Judge Rules BDO Arbitration Clauses Unenforceable

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A federal judge has ruled that because contracts BDO Seidman LLP had with tax-shelter clients were fraudulent, the contracts' arbitration clauses are unenforceable, which means the case will be heard in court, the Wall Street Journal reported.

U.S. District Court Judge Shira Scheindlin of New York signed the ruling on Jan. 7 as part of a lawsuit brought last year against BDO and Deutsche Bank AG over a complex tax shelter that the Internal Revenue Service has designated as an abusive tax-avoidance scheme, the Journal reported.

In a statement yesterday, BDO said: "We respectfully, but firmly, disagree with the court's decision." The firm said the ruling didn't touch "on the quality or accuracy of the services provided by BDO Seidman. We plan to defend ourselves vigorously in this lawsuit."

The shelter, called "Currency Options Bring Reward Alternatives" or COBRA, was developed by Deutsche Bank, in concert with the Dallas law firm Jenkens & Gilchrist P.C., and marketed by BDO and others, the Journal reported, citing the judge's ruling.

Judge Scheindlin pointed to "new evidence of the fraudulent nature of BDO's consulting agreements" with tax-shelter clients. Specifically, she noted an April 2000 internal memo by a BDO tax-shelter executive that said the firm's agreements with clients "have been structured not to make clear exactly what services we were providing in return for our fee." That memo, the judge wrote, "strongly supports my finding of mutual fraud." The agreements in question, she wrote, describe services that were "never rendered nor intended to be rendered, and conceal the real substance of the parties' agreement -- the provision of tax shelter advice," the Journal reported.

BDO had claimed the memo, written in April 2000, was privileged communication protected from disclosure and had successfully argued this point in another lawsuit. Judge Scheindlin disagreed, saying BDO waived the privilege in 2001 when the firm shared the memo with Jenkens.

In the same ruling, Judge Scheindlin denied a motion by BDO and Deutsche Bank to stay proceedings in the case. A Deutsche Bank spokeswoman declined to comment. Separately, Jenkens this month agreed to pay $81.6 million in a putative class-action settlement to resolve claims related to its tax-shelter work, the Journal reported.

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