If you've tired of hearing campaign promises about tax cuts, repeal of tax cuts, extension of tax cuts, tax cuts for the middle class, tax cuts for income over $250,000 a year, and the like — relax.  Let Blawgletter tell you about an entirely other subject:  tax avoidance.

And not just any kind of tax avoidance.  This type involved buying an interest in a limited liability company and then claiming "losses" on option contracts that the LLC bought for the sole purpose of losing money.  The buyer would then deduct the losses on her income tax return.  Which sounds dumb, but not unlawful, so far.

But it gets worse.  The LLC also purchased option contracts that made profits equal to the losses.  Which does make the whole thing sound like a scam.

The accounting and consulting behemoth, KPMG, had pitched the scheme as an okay tax shelter, promising to provide from "several major national law firms" opinions that vouched for the legality of the plan.  Some people paid KPMG for helping them buy interests in the LLCs.  The buyers included AFFCO Investments 2001 LLC and others, which received an opinion letter from law firm A, Sidley Austin.

The story did not end well for AFFCO, et al.  After they bought their LLC interests but before they filed their tax returns, the Internal Revenue Service gave notice that it would challenge certain schemes as invalid.  Then law firm B — Proskauer — sent them an opinion letter saying that the LLC plan didn't look enough like the schemes the IRS mentioned to worry overmuch.  And so AFFCO, et al., claimed their LLC "losses" as deductions; the IRS contested the deductions; and AFFCO, et al., had to pay the IRS millions to settle the dispute.

AFFCO, et al., sued KPMG, Sidley Austin, and Proskauer, among others, under the Racketeer Influenced and Corrupt Organizations Act, section 10(b) of the Securities Exchange Act, and state (Texas) law.  They settled with all but Proskauer.  The district court dismissed the claims against Proskauer.  AFFCO, et al., appealed.

Today the Fifth Circuit affirmed.  It agreed with the district court that the Private Securities Litigation Reform Act of 1995 barred RICO claims that asserted "any conduct that would have been actionable as fraud in the purchase or sale of securities."  18 U.S.C. 1964(c).  Because the LLC interests qualified as "securities", AFFCO, et al.'s RICO claims had to go.  AFFCO Investments 2001 LLC v. Proskauer Rose L.L.P., No. 09-20734, slip op. at 5-8 (5th Cir. Oct. 27, 2010).

The panel also concluded that the securities fraud claims themselves couldn't survive either.  Proskauer, the court noted, might count as a "major national law firm" and did aid KPMG in putting together the tax avoidance plan.  But AFFCO, et al., didn't allege that Proskauer made any misrepresentations to them.  The materials that persuaded AFFCO, et al., to invest did not "attribute" any statements to Proskauer by name, the panel pointed out, and the lack of attribution meant Proskauer at most qualified as an aider and abetter.  And, as we all know, the Supreme Court in Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), held that aiding and abetting doesn't run afoul of the Securities Exchange Act, at least not in private litigation.  AFFCO, slip op. at 12-15.

The panel dispatched an interesting point in a two-sentence footnote.  AFFCO, et al., argued that, if the panel decided to dismiss the securities fraud claim, its RICO claim didn't fall within the PSLRA's exception from RICO of "conduct . . . actionable as fraud in the purchase or sale of securities."  How could conduct not actionable as securities fraud under the Securities Exchange Act count as actionable securities fraud under the RICO carve-out?  The panel's footnote seemed a little short on the shrift.