In Affco Investments 2001 LLC v. Proskauer Rose L.L.P., No. 09-20734, 2010 WL 4226685 (5th Cir. Oct. 27, 2010), the United States Court of Appeals for the Fifth Circuit held that a law firm which allegedly assisted in developing a fraudulent tax shelter scheme could not be held liable under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, for conduct and statements not explicitly attributed to it. In the absence of such express attribution, the Court held, the investor plaintiffs could not demonstrate reliance upon the law firm in deciding whether to invest. This decision echoes a recent, similar ruling by the Second Circuit establishing a “bright line” rule limiting liability of secondary actors only to instances where conduct or statements are expressly attributed to them.

According to plaintiffs' amended complaint, the accounting firm of KPMG, LLP (“KPMG”) targeted and solicited plaintiffs for participation in a tax shelter involving investment in LLCs specially created for that purpose. In its soliciting materials, KPMG represented the scheme as “a legitimate investment vehicle as well as a legitimate tax shelter,” and promised to provide investors with independent opinions from “several major national law firms” that had analyzed and approved the tax strategy. Based on these assurances, plaintiffs agreed to invest. After plaintiffs? invested, they received an opinion letter from the law firm of Sidley Austin Brown & Wood, LLP that the IRS would likely condone the tax scheme. Later, in response to an IRS notice regarding so-called “prohibited transactions,” plaintiffs sought — and received — tax opinions from Proskauer Rose LLP (“Proskauer”) concluding that the KPMG transactions were not substantially similar to the “prohibited transactions” noticed by the IRS, and that plaintiffs did not need to disclose their involvement in the tax scheme on their tax returns...

See alert below for more.