion for summary judgment. Since such a motion limits consideration to the pleadings, it precluded the court from considering any “new evidence.”

The court also determined that Rezner II did not stand for the proposition that the investor was required to articulate some “new theory.” Rather, if he wanted to pursue a RICO claim, he would have to do so on some other basis than the RICO conspiracy injured the United States. Since this alternate theory had always been imbedded in his complaints, and the tax organizers had never obtained a court ruling on the theory, there was no reason to believe that he was precluded from pursuing it now.

The tax organizers’ substantive argument for dismissal was that the alleged conspiracy was not plausible because the investor’s financial advisor received more fees than any actual member of the conspiracy. The court disagreed because it determined that it was plausible that the tax shelter organizers successfully defrauded the investor even while his financial advisor collected a large fee.

UCL claims. The court had previously granted summary judgment on the investor’s UCL claims in favor of the tax shelter organizers but this grant of summary judgment was subsequently vacated in Rezner II and remanded for reconsideration in light of the California Supreme Court’s decision in Riverisland Cold Storage, Inc. v. Fresno-Madera Prod. Credit Ass’n (Cal 2013).

At the time the court originally granted summary judgment in favor of the tax shelter organizers, the investor’s RICO claim had been dismissed with prejudice and the determination to grant the motion was premised on the investor’s inability to establish justifiable reliance in support of his UCL claim. However, it was later ruled that the investor could go forward with his RICO claim, and the tax shelter organizers had not sought summary judgment on his RICO claim based on a lack of evidence to support the claim.

The court noted the general rule that “when a court vacates an order previously entered, the legal status is the same as if the order was never existed. “ Therefore, although the reason that the original order was vacated was that it relied on cases subsequently overruled in Riverisland Cold Storage, Inc., the court determined that it was obliged to consider anew the investor’s entire UCL claim.

The case is No. 06-cv-02064-VC.

Attorneys: Joseph W. Cotchett (Cotchett Pitre & McCarthy LLP) for John N. Rezner. William M. Goodman (Kasowitz, Benson, Torres & Friedman LLP) for HVB America, Inc., Unicredit Bank AG, and Unicredit U.S. Finance LLC.

Companies: HVB America, Inc.; Unicredit Bank AG; Unicredit U.S. Finance LLC

Cases: RICO StateUnfairTradePractices CaliforniaNews