Justice Releases Petition in Presidio Enforcement Action -- Exhibit A3, Loftin Complaint

2. This case arises from a well-planned tax avoidance scheme concocted, promoted, implemented and fraudulently concealed by First Union, KPMG, QA, Brown & Wood and Presidio who, at all relevant times, constituted an enterprise within the meaning of 18 U.S.C. § 1961(4) ("the Enterprise").

3. The Enterprise acted in a highly-organized fashion, with each participant fulfilling a critical role. Upon information and belief, and as described more fully herein, plaintiff Loftin is just one of the hundreds of victims of this RICO conspiracy.

4. The scheme promoted by the Enterprise involved a variety of different tax strategies, including: the Foreign Leveraged Investment Program ("FLIP"); the Offshore Portfolio Investment Strategy ("OPIS") and the Bond Linked Issue Premium Structure ("BLIP"), which was also known as "Son of BOSS" (BOSS may be another tax strategy). These tax strategies were marketed as a lawful tax avoidance strategy that was not in any way a tax shelter (either legal or illegal), but in reality, as known to each member of the Enterprise, FLIP and OPIS were improper basis-shifting tax shelters, and BLIP was an improper tax shelter involving a loan to create basis and an investment in a fund that traded in foreign currencies. KPMG failed to register FLIP, OPIS and BLIP as tax shelters and, as each member of the Enterprise well knew, but failed to disclose to Mr. Loftin, each of these tax strategies was highly likely to be found improper by the IRS. The defendants traded on their national reputations and positions of trust with the plaintiff to fraudulently -- and shamefully -- induce Mr. Loftin, into getting unwittingly caught up in a massive tax fraud that has caused Mr. Loftin substantial money damages and untold emotional strain and public embarrassment. Mr. Loftin is a self-made man with a previously sterling reputation, who founded BTI Communications, Inc. at age twenty-four with a $10,000 loan that required his parents to mortgage their home.

5. Mt. Loftin was induced to enter into the FLIP tax strategy in 1997 and the BLIP tax strategy in 1999. KPMG prepared Mr. Loftin's returns for 1997, 1999 and 2000 (BLIP affected Mr. Loftin's 1999 and 2000 tax returns). Mr. Loftin's 1997, 1999 and 2000 returns are under audit by the Internal Revenue Service ("IRS"), as are the entire FLIP, OPIS and BLIP programs and the promoters of those programs, including KPMG. Mr. Loftin is currently in negotiations with the IRS to settle his tax liability, which would have been substantially lower absent defendants' fraudulent conduct, and may be assessed significant penalties.

7. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. § 1962 et seq. and 28 U.S.C. § 1331 and venue is proper in this District pursuant to 28 U.S.C. § 1391 (a) and (c) as plaintiff resides in this District. this Court has supplemental jurisdiction over plaintiff's state law claims pursuant to 28 U.S.C. § 1367(a).

9. Defendant KPMG is a worldwide firm of certified public accountants, auditors and consultants that provides a variety of accounting, auditing and consulting services. KPMG marketed and sold the tax strategy schemes alleged herein. KPMG conducts extensive business in this District.

10. Defendant First Union is a national bank now known as Wachovia Corporation. Throughout this Complaint, Wachovia will be referred to as "First Union." Through its representatives, First Union used its confidential information concerning the financial assets of its clients, including Mr. Loftin, to generate leads for KPMG, QA and Brown & Wood, to promote and market their tax-avoidance strategy, in exchange for a substantial fee, as set forth herein. First Union does substantial business in this District.

11. (a) Defendant QA Investments is a Delaware limited liability company with its principal place of business in Seattle, Washington. Mr. Loftin entered into a "QA Investments LLC Investment Advisory Agreement" with QA dated September 3, 1997.

(b) Defendant Quellos Group LLC ("Quellos") is a Delaware limited liability company with its principal place of business in Seattle, Washington. Quellos is the parent of QA and controlled QA at all relevant times. Quallos also controlled Quadra Capital Management, LP, an affiliate of both QA and Quellos that was involved in the promotion and sale of FLIP/OPIS as described below.

(c) QA Investments and Quellos are collectively referred to herein as "QA."

12. Defendant Brown & Wood is a nationally prominent law firm with its principal place of business in New York City and a practice that is nationwide and international in scope. Brown & Wood knowingly issued a false and misleading boilerplate tax opinion to Mr. Loftin for $50,000, and issued similar opinions to other victims for $50,000 each.

13. Presidio is an independent investment advisor registered under the Investment Advisers Act of 1940 that specializes in structured financial products and the execution of associated investment and derivative-based trading strategies. Upon information and belief, Presidio was formed by former QA principals and/or employees, who were also former KPMG employees, and performed a role in the BLIP transaction described below similar to the role performed by QA in the FLIP transaction.

14. In 1984, Congress enacted a comprehensive system to regulate the development, promotion and marketing of tax shelters. That system was amended and modified by law and regulation in subsequent years. Notably, the Secretary of the Treasury promulgated temporary regulations concerning, among other things, the registration of tax shelters and the creation and retention of lists of investors in tax shelters by the promoters and marketers of the tax shelter.

15. In this regard, under 26 U.S.C. § 6111, a promoter of tax shelters is required to register each shelter with the IRS prior to offering the public the opportunity to participate in the shelter. Pursuant to 26 USC § 6112, an organizer and/or seller of a tax shelter is required to keep a list of investors and provide it to the IRS within ten (10) days. Failure to either register a tax shelter or maintain (or provide to the IRS) a list of investors subjects the tax shelter seller/organizer to potential penalties.

16. In order to further the policies of the aforementioned provisions, the Secretary of the Treasury promulgated regulations under 26 U.S.C. § 6111 which authorize the IRS to publish a list of arrangements which it considers to be tax shelters subject to registration and disclosure. When the IRS publishes a notice listing such transactions as tax shelters, they are referred to as "listed transactions" and become subject to the requirements of 26 U.S.C. §§ 6111 and 6112.

17. Since at least 1997, KPMG promoted and marketed the FLIP tax strategy. Beginning in approximately 1998, KPMG began to abandon FLIP in favor of OPIS, which was essentially a tweaked version of the FLIP tax strategy. Upon information and belief, KPMG concluded that OPIS might have a somewhat better chance than FLIP of surviving IRS scrutiny. However, KPMG never disclosed FLIP's failures to any of the FLIP investors, nor did KPMG or any other member of the Enterprise tell OPIS investors that, in substance, OPIS was ultimately no better than FLIP and was also an illegal basis-shifting tax shelter. FLIP and OPIS both involved an arrangement to shift basis and generate a loss from the sale of stock and warrants, purportedly making use of Sections 302 and 318 of the Internal Revenue Code. In Notice 2001- 45, 2001-33 IRB 129, the IRS identified OPIS as a listed transaction. KPMG, however, never registered FLIP or OPIS as a tax shelter under § 6111.

18. At some point in time, but at least by the 1st quarter of 1999, the Enterprise members cooked up BLIP, a new version of their scam. Unlike FLIP and OPIS, BLIP used domestic partnerships and funds, rather than offshore entities. And, rather than relying on shifting the tax basis of stock between entities, BLIP involved an enormously complicated loan arrangement. The IRS is also challenging BLIP, which, as with FLIP and OPIS, KPMG failed to register as a tax shelter.

Mr. Loftin Sells A Business, Has A Large

20. Given Mr. Loftin's long-standing relationship with First Union and the degree of trust and confidence that he reposed in First Union, it was a natural step for Mr. Loftin to turn to his trusted private bankers at First Union for investment advice. Mr. Loftin was not considering tax shelters at the time, but rather was deciding how to invest the proceeds of his sale. However, Mr. Loftin's First Union account representative suggested that he meet with representatives of the bank to discuss tax planning for the monies Mr. Loftin had generated in the sale of FiberSouth.

21. That meeting occurred in Raleigh, North Carolina on August 6, 1997, and was attended by Mr. Loftin and First Union representatives Terry Hessling (a CPA and formally with Arthur Andersen), Jeff Martin, Jeff Aremplenan, George Basin and Susan Jessup. At that meeting, the First Union representatives advised Mr. Loftin that he should consider retaining KPMG for tax planning purposes in connection with the capital gains generated in the sale of FiberSouth. Mr. Loftin assented and First Union hastily arranged for Mr. Loftin to meet with KPMG the next day. Unknown to Mr. Loftin, First Union had a prior relationship with KPMG as part of the Enterprise alleged herein, whereby First Union, as a bank and therefore an entity most likely to see large deposits like Mr. Loftin's, would "bird-dog" potential victims for the defendants' fraudulent scheme. Indeed, First Union typically fulfilled this role with respect to most victims.

