Commercial Litigation and Arbitration

European-Style Digital Options Are Likely Securities, Precluding Civil RICO Claim

From Affco Invs., LLC v. KPMG, LLP, 2008 U.S. Dist. LEXIS 94396 (S.D. Tex. Nov. 20, 2008), a civil RICO claim (among others) against a law firm (among others) in connection with a tax shelter gone awry:

This case involves a complicated scheme whereby taxpayers with substantial income or capital gains could claim a purportedly legal tax loss by executing a series of transactions relating to European-style digital options ("the Scheme"). ***

[T]he plaintiffs' second argument [is that t]he digital options contracts are not securities under the Exchange Act.... At least one district court in the Fifth Circuit has examined digital options contracts and determined that they are securities. RA Inv. I, LLC v. Deutsche Bank AG, No. 3:04-CV-1565-G, 2005 WL 1356446 at *8 (N.D. Tex. June 6, 2005) (digital option contracts are securities). Many other courts when faced with digital options contracts have declined to answer the question regarding the digital options themselves, finding instead some other securities involved in the scheme on which to predicate the bar. See, e.g., Stechler v. Sidley, Austin, Brown & Wood, L.L.P., 382 F. Supp. 2d 580, 597 (S.D.N.Y. 2005) (strategy involved sale of stock); King v. Deutsche Bank AG, No. CV 04-1029-HU, 2005 WL 611954 at *17-21 (D.Or. Mar. 8, 2005) (scheme was initiated to avoid taxes on large gains from sale of stock); Seippel, 341 F. Supp. 2d at 374 (scheme coincided with sale of stock). Likewise here, although the court agrees with the Northern District of Texas that the digital options are likely securities themselves, the court need not reach that question....

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