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Judge Says Tax Shelter Suit Has to Go to Arbitration
By LYNNLEY BROWNING

Published: February 26, 2004


federal judge has dealt a setback to a lawsuit brought by an Indiana millionaire who accused the accounting firm Ernst & Young and others of selling him a tax shelter that has been barred.

Judge Barbara Jones of Federal District Court in Manhattan ruled on Feb. 13 that the lawsuit, brought by Henry Camferdam, would not be allowed to proceed to trial. Instead, she said the dispute must be resolved through arbitration.



The ruling appears to be a setback for Mr. Camferdam of Carmel, Ind., and three colleagues who are also plaintiffs in the suit.

The suit seeks $40 million in compensatory damages and $1 billion in punitive damages from Ernst & Young; from two law firms, Jenkens & Gilchrist and the former Brown & Wood, now part of Sidley Austin Brown & Wood; and from Deutsche Bank.

David Weisbach, a law professor at the University of Chicago, said yesterday that the judge's ruling could hamper efforts by lawyers and officials to deter promoters of questionable tax shelters.

"It's got to be a setback because all the remedies available in court are not available in arbitration," Professor Weisbach said, adding that in arbitration, "the tax shelter promoters will be less punished and most of these tax shelters may go unnoticed."

Unlike jury trials, arbitration produces few public documents and is often secretive. Congressional officials have relied on public documents in their attempt to crack down on abusive tax shelters, which themselves are often shrouded in secrecy. Arbitration agreements are usually a part of most tax shelter contracts, several lawyers said yesterday.

David Deary, a lawyer based in Dallas who represents Mr. Camferdam, said yesterday that he would appeal Judge Jones's ruling.

Mr. Camferdam's suit, filed by Mr. Deary in amended form last July after he inherited the case from another lawyer, accuses the defendants of working together to sell him a tax shelter known as Cobra, for "currency options bring alternative rewards,'' in November 1999. The shelter, the lawsuit says, was designed to shield from taxes $70 million in profit that Mr. Camferdam had made from selling his computer company.

By late 1999, the Internal Revenue Service was questioning the legitimacy of Cobra transactions and effectively barred them in September 2000. The I.R.S. is auditing Mr. Camferdam's return for 1999 and contends that he owes the agency millions of dollars in back taxes, plus interest and penalties.

Mr. Camferdam says he paid more than $3.5 million for the tax shelter, including more than $1 million to Ernst & Young and more than $2 million to Jenkens & Gilchrist. He said he thought the tax shelter was legal because Ernst & Young and the two law firms told him it was.

In a motion, Ernst & Young argued that Mr. Camferdam had agreed when he bought his tax shelter to resolve any disputes through arbitration.

Charles Perkins, a spokesman for Ernst & Young, said yesterday that "we are pleased