22. On August 7, 1997, Mr. Loftin met at BTI's offices with various First Union representatives and KPMG representatives Dale Baumann ("Baumann") and Carolyn Branan ("Branan"), both of whom were part of KPMG's "Personal Financial Planning Group" in Charlotte, North Carolina. At this meeting, Branan and Baumann presented Mr. Loftin with the FLIP tax strategy, which is described in detail below. As part of implementing the strategy, KPMG told Mr. Loftin that he would have to retain the investment services of QA, a firm that KPMG represented as being knowledgeable about the FLIP tax strategy. Again unknown to Mr. Loftin, KPMG and First Union had a prior relationship with QA, whereby QA was always brought in to provide "investment services" and to implement the fraudulent transactions. Indeed, with respect to some of the victims -- though not Mr. Loftin -- QA would occasionally fulfill the role more typically fulfilled by KPMG, with the exception of the preparation of the tax returns, which were always prepared by KPMG. As discussed later herein, Presidio later occasionally fulfilled the role fulfilled in 1997 by QA.

23. In any event, Branan and Baumann assured Mr. Loftin at this meeting that he would receive a legal opinion from a large, well- known law firm, arranged for by KPMG and QA, that would certify the "economic substance" of KPMG's tax strategy for Mr. Loftin and the operational aspects of the investments.

24. At that meeting, KPMG told Mr. Loftin that he could make some money on the transactions to cover some of his investment costs and, at the same time, incur large capital losses on the investments to offset his other capital gains. KPMG also falsely said that it was realistically possible that W Loftin could make substantial money with the tax strategy. One client, according to KPMG, had made $30 million using the same tax strategy. Thus, Mr. Loftin was assured that he would either make substantial money or incur large capital losses, or both, on the investments to offset the taxable gains that he had incurred in his sale of FiberSouth.

25. In fact, the above representations were false. As known to all of the members of the Enterprise, but not disclosed to Mr. Loftin, neither the FLIP tax strategy nor the BLIP tax strategy discussed infra were a legitimate tax planning strategy that could incur legitimate capital losses. Moreover, the members of the Enterprise knew that neither FLIP nor OPIS could generate substantial sums of money. At best, the tax strategies could generate sums not sufficient to cover the fees associated with entering into the transaction. Thus, instead of a "win-win" or "no-lose" situation, as described by the defendants, Mr. Loftin actually was induced to enter into a "lose-lose" proposition.

26. KPMG advised Mr. Loftin that the tax strategy compiled with IRS rules and regulations. KPMG also represented to Mr. Loftin that the investment strategy being proposed by KPMG was a "'no lose" proposition. KPMG further promised Mr. Loftin a legal tax opinion, referenced above, that the goals of the investment could be accomplished as presented to Mr. Loftin in the event of any audit by the IRS and that KPMG would provide Mr. Loftin with its own opinion as to the same. In addition, at the August 7, 1997 meeting, Carolyn Branan told Mr. Loftin that if he was ever audited, KPMG would fight and win.

27. Mr. Loftin told Carolyn Branan that BTI was under audit by the IRS, and he emphasized that he could not afford any tax strategy that could expose him to additional scrutiny by the IRS. He was assured that the tax strategy would not lead to any such additional scrutiny.

28. KPMG tried to pressure Mr. Loftin by representing to him that "there were very few spots left" and that he would therefore have to act quickly. Moreover, KPMG told Mr. Loftin that he could not retain the services of any outside professional to counsel him as to the transactions as the tax strategy was "confidential." When Mr. Loftin asked if he could have his personal lawyer, Larry Robbins, review the strategy and the proposed transactions, KPMG refused to permit it, and stated that the entire matter was highly confidential and could not be discussed with anyone, including his advisors. Mr. Loft in was thus put in a position, by professionals he trusted and relied upon, of having to make a quick decision about whether to invest in an incredibly complex international transaction that he did not actually understand without the benefit of counsel from either his accountant or tax lawyer.

29. First Union and KPMG also told Mr. Loftin that he should retain KPMG to perform his accounting work and prepare his tax return. They told Mr. Loftin that only KPMG would have the expertise necessary to efficiently prepare the return, given the added complexity in connection with this strategy.

30. KPMG did not disclose to Mr. Loftin the fact that KPMG was involved in over one hundred transactions as an illegally unregistered tax shelter promoter. Also not disclosed was the fact that KPMG was involved in many other similar transactions with QA (and, later, Presidio) and First Union on an assembly line, cookie- cutter basis. Nor was it disclosed to Mr. Loftin that Ralph Lovejoy of QA was married to KPMG tax partner Carolyn Branan, and that she was steering tax shelter business -- and substantial fees -- to her husband and QA. Nor was it disclosed to Mr. Loftin that at or about the time he was being promised a tax opinion from a prominent Wall Street law firm, KPMG was receiving advice that was highly skeptical of the bona fides of the entire scheme. Nor was it disclosed that the Wall Street tax opinion would not be "independent," because the issuer of the opinion (Brown & Wood) was a "promoter" receiving a large fee, and therefore would not be considered independent under IRS rules.

31. Mr. Loftin has been a successful businessman, but he is not sophisticated about taxes. (Moreover, tax strategies like FLIP, OPIS and BLIP can only be understood by the most sophisticated tax professionals. The average tax preparer cannot understand the transactions.) At the end of his meetings with First Union and KPMG, Mr. Loftin did not fully understand the complex international transaction that had been outlined to him, but he understood that his trusted bankers at First Union were recommending the deal to him along with one of the country's largest and best known accounting firms. Mr. Loftin believed that he was dealing with experts and, in reliance on their representations, agreed to implement the FLIP tax strategy and to engage KPMG to prepare his tax returns.

32. Mr. Loftin met with First Union representatives between August 1997 and December 1997 for a total of at least eight meetings. But, at no time did either First Union or KPMG apprise Mr. Loftin of the significant tax risks associated with the FLIP tax strategy or of the fact that it was virtually guaranteed to lose money. These undisclosed risks included the possibility that the IRS would not only deny the capital loss, resulting in an increased tax liability and accompanying interest, but impose accuracy-related penalties or, even worse, the possibility that the IRS would target the basis-shifting transaction as an "abusive tax shelter." No member of the Enterprise told Mr. Loftin that the FLIP tax strategy should have been registered as a "tax shelter" with the IRS and that KPMG and QA should have been listed as "promoters," as required by IRS rules. Nor was Mr. Loftin offered alternative, legal, investment and/or tax advice.

33. Moreover, though First Union and KPMG had expressly emphasized that Mr. Loftin would receive opinion letters certifying the economic substance of the FLIP tax strategy, they failed to explain that the opinions would be "more likely than not" opinions -- a phrase that itself was fraudulent because the scheme was not "more likely than not" to be considered proper -- and they failed to tell Mr. Loftin the difference between such an opinion and an "unqualified" opinion. Even more fundamentally, KPMG and First Union pressed Mr. Loftin to make a decision about taking one of the "few spots left" in the FLIP transaction before he had even received KPMG's own opinion, let alone Brown & Wood's. Though KPMG might have been expected to deliver an opinion to Mr. Loftin to inspect as part of making his decision or, at the latest, on the date he executed the first step in the strategy, KPMG did not actually deliver an opinion to Mr. Loftin until June 8, 1998. By then, of course, it hardly mattered what the opinion said because Mr. Loftin was already committed. Similarly, the Brown & Wood opinion was not delivered until June 15, 1998. On information and belief, the delay was caused, at least in part, because KPMG was having difficulty convincing anyone to sign an opinion. Thus, KPMG's and First Union's descriptions of the opinions were all that Mr. Loftin had to go on when he made his investment decision. The fact that Brown & Wood agreed to allow KPMG to represent to victims that it would provide a tax opinion was therefore a critical part of the scheme. Had Brown & Wood not consented to act in this role of delivering post-transaction opinion letters and permitting its name to be used in pitch meetings, the tax strategy would not have had the aura of legitimacy that it had when it was pitched to Mr. Loftin and others. Brown & Wood's involvement was thus an important element of the scheme to lure clients into entering into these bogus strategies, generating millions of dollars in fees for the Enterprise members.

34. Had Mr. Loftin been advised of the true risks associated with the tax strategy, he would not have agreed to implement it and, instead, would have availed himself of traditional investment and tax planning strategies.

35. Defendants' motive for participating in the Enterprise was pure greed. All reaped substantial fees from the tax strategies Mr. Loftin was induced to implement, as well as from the scores of taxpayers similarly caught in the defendants' web of deceit.

36. In the case of First Union, Mr. Loftin was told at the August 6th meeting that in order to compensate First Union in connection with its role in advising Mr. Loftin as to the tax strategy, Mr. Loftin would have to take a loan from First Union in the amount of $3.9 million to start implementing the tax strategy. In this regard, Mr. Loftin signed a loan agreement with First Union on September 2, 1997, and then, at the direction of defendants, directed that the proceeds of the loan be distributed as follows: $1,500,000 to Union Bank of Switzerland, New York Branch; $2,100,000 to BankAmerica International, NEW YORK, NEW YORK; and $100,000 to First Union for "fees relating to Financial Consulting/Tax Strategy."

37. Before the end of 1997, Mr. Loftin paid transaction fees associated with the FLIP tax strategy to KPMG and QA, by way of documents prepared and presented to him by defendants that, without explanation, authorized Larkhaven Capital, as described below, to pay defendants fees in connection with the tax FLIP strategy.

KPMG And QA Implement The FLIP Tax Strategy

40. In October 1998, Mr. Loftin filed his federal income tax return for 1997 which was prepared by KPMG. KPMG's preparation of Mr. Loftin's tax returns effectively assured that the tax strategies were not subjected to the scrutiny of a truly independent tax preparer that could examine the transactions to determine if they were legal and appropriate. The return was timely filed with the IRS and reflected over $27,416,629 in capital losses in 1997 from the tax strategy.

KPMG, QA, Brown & Wood and First Union Worked Together

42. QA entered into an Investment Adviser Agreement with Mr. Loftin dated September 3, 1997. Defendants also arranged for QA to be investment adviser to Larkhaven, which retained QA as an investment advisor by agreement dated September 15, 1997. In this way, QA had control over all aspects of the transactions and could ensure that the transactions were implemented according to the tax strategy defendants had designed for Mr. Loftin and others. QA arranged for all of the transactions described above and corresponded with UBS on behalf of Mr. Loftin to arrange for the transactions. Similarly, QA corresponded with UBS on behalf of Larkhaven. On information and belief, in connection with the FLIP transaction, there were undisclosed side agreements between UBS and some of the foreign entities which reduced the possibility of profits on Mr. Loftin's investment in the FLIP tax strategy. Although these undisclosed side agreements were material to the transactions, neither Brown & Wood nor KPMG disclosed them in their opinion letters although they knew, or should have known, of their existence.

43. In an effort to insulate itself from liability, KPMG fraudulently induced Mr. Loftin to sign an agreement, dated August 15, 1997, which purports to indemnify KPMG and limit its liability should any adverse legal action take place with respect to the FLIP tax strategy. KPMG's intention was to use these illegal exculpatory clauses to avoid crippling civil liability if their clients were audited by the IRS. Through the use of such illegal exculpatory clauses, KPMG -- and First Union -- in this, and related cases, have sought to limit or eliminate their liability and accountability for wrongdoing involving not only massive client fraud but a fraud on the United States Treasury. On information and belief, the improper losses on taxpayers' returns for these assembly line, cookie cutter improper tax strategies are approximately $1.4 billion, and the exculpatory provisions in the defendants' contracts with Mr. Loftin are illegal, contrary to public policy and void.

44. On information and belief, Mr. Loftin believes that in instances where KPMG was preparing and signing investors' tax returns, it often used Brown & Wood to provide a favorable tax opinion letter, just as it did in the case of Mr. Loftin. The involvement of Brown & Wood, which, like KPMG, was a highly respected firm, further reassured Mr. Loftin that he was making a reasonable, sound and prudent decision to invest in a valid bona fide investment. Instead, Mr. Loftin was being lured into participating in a massive tax fraud scheme that was never "more likely than not" to succeed, as falsely represented by Brown & Wood. Worst of all, by trading on their own ill-deserved substantial reputations to capture Mr. Loftin's trust, defendants induced Mr. Loftin to enter into transactions that have unfairly sullied his own sterling reputation, subjecting him to unwanted publicity and hurtful characterization as a "tax cheat."

Still Not Realizing That He Has

46. Faced again with a large infusion of cash, Mr. Loftin contacted Carolyn Branan at KPMG to seek tax advice. Ms. Branan quickly assured Mr. Loftin that he could do "the same strategy." In addition to the proceeds from his sale of BTI stock, Mr. Loftin had capital gains from his investment portfolio. He told Ms. Branan that he would engage in a tax strategy with respect to $100 million in capital gains. Ms. Branan tried to convince Mr. Loftin to increase the number to $180 million, but Mr. Loftin declined.

47. Rather than use QA for this second deal, Ms. Branan instructed Mr. Loftin that the investment advisor on the second deal would be Presidio. Upon information and belief, Presidio is a company founded by QA expatriates after an internal rift at QA. Mr, Loftin, still relying on KPMG's expertise and lulled into the false impression that the 1997 FLIP transaction had been completely legitimate, followed Ms. Branan's instructions. Presidio implemented the BLIP tax strategy.

48. At the time that Mr. Loftin entered into the BLIP tax strategy, he believed -- mistakenly, as it turns out -- that the BLIP tax strategy was also a FLIP transaction. Mr. Loftin has since learned, as a result of the IRS audit, that the 1999 deal was a BLIP transaction.

49. As noted briefly above, the BLIP concept, like the FLIP, was extraordinarily complex. KPMG summed up BLIP in its December 31, 1999 opinion letter thus: "Investor participated in a series of transactions involving investments in foreign currency-based securities and derivative contracts through an investment program . . . designed by Presidio Growth LLC." The BLIP tax strategy yielded capital losses over two tax years, 1999 and 2000.

50. Presidio -- the firm formed by QA expats -- played the role in the 1999 BLIP tax strategy that QA had played in the 1997 FLIP strategy, directing and implementing all the steps in the highly complex series of transactions. Presidio also acted as the "managing member" of one of the entities involved in the transactions and, for that, received substantial fees from Shoalhaven Ventures, LLC, the Caymans company that played the Larkhaven role in the 1999 transaction.

51. Brown & Wood, as ever, provided an after-the-fact "more than likely" opinion letter that Mr. Loftin did not receive until after he had entered into the deal. As with the 1997 FLIP deal, Mr. Loftin knew in advance of entering into the deal that Brown & Wood was again part of the group promoting the deal and would, in due course, send him an opinion.

52. KPMG once again prepared Mr. Loftin's tax returns for 1999 and 2000. The tax returns, which are currently under audit and the subject of settlement negotiations between Mr. Loftin and the IRS, reported capital losses of approximately $100 million as a result of the implementation of the BLIP tax strategy. As with 1997 FLIP transaction, absent defendents' fraud, Mr. Loftin could have utilized alternative, traditional investment and tax avoidance strategies.

The IRS Cracks Down On

54. In October 2000, the IRS made a formal information request of Mr. Loftin and initiated an audit of his 1997 tax return. The IRS had contacted Mr. Loftin after getting information about Mr. Loftin's participation in FLIP and BLIP from QA. The IRS had contacted QA because QA had actually registered FLIP (and, possibly, BLIP) as a tax shelter without telling Mr. Loftin or any other FLIP investor that it was doing so and despite the repeated assurances to Mr. Loftin by KPMG, First Union and Brown & Wood that the tax strategies were not tax shelters and did not have to be registered. The fact that the tax strategies would be registered as tax shelters was not revealed to Mr. Loftin at the time he was sold the investment and, more importantly, it was not disclosed to him when KPMG prepared, signed and delivered Mr. Loftin's tax returns.

55. KPMG represented Mr. Loftin in connection with the IRS audit, but has not challenged the IRS's characterization of either FLIP or BLIP. Instead, KPMG has encouraged Mr. Loftin to settle with the IRS based on the IRS's settlement proposal. KPMG, in effect, pulled the rug right out from Mr. Loftin in his audit, finally revealing by its actions that KPMG had known all along that the FLIP and BLIP tax strategies were bogus shams designed to generate fees for the Enterprise members. Mr. Loftin has now committed to pursue settling his tax liability with the IRS and will likely have to make substantial tax repayments, plus undetermined interest, and is subject to potential penalties.

56. On information and belief, KPMG admitted, after issuance of IRS Notice 2001-45, that KPMG was aware, at least 2 1/2 years earlier, that the IRS was investigating and even challenging tax investments strategies similar to the investment tax strategies conceived, marketed, promoted and managed by the members of the Enterprise. Had any member of the Enterprise revealed to Mr. Loftin that there was a risk with the IRS, Mr. Loftin would never have encountered the costs and IRS problems now facing him. Moreover, Mr. Loftin would not have invested in the tax strategies if he had been told in advance that QA would register it as a tax shelter with the IRS.

58. At all relevant times, KPMG, QA, First Union, Brown & Wood and Presidio were a "person" within the meaning of 18 U.S.C. § 1961(3), and "capable of holding a legal or beneficial interest in property." At all relevant times, KPMG, QA, First Union, Brown & Wood and Presidio constituted an "Enterprise" within the meaning of 18 U.S.C. § 1961(4). In its tax consulting business, KPMG closely worked with QA and Presidio for QA and Presidio to handle the "economic substance" of the transactions and to oversee the operational steps and payment of money. First Union coordinated closely with KPMG and rendered marketing and financial assistance. Brown & Wood lent the tax strategies enormous perceived credibility and legitimacy by putting its name and reputation behind them. Brown & Wood knew that its name was being used in pitch meetings to sell clients on the tax strategies and consented to its name being used in this fashion, all in exchange for a fee.

59. The purpose of the Enterprise was to solicit and represent current and prospective clients and maximize profits through the fees charged for KPMG's, First Union's, QA's, Presidio's and Brown & Wood's services. The Enterprise functions as a well-planned tax avoidance scheme. Initially, a prospective client becomes involved in a transaction that gives rise to a capital gain of tens of millions of dollars, usually the sale of a business. First Union, as the client's banker, becomes aware of the transaction and advises the client to engage KPMG (or occasionally QA) for tax planning. Having been thus steered to KPMG (or QA), the client is the subject of a real "hard-sell," where KPMG stresses that time is short and only a limited number of spots remain. After hooking the client, KPMG passes off responsibility for actually implementing the fraudulent transaction to QA or Presidio, both companies filled with former KPMG employees. KPMG prepares the tax return, thus extinguishing the clients last chance to get an independent opinion as to the legitimacy of the tax strategy. Brown & Wood permits its name to be invoked as a mantra, soothing a client's fear and spreading a patina of legitimacy over the sham deal. In exchange for preparing an opinion that is used, cookie-cutter, with each of the Enterprise's marks, Brown & Wood receives a handsome per-client fee. The Enterprise is an ongoing organization. The Enterprise has an ascertainable structure and purpose beyond the scope of the predicate acts and their conspiracy to commit such acts. The Enterprise has engaged in, and its activities have affected, interstate and foreign commerce. Each defendant has been associated with the Enterprise. Each defendant helped to direct the Enterprise's actions and manage its affairs. Each defendant conducted or participated, directly or indirectly, in the conduct of the Enterprise's affairs through a pattern of racketeering activity in violation of 18 U.S.C. 1962(c).

60. Defendants' multiple predicate acts of racketeering include mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343. Defendants engaged in multiple schemes to defraud consumers by marketing, establishing, and promoting tax avoidance benefits and willfully misrepresenting or failing to disclose material facts about "tax strategies" to such clients. Defendants executed or attempted to execute such schemes through the use of the United States mails and through transmissions by wire in interstate commerce. Defendants committed many predicate acts from September 1997 through January 2002 in furtherance of their scheme to defraud Mr. Loftin, as described above, and as set forth below:

62. Defendants' acts form a "pattern" of racketeering activity. They have been related in their common objectives to maximize profits, conspire to evade the Internal Revenue law by marketing and establishing "tax strategies" through the use of false and misleading information, and conspire to defraud clients regarding the tax consequences of such strategies. These acts have had the same or similar purposes, results, participants, victims, and methods of commission. Defendants' pattern of racketeering activity dates from at least mid-1997 and continues to the present, and threatens to continue in the future. The predicate acts of the defendants all are clearly related to the effort to fraudulently induce unsuspecting clients, including Mr. Loftin, into using the FLIP/OPIS transactions. Defendants were in the business of marketing this and similar tax shelters to hundreds of high net-worth potential investors. Defendants have engaged in the unlawful conduct over the years and have depended on it as a major source of business and profit. The predicate acts involve different victims at different points in time, all as one aspect of defendants' way of doing business.

63. Defendants participated, since fall 1997 and through 2002, in a pattern, of racketeering adversely affecting Mr. Loftin and similarly situated prospects and clients. The predicate acts of defendants all are clearly related to the effort to fraudulently induce unsuspecting clients into using the tax-avoidance strategy detailed herein. Mr. Loftin and his counsel have learned that the transactions were referred to as FLIP, OPIS and BLIP within KPMG and were marketed and "sold" to many high net worth individuals over several years. It was standard operating procedure for KPMG, QA and Presidio to demand that their clients sign nondisclosure agreements concerning FLIP/OPIS. Indeed, the copy of the Churchill Strategic Investment Fund Confidential Memorandum provided to Mr. Loftin in connection with the BLIP transaction is numbered, as is a common business practice with only the most confidential documents. Many of these individuals have retained legal counsel, who are participating in an "Alliance Group" in discussions with the IRS. For example, an article in Forbes magazine reported that the IRS "says hundreds of wealthy taxpayers. . . used variants of the same tax shelter to generate several billion dollars in artificial capital losses, which then offset 'real gains.'" Forbes, April 1, 2002, at 40 (emphasis added).

64. Encouraged and enriched by its success in 1997 promoting the tax avoidance strategy to Mr. Loftin and FLIP or OPIS Transactions to other taxpayers, KPMG increased its promotional efforts in 1998, KPMG aggressively marketed its tax strategies at a "Wealth Management" seminar sponsored by KPMG in Phoenix, Arizona in 1998. The seminar was targeted at high net worth individuals, both existing and prospective KPMG clients who might be vulnerable to KPMG's marketing of tax avoidance "products." KPMG promoted its tax strategies as using the IRS's complex rules against it. KPMG touted the investment advisory role of QA and another firm formed by principals who left QA, Presidio Advisors, LLC. Based on the KPMG Wealth Management conference and extensive promotional efforts by Carolyn Branan and others at KPMG, many taxpayers were defrauded into participating in FLIP, OPIS, BLIP and other tax strategies in 1998 and 1999.

65. The IRS Petition in United States v. KPMG LLP, Case No. 1:02MS00295 (D.D.C.), and accompanying privilege log prepared by KPMG, reveal the names of approximitely 160 other taxpayers who were solicited and fraudulently induced into investing in FLIP/OPIS transaction. Attached to the IRS petition, there are copies of written agreements and engagement letters between KPMG and QA relating to the development, promotion and implementation of the tax avoidance strategy detailed herein.

66. The pattern of racketeering activity caused damages to Mr. Loftin and to other clients of defendants, who were defrauded by defendants' failure to disclose the substantial risks involved, and by defendants' assurances that the tax strategies were legitimate tax avoidance steps that did not have to be registered as tax shelters with the IRS. Some of these other clients have filed lawsuits that describe how KPMG, First Union and QA made fraudulent misrepresentations and omissions to them that were substantially similar to those detailed above. Notably, these other clients tell how many of the same KPMG, First Union and QA personnel who were involved in the above-described transactions were also involved -- and performed similar roles -- in their respective transactions. As set forth in the Second Amended Complaint in Jacoboni v. KPMG, Case No. 6:02-cv-510-orl-22DAB (M.D. Fla), and repeated in this paragraph:

Mr. Charles Houser and Mr. William Rogers were business partners in a closely held telecommunications company based in Greenville, South Carolina. KPMG served as the company's regular outside accountant and the personal accountant for Mr. Houser. KPMG was in a position of trust and fiduciary duty in light of its complete access to the company's business plans and financial information.

In 1998, KPMG's employee, William Spitz, called Mr. Houser via an interstate telephone call regarding a "business opportunity" that might be beneficial considering their position following the sale of their telecom company. Mr. Spitz then met in Greenville to pitch the FLIP tax strategy to Mr. Houser and Mr. Rogers.

Mr. Spitz would not permit Mr. Houser or Mr. Rogers to have anyone else evaluate the recommended FLIP tax strategy, but Mr. Spitz represented that KPMG "has presented this strategy to its clients all over the country" and that "some clients made over $700,000." Mr. Spitz gave his oral assurance that the FLIP strategy met the IRS rules and regulations. KPMG never advised Mr. Houser or Mr. Rogers of the risks of the FLIP tax strategy, or that they might be subject to increased tax liability and possible penalties.

Mr. Rogers later requested a tax opinion letter from Mr. Spitz and KPMG, as they had assured him that they would give him a favorable opinion letter on the tax aspects of the transaction. At a later meeting in 1999 with Mr. Spitz in Greenville, Mr. Spitz told Mr. Rogers that he did not have a written legal opinion concerning the FLP tax strategy. That statement was a misrepresentation, because Mr. Spitz personally -- and KPMG as a company -- were aware that written legal opinions were available within KPMG at the time. In order to effectuate the FLIP tax strategy, Mr. Spitz periodically called Mr. Houser and Mr. Rogers in late 1998 via interstate phone calls, asking them to send checks via U.S. Mail or complete wire transfers of funds.

QA Investments assisted KPMG in carrying out the FLIP tax strategy by establishing a Cayman Island corporation through which stock and warrant transactions were routed, by trading in UBS stock, and by otherwise consummating the transactions via U.S. Mail and interstate telephone calls and wire transfers.

Despite their request for assistance, KPMG refused to recommend whether they should participate in the IRS settlement Mr. Houser and Mr. Rogers have elected to participate in the MS settlement offer.

(c) Other RICO Victims

• The Brashier Family: A grandfather, his children, and his grandchildren, all residing in South Carolina, invested in a KPMG and QA Tax Strategy in 1998. The investing family members included:

• • Thomas Walter Brashier

  • Kathy Brashier Duncan

  • William Benjamin Duncan

  • Thomas Walter Brashier, Jr.

  • Thomas Walter Brashier, II

  • Martin Timothy Brashier

  • Samuel Wesley Brashier

  • James Ted Brashier

  • James Brian Duncan

  • Christy Lynn Brashier

  • James Matthew Brashier

  • Emily Caroline Brashier

  • Daniel McKinney Brashier

• Bruce Richbourg: a resident of South Carolina, also invested In a FLIP tax strategy in 1998. Mr. Richbourg recently filed an action against KPMG, First Union and QA in state court in South Carolina titled Richbourg v. KPMG, Case No. 2003-CP-23-1751 (Ct. of Common Pleas, 13th Jud. District).

68. The pattern of racketeering activity caused damages to Mr. Loftin and other clients of defendants, who were defrauded by defendants' failure to disclose the substantial risks involved and the defendant's assurances that the tax strategies were legitimate tax avoidance steps that did not have to be registered as tax shelters with the IRS.

69. The pattern of racketeering activity, including the mail and wire fraud, were all committed in an effort to induce Mr. Loftin to invest in the transactions and in turn pay millions of dollars in fees and related expenses to the Enterprise.

70. As described herein, defendants' predicate arts of mail and wire fraud were committed by defrauding customers, misrepresenting material facts, and failing to disclose material risks. Had it not been for those fraudulent misrepresentations, Mr. Loftin would not have invested in the tax-avoidance strategy. This would have saved him millions of dollars in fees, prevented an IRS audit, avoided the need to hire a new accountant and to incur legal fees, and avoided the need to pay additional tax liability, interest and possibly penalties. Mr. Loftin would also have been able to pursue reasonable and legitimate alternative investments and tax planning strategies. The conduct of defendants was the direct and immediate cause of Mr. Loftin's misinformed decision to invest his money in the fraudulent tax-avoidance strategy. Defendants conspired to defraud Mr. Loftin and other taxpayers in violation of 18 U.S.C. § 1962(d).

71. As a direct and proximate result of defendants' violations of 18 U.S.C. § 1962(c) and (d), Mr. Loftin and others have been injured in their business and property. Pursuant to 18 U.S.C. §1962(c), Mr. Loftin seeks recovery of treble damages, the costs of bringing this lawsuit, and reasonable attorneys' fees.

73. Fiat Union, KPMG, QA, Presidio and Brown & Wood made numerous material misrepresentations and failed to disclose material information to plaintiff.

74. At the time that First Union, KPMG, QA, Presidio and Brown & Wood made these misrepresentations or omissions of fact, they knew or were reckless in not knowing that such representations and omissions were false and misleading. Defendants knew such information was material and knew of the information that was not disclosed, as described above. Moreover, defendants had a duty to plaintiff to disclose such facts, and to ensure that all of their statements and representations were complete, truthful, and not false or misleading.

75. Plaintiff was unaware that First Union's, KPMG, QA, Presidio and Brown & Wood's representations and omissions were false and misleading and that defendant had not disclosed material information. Plaintiff reasonably relied on the representations, and relied on information provided by defendant without knowing of defendants' omissions, and plaintiff was thereby detrimentally affected, as described herein. Plaintiff was unaware of defendants' material misrepresentations and nondisclosures, and could not have discovered them through reasonable diligence as a result of defendants' conduct in fraudulently concealing their wrongdoing, as described more fully in this complaint.

76. First Union, KPMG, QA, Presidio and Brown & Wood intended for plaintiff to rely on the foregoing misrepresentations and omissions of fact, as set forth in this complaint.

77. In addition, First Union and Brown & Wood provided KPMG, QA, and Presidio substantial assistance in the commission of the fraud, knowing of the underlying wrongdoing.

78. By reason of the foregoing, plaintiff is entitled to damages in an amount to be determined at the trial of this action.

79. Defendants' misconduct described in this action was done willfully and with knowing and conscious disregard of the rights of plaintiff, with the intent to vex, injure, or annoy plaintiff, so as to constitute oppression, fraud, or malice. Plaintiff is entitled to receive punitive damages in an amount appropriate to punish or set an example of defendants.

81. Defendants owed plaintiff fiduciary duties, including the duty of good faith and fair dealing, the duty of full disclosure, and the duty of care arising out of their relationship with plaintiff as alleged more fully above.

82. Defendants held and continue to hold a special relationship with plaintiff.

83. Defendants had a duty to provide complete and truthful information to plaintiff when offering the tax strategy described herein.

84. All defendants engaged in the aforesaid misconduct both individually and by aiding and abetting each other in the commission of the wrongs, By engaging, in the conduct alleged herein, defendants breached their fiduciary dudes to plaintiff, by misrepresenting or omitting and failing to disclose, while under a duty to do so, the numerous material facts set forth more fully herein.

85. As a result of defendants' breaches of fiduciary duty, plaintiff is entitled to damages in an amount to be determined at trial.

87. Defendants First Union, KPMG, QA, Presidio and Brown & Wood falsely stated and misrepresented to plaintiff, through memoranda, presentations and materials approved, prepared and disseminated by them, that the tax strategy, described herein, was proper and legal, or was "more likely than not" to be found to be proper and legal.

88. At the time defendants First Union, KPMG, QA, Presidio and Brown & Wood made these misrepresentations, they were both material and false.

89. These statements and representations were negligently made by defendants First Union, KPMG, QA, Presidio and Brown & Wood without reasonable grounds to believe that they were true. Plaintiff reasonably relied on defendants' misrepresentations. If defendants had not made those misrepresentations, plaintiff would not have entered into the tax strategy, described herein.

90. Defendants First Union, KPMG, QA, Presidio and Brown & Wood reasonably should have known that plaintiff, at the time theft representations were made, did not know the truth but believed defendants' representations to be true, reasonably relied upon them, and were thereby induced to enter into the tax strategy described herein.

91. Defendants First Union, KPMG, QA, Presidio and Brown & Wood reasonably should have known that plaintiff would suffer injury from engaging in the tax strategy described herein. Plaintiff was injured as a result thereof.

92. Based on defendants and/or defendant's agents' relationship with plaintiff, defendants' owed plaintiff a duty of care to act with reasonable skill and diligence in conducting business, which duty defendants breached. By reason of the foregoing, plaintiff is entitled to damages in an amount to be determined at the trial of this action.

94. KPMG owed a duty to plaintiff to use the skill and care of a reasonably competent accountant and tax consultant. KPMG owed a duty to plaintiff to perform professional accounting, financial planning and tax consulting services in a proper, skillful and careful manner.

95. KPMG intentionally, recklessly and/or with negligence or gross negligence breached its duty owed to plaintiff to act with the care and skill of a reasonably competent accountant and tax consultant.

96. KPMG intentionally, recklessly and/or with negligence or gross negligence breached its duty owed to plaintiff by other ads and omissions including those acts and omissions previously alleged. KPMG's breach of duty alleged above constitutes malpractice.

97. As a direct and proximate result of KPMG's malpractice, in violation of the standard of care or skill required of a reasonably competent accountant and tax consultant/preparer, plaintiff has incurred economic and consequential damages.

99. Brown & Wood owed a duty to plaintiff to use the skill and care of a reasonably competent attorney. Brown & Wood owed a duty to plaintiff to perform professional legal services in a proper, skillful, and careful manner.

100. Brown & Wood intentionally recklessly and/or with negligence or gross negligence breached its duty owed to plaintiff to act with the care and skill of a reasonably competent accountant and tax consultant.

101. Brown & Wood, intentionally recklessly and/or with negligence or gross negligence breached its duty owed to plaintiff by other acts and omissions including those acts and omissions previously alleged. Brown & Wood's breach of duty alleged above constitutes malpractice.

102. As a direct and proximate result of Brown & Wood's malpractice, in violation of the standard of care or skill required of a reasonably competent attorney, plaintiff has incurred economic and consequential damages.

WHEREFORE, Plaintiff prays for relief and judgment as follows:

(a) Ordering that defendants indemnify and reimburse plaintiff for any and all additional tax liability, interest and penalties assessed or that may be assessed against plaintiff relating to plaintiff's 1997 and 1999 federal income tax returns;

(b) With respect to the First Claim, awarding plaintiff treble damages under RICO;

(c) Awarding compensatory damages in favor of plaintiff against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

(d) Awarding plaintiff punitive damages in an amount to be determined at trial;

(e) Ordering that the indemnity agreement be declared null and void;

(f) Awarding plaintiff his reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

(g) Such other and further relief as the Court may deem just and proper.

Dated: April 4, 2003

KPMG LLP ("KPMG") moved to dismiss on May 6, 2003 [DE 45]. Loftin responded on June 13, 2003 [DE 91]. KPMG replied on June 30, 2003 [DE 106]. Presidio Growth, LLC ("Presidio") has joined KPMG's motion to dismiss.

QA Investments LLC ("QA") moved to dismiss the complaint on May 6, 2003 [DE 39]. Loftin responded on June 13, 2003 [DE 92]. QA replied on June 27, 2003 [DE 103]. QA joins the other Defendants' motions to dismiss to the extent applicable.

Quellos Group LLC ("Quellos") moved to dismiss the complaint on May 6, 2003 [DE 42]. Loftin responded on June 13, 2003 [DE 93]. Quellos replied on June 27, 2003 [DE 102]. Quellos joins the other Defendants' motions to dismiss to the extent applicable.

Sidley, Austin, Brown & Wood, LLP ("Brown & Wood") moved to dismiss on June 11, 2003 [DE 89]. Loffin responded on July 1, 2003 [DE 107]. Brown & Wood replied on July 14, 2003 [DE 114]. ¹ These motions are ripe for adjudication.

At the suggestion of his First Union account representative, Loftin met with First Union bank representatives in Raleigh, North Carolina on August 6, 1997 to discuss tax planning regarding the proceeds from the FiberSouth sale. (ACC ¶ 20-21.) At the meeting, First Union representatives encouraged Loftin to retain the services of KPMG, a firm of certified public accountants, auditors and consultants that provides a variety of accounting, auditing and consulting services, for tax planning purposes in connection with the capital gains stemming from the FiberSouth sale. (ACC ¶¶ 9, 21.)

The next day, August 7, 1997, Loftin met with representatives from First Union and KPMG. (ACC ¶ 22.) KPMG representatives presented Loftin with the FLIP tax planning strategy and told him that in order to implement the strategy, he would have to retain the services of QA, a firm knowledgeable about the strategy. (ACC ¶ 22.) Loftin claims that KPMG told him that he would either make substantial money, incur large capital losses, or both, as a result of participating in the FLIP strategy. (ACC ¶ 24.) Loftin asserts that KPMG told him that the strategy complied with IRS rules and regulations and would withstand an IRS audit. (ACC ¶ 26.) KPMG also promised Loftin a legal opinion certifying the "economic substance" of the FLIP strategy. (ACC ¶ 23.) Loftin agreed to implement the FLIP strategy and to hire KPMG to prepare his tax returns. (ACC ¶ 31.)

Implementation of the FLIP strategy commenced on September 16,1997, when Loftin purchased a warrant from Larkhaven Capital, Inc. ("Larkhaven"), a foreign corporation organized under the laws of the Cayman Islands, for 4,250 shares of Larkhaven at a price of $2,100,000. The warrant expired on September 30, 1998 and entitled Loftin either to exercise the warrant or settle the warrant based upon a "put" value based on the net asset value of Larkhaven multiplied by the percentage of Larkhaven covered by the warrant. The same day, Loftin purchased 1,408 shares of Union Bank of Switzerland ("UBS"), a foreign bank, at a price of $1,064.81 per share for a total of $1,499,246. Also on September 16, Larkhaven purchased 28,392 shares of UBS for a total price of over $29 million. UBS was committed to finance 100% of Larkhaven's purchase of UBS shares. Larkhaven sold European-style "call options" to UBS at a strike price of 1,451.60 Swiss Francs per share for the bank to purchase its shares. The call options allowed Larkhaven to earn a fixed daily payment for each day the price of UBS stock closed above a certain level. The call options expired on November 5, 1997.

On November 5, 1997, when UBS shares were trading at 1,708 Swiss Francs, UBS exercised its call option and purchased 29,610 shares of its stock from Larkhaven at the strike price of 1,451.60 per share. The same day, Loftin purchased from UBS 28,392 over-the-counter call options on UBS shares. Loftin's call options expired, unused, on November 25, 1997.

On December 10, 1997, Loftin put his warrant back to Larkhaven for its value of $2,048,857. On December 22, 1997, Loftin sold 1,267 shares of UBS for $1,835,402 for a profit of approximately $486,294. These transactions were designed to effect a "basis shift" from the redeemed UBS shares held by Larkhaven to the UBS shares held by Loftin, thereby enabling Loftin to recognize a capital loss on his sale of UBS shares. (ACC ¶¶ 38, 39). QA orchestrated each of the transactions. (ACC ¶¶ 42.)

KPMG's opinion letter was delivered on June 8, 1998, and Brown & Wood's opinion letter was delivered on June 15, 1998, both advising Loftin that the FLIP strategy was "more likely than not" to be considered proper. (ACC ¶ 33.) In October of 1998, Loftin filed his KPMG-prepared 1997 federal income tax return in which he claimed over $27,416,629 in capital losses from the FLIP strategy. (ACC ¶ 40.)

In 1999, Loftin entered into a transaction to sell a portion of his equity stake in BTI to another investor, resulting in $65 million in proceeds. (ACC ¶ 45.) Loftin contacted KPMG for tax advice concerning the $65 million and other capital gains from his investment portfolio and was told that he could employ a BLIP Strategy. ³ (ACC ¶ 46.) Presidio, rather than QA, served as the investment advisor for the BLIP strategy. (ACC ¶ 47.) Loftin received another favorable opinion letter from Brown & Wood subsequent to committing to the BLIP strategy. (ACC ¶ 51.) KPMG prepared Loftin's 1999 and 2000 federal income tax returns, which reported capital losses of approximately $100 million as a result of the implementation of the BLIP strategy. (ACC ¶ 52.)

In October 2000, the IRS commenced an audit of Loftin's 1997 tax return. (ACC ¶ 55.) KFMG encouraged Loftin to settle with the IRS, and Loftin states that he is committed to pursuing a settlement agreement with the IRS. (ACC ¶ 55.)

Loftin asserts a six count complaint against Defendants. Count I is a RICO action brought against all Defendants alleging that Defendants fraudulently induced him to enter the FLIP and BLIP securities transactions. Count II is a claim for fraud against all Defendants, alleging that Defendants made misrepresentations of fact they knew to be false, or, alternatively, were recklessly unaware of their falsity. Count III is a claim for breach of fiduciary duty against all Defendants alleging failure to represent accurately and completely the nature of the FLIP and BLIP transactions. Count IV is a claim for negligent misrepresentation against all Defendants, claiming that Defendants falsely represented that the transactions were "more likely than not" to be found proper and legal. Count V is a claim for malpractice against KPMG for failure to provide reasonably competent accounting, financial planning and tax consulting services. Count VI is a claim for malpractice against Brown & Wood for failure to provide reasonably competent accounting and tax consultant services.

RICO, 18 U.S.C. § 1961, et seq., provides civil and criminal liability for individuals engaged in "a pattern of racketeering activity." 18 U.S.C. 1962(a-d). Private individuals suffering injury resulting from RICO violations have a cause of action under the act. See 18 U.S.C. § 1964. The elements of a civil RICO cause of action are "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." Durham v. Business Mgmt. Assocs., 847 F.2d 1505, 1511 (11th Cir. 1988) (quoting Sedima S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 105 S.Ct. 3275, 3285 (1985)). A pattern of racketeering activity consists of two "predicate acts" of racketeering activity occurring within a ten year period. 18 U.S.C. § 1961(5). "Racketeering activity" includes acts that are indictable under designated criminal offenses, including federal statutes prohibiting mail and wire fraud. 18 U.S.C. § 1961 (1).

Defendants argue that Loftin's RICO claim is barred by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 18 U.S.C. § 1964(c). The PSLRA provides that a civil RICO claimant may not "rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962" unless the person who committed said fraudulent conduct has been criminally convicted. 18 U.S.C. § 1964(c). Defendants move to dismiss the RICO claim with prejudice because the conduct Loftin relies on as predicate acts of racketeering, alleged wire and mail fraud, would be actionable as securities fraud claims.

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) provides that

Loftin points to specific acts of alleged mail and wire fraud with respect to both the FLIP and BLIP transactions. Regarding the FLIP transaction, on September 7, 1997, QA sent Loftin a copy of an investment advisory agreement and provided wiring instructions for funding the UBS Securities LLC brokerage account; on May 15, 1998, a KPMG representative faxed Loftin a draft of a tax opinion letter relating to Loftin's purchase of UBS stock; on June 8, 1998, KPMG sent Loftin an opinion on the consequences of the FLIP transaction allegedly containing false and misleading statements regarding the likely impact of implementation of the FLIP strategy; on June 15, 1998, Brown & Wood mailed a tax opinion to Loftin allegedly containing false and misleading statements regarding the likely impact of implementation of the FLIP strategy; finally in 1998, KPMG prepared an allegedly illegal and fraudulent tax return for Loftin knowing that Loftin would place the tax return in the mail.

Regarding the BLIP transaction, on November 4, 1999, KPMG faxed Loftin a memo to effectuate a step in the strategy instructing Loftin to sign the document and mail the original, and fax a copy, to Presidio; on December 31, 1999, Brown & Wood sent Loftin an opinion letter allegedly containing false and misleading statements regarding the likely tax consequences of implementation of the BLIP strategy; on April 5, 2000, KPMG sent Loftin an opinion regarding the tax consequences of implementation of the BLIP strategy allegedly containing false and misleading statements; finally, in 2000 and 2001, KPMG prepared allegedly illegal and fraudulent tax returns for Loftin knowing that Loftin would place the returns in the mail. Since the conduct on which Loftin relies is conduct that would be actionable under 15 U.S.C. § 78j(b) and SEC Rule 10b-5, the PSLRA bar applies to warrant dismissal of Loftin's RICO claim with prejudice.

Courts examining this issue have reached similar conclusions. In Florida Evergreen Foliage v. DuPont, 165 F.Supp.2d 1345 (S.D.Fl. 2001), aff'd Green Leaf Nursery v. DuPont, ___ F.3d ___, 2003 WL 21949591 (11th Cir. Aug. 15, 2003), Plaintiffs alleged that Dupont executed a scheme to defraud them into settling their initial case for less money than they would have sought otherwise by withholding information and making false statements. Plaintiffs alleged that DuPont, inter alia, gave misleading and false answers to discovery requests, false answers to court orders to produce, intentionally concealed relevant documents and data and gave false deposition testimony. As this conduct was also the subject of an underlying securities fraud suit, the Court held that the PSLRA bar applied, thereby precluding Plaintiffs' RICO claims.

In Aries Aluminum Corp. v. King, No. 98-4108, 1999 WL 801523, at *2-3 (6th Cir. Sept. 30, 1999), the Sixth Circuit held that fraud committed in connection with the sale and purchase of stock, even counterfeit stock, is not actionable under RICO. The Defendants in Aries sent shareholders a letter and research report encouraging investment in their company. Unbeknownst

to the shareholders, the company was merely a corporate shell controlled by offshore corporations, the actual sellers of the stock. Plaintiff argued that the sale of the stock was fraudulent because Defendants issued the stock prior to the formation of the company. As Defendant's fraud was "in connection with the purchase or sale of securities," the Court held that Plaintiff could not maintain a RICO action against Defendant. See also Howard v. America Online, Inc., 208 F.3d 741, 749-50 (9th Cir. 2000) (allegations that AOL misrepresented revenues, profits and numbers of subscribers; used improper accounting practices; and illegally sold stock for a profit cannot form the basis of a RICO claim because they are actionable as securities fraud by a plaintiff with proper standing); Bald Eagle Area School Dist. v. Keytone Financial, Inc., 189 F.3d 321, 327- 30 (3d Cir. 1999) (allegations that Defendants operated a Ponzi scheme via the purchase and sale of collateralized investment agreements would have been actionable under the securities laws and therefore could not form the basis of a RICO claim).

Loftin raises three objections to the application of the PSLRA bar. First, Loftin claims that the statutory bar is inapplicable because KPMG was not the issuer of the securities he purchased as part of the FLIP and BLIP strategies. The Court notes that this objection amounts to a concession by Loftin that the conduct in question involved the "purchase or sale of securities." Furthermore, the governing caselaw holds that any person or entity, whether or not the issuer of the securities in question, is a potential defendant in a securities action. See Silverberg v. Paine, Webber, Jackson & Curtis, Inc. 710 F.2d 678, 682 (11th Cir. 1983) (investor brings securities fraud action against broker and brokerage firm); Brown v. Ivie, 661 F.2d 62, 63 (5th Cir. 1981) (minority shareholders brought securities fraud action against the two remaining shareholders); In re Checkers Sec. Litig., 858 F.Supp. 1168, 1174 (M.P. Fla. 1994) (securities purchasers brought securities fraud action against corporation, individual defendants and accounting firm). That KPMG was not the issuer of the securities involved in the FLIP and BLIP transactions does not preclude application of the PSLRA bar.

Second, Loftin argues that the PSLRA bar should not apply because KPMG's representations about the securities did not relate to the value of the securities. Again, Loftin cites no law for this proposition. That an alleged misrepresentation relates to the value of the securities in question is not an essential element of a securities fraud claim. See SEC v. Zandford, 535 U.S. 813, 820, 122 S.Ct. 1899, 1903 (2002) ("[N]either the SEC nor this Court has ever held that there must be a misrepresentation about the value of a particular security in order to run afoul of the Act."); Brod v. Perlow, 375 F.2d 393, 396-97 (2d Cir. 1967) ("Neither § 10(b) nor Rule 10b-5 contains any language which would indicate that those provisions were intended to deal only with fraud as to the 'investment value' of securities, and, indeed, it is established that a 10b-5 action will survive even though the fraudulent scheme or device is unrelated to 'investment value."'). That the alleged misrepresentations were unrelated to the value of the securities does not foreclose application of the PSLRA bar.

Third, Loftin argues that the statutory bar should not apply to his RICO claim against Brown & Wood because the sale of securities was incidental to Brown & Wood's alleged fraud. Loftin claims that Brown & Wood's primary objective was not the sale of securities, but the sale of "phony tax advice." As such, Brown & Wood's alleged misconduct was not "in connection with" the sale of securities, thereby precluding application of the PSLRA bar.

This argument is an attempt on the part of Loftin to recharacterize the allegations set forth in his Complaint. Loftin may not recharacterize his Complaint in a brief responding to a motion to dismiss, as a court reviewing a motion to dismiss may examine only the allegations of the Complaint. Grossman, 225 F.3d at 1231; GSW, Inc., 999 F.2d at 1510. Loftin's Complaint alleges that the Defendants' "pattern of racketeering activity, including the mail and wire fraud, were all committed in an effort to induce [him] to invest in the transactions and, in turn, pay millions of dollars in fees and related expenses to the Enterprise." (ACC paragraph 69.) The transactions consisted of the purchase and sale of securities. (ACC paragraphs 38, 49.) Thus, Brown & Wood's alleged actions were "in connection with" the purchase and transfer of securities, thereby implicating the PSLRA bar. See Zandford, 535 U.S. at 819, 122 S.Ct. at 1903 (explaining that the Act "should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes' and holding that a broker's alleged selling of securities with intent to misappropriate the proceeds was "in connection with" the sale of the securities) (internal quotation omitted), Loftin cites Neibel v. Trans World Assurance Co., 108 F.3d 1123 (9th Cit. 1997) as an example of a tax shelter case brought under RICO rather than the securities act, yet Neibel is distinguishable because it focused on a tax shelter involving home- based tax deductions and had nothing to do with the purchase or sale of securities. Id. at 1125-27. As Brown & Wood's issuance of the opinion letters was "in connection with the purchase or sale of securities," the statutory bar applies to bar Loftin's RICO claim against Brown & Wood.

The Court finds that the PSLRA bars Loftin's RICO claim and therefore dismisses Count I of the Amended Corrected Complaint with prejudice. As the PSLRA bar is dispositive of the motions to dismiss Count I, the Court declines to rule on whether Loftin properly alleged each element of a claim under RICO and whether Loftin suffered an injury under RICO. For the same reason, the Court declines to rule on Quellos's argument that it is not subject to personal jurisdiction.

2. State Law Claims

A. Fraud and Negligent Misrepresentation

Loftin alleges that Defendants fraudulently induced him to enter into the FLIP and BLIP strategies and negligently misrepresented that the strategies were more likely than not to be found proper and legal. To state a claim for fraud under Florida law, a Plaintiff must demonstrate

Loftin has failed to state claims for fraud and negligent misrepresentation because he has not established that he suffered any injury stemming from Defendants' alleged misconduct. The Amended Corrected Complaint merely establishes that Loftin is in the midst of a dispute with the IRS. According to the Complaint, "Loftin's 1997, 1999 and 2000 [tax] returns are under audit by the Internal Revenue Service ('IRS') . . . [he] is currently in negotiations with the IRS . . . and may be assessed significant penalties." (ACC paragrpah 5.) Loftin also alleges that he "has now committed to pursue settling his tax liability with the IRS and will likely have to pay substantial tax repayments, plus undetermined interest and is subject to potential penalties." (ACC paragraph 55.) Loftin argues that he has suffered an injury because he "has committed to settle with the IRS and is just waiting to be told the ultimate number." (Response to KPMG's Motion to Dismiss at 15.) Loftin speculates that he will have to pay the IRS a "hefty sum" as a settlement. (Id.) Until and unless Loftin and the IRS reach a final resolution of the dispute, it is impossible to determine whether Loftin actually suffered damages from Defendants' alleged misconduct. Even if Loftin is anticipating having to make a large payment to the IRS, the amount and nature of the payment remain unknown. Indeed, if Loftin's settlement payment amounts to nothing more than payment for back taxes and interest, he will not have suffered an injury. Hirscfield v. Winer, 1989 WL 120584, at *2 (S.D.N.Y. Oct. 3,1989) (securities claim concerning sale of tax shelter investments speculative and therefore unripe because IRS proceedings were still in progress and plaintiffs had not suffered an actual injury). Consequently, Loftin has failed to allege that he has suffered an actual injury from the alleged misconduct and therefore lacks standing to bring his claims for fraud and negligent misrepresentation. See Bowen v. First Family Services, Inc., 233 F.3d 1331, 1339-40 (11th Cir. 2000) (standing doctrine requires plaintiff to show actual injury; failure to do so deprives the federal judiciary of subject matter jurisdiction over the claim for lack of an Article III case or controversy).

Although not specifically stated in an additional count, Loftin's fraud claim contains the subsidiary allegation that "Brown & Wood provided KPMG, QA and Presidio substantial assistance in the commission of the fraud, knowing of the underlying wrongdoing." (ACC paragraph 77.) Brown & Wood characterizes this subsidiary count as one for aiding and abetting in fraudulent conduct. As Loftin's fraud claims are premature, his subsidiary aiding and abetting claim is as well.

Because the Court finds that the prematurity of Loftin's claims for fraud, aiding and abetting in fraud, and negligent misrepresentation is an adequate basis for dismissing Counts II and IV, it issues no ruling on Defendants' arguments that Loftin did not reasonably rely on their representations.

B. Breach of Fiduciary Duty

Loftin brings a claim for breach of fiduciary duty against all Defendants, arguing that they failed to provide complete and truthful informaion about the FLIP and BLIP strategies. To state a claim for breach of fiduciary duty in Florida, a plaintiff must allege "the existence of a fiduciary duty, and the breach of that duty such that it is the proximate cause of . . . [his] damages." Gracey v. Eaker, 837 So.2d 348, 353 (Fla. 2002).⁶

Defendants move to dismiss Loftin's claim for breach of fiduciary duty on the grounds that Loftin has not suffered any injury as a result of their alleged misconduct. The Court finds that Loftin's breach of fiduciary duty claim is premature for the same reasons his fraud and negligent misrepresentation claims are premature. Because the prematurity of the claim is dispositive of the motions to dismiss, the Court declines to rule on whether fiduciary relationships existed between Loftin and each Defendant and whether Defendants breached their alleged fiduciary duties.

C. Malpractice

1. KPMG

Count V is a cause of action for malpractice against KPMG for failure to use the skill and care of a reasonably competent accountant and tax consultant. In both Florida and North Carolina, a cause of action for malpractice arising from a tax matter does not accrue until the IRS assesses a tax deficiency against the plaintiff. Snipes v. Jackson, 316 Se.2d 657, 661 (N.C. App. 1984) (plaintiffs malpractice action brought against his attorney, his accountant and his accountant's firm "was not complete and did not fully arise until he was assessed by the I.R.S. If plaintiff had commenced his action prior to the date of assessment, defendants could have properly objected on the ground that the action was premature."); Blumberg v. USAA Cas. Ins. Co., 790 So.2d 1061, 1064 (Fla. 2001) (malpractice action in a tax matter does not arise until final determination that taxpayers' deduction was improper). As no deficiency has been assessed against Loftin, Loftin's claim for accountancy malpractice is unripe and is therefore dismissed.

ii. Brown & Wood

Count VI is a cause of action for legal malpractice against Brown & Wood for failure to use the skill and care of a reasonably competent attorney in issuing the two opinion letters. To state a claim for legal malpractice in Florida, a plaintiff must allege "(1) that the defendant, attorney was employed by the plaintiff; (2) that the defendant attorney neglected a reasonable duty owed to the plaintiff, and (3) that such negligence was the proximate cause of loss to the plaintiff." Olmstead v. Emmanuel, 783 So.2d 1122, 1125 (Fla. 1st DCA 2001). A claim for legal malpractice in North Carolina also requires a showing of injury and causation. Rorrer v. Cook 329S. E.2d 355, 369 (N.C. 1985)("To establish that negligence is aproximate cause of the loss suffered, the plaintiff must establish that the loss would not have occurred but for the attorney's conduct.").

The Court finds that Loftin's legal malpractice claim is premature for the same reasons the rest of his state law claims are premature. Loftin's claim for legal malpractice is therefore dismissed.

ORDERS AND ADJUDGES that Count I of the Amended Corrected Complaint, alleging violations of RICO, is DISMISSED WITH PREJUDICE as it is barred by the PSLRA. The Court further

ORDERS AND ADJUDGES that Counts II -- VI of the Amended Corrected Complaint, alleging violations of state law, are DISMISSED for lack of ripeness.

The Clerk of Court shall CLOSE this case and DENY any pending motions as MOOT.

DONE AND ORDERED at Chambers in West Palm Beach, Florida, this 10th day of September, 2003.

² References to the Amended Corrected Complaint shall be noted as "ACC."

³ Although the Amended Corrected Complaint provides a detailed account of implementation of the FLIP strategy, it does not provide a similar account of implementation of the BLIP strategy.

⁴ Since Florida and North Carolina law are not materially different with regard to Loftin's state law claims, the Court declines to rule on the choice of law issue.

⁶Injury is also an element of a cause of action for breach of fiduciary duty (also known as constructive fraud) in North Carolina. See Jay Group, Ltd. v. Glasgow, 534 S.E.2d 233, 236 (N.C. App. 2000) ("The elements of a constructive fraud claim are proof of circumstances (1) which created the relation of trust and confidence, and (2) led up to and surrounded the consummation of the transaction in which defendant is alleged to have taken advantage of his position of trust to the hurt of plaintiff.") (quotation omitted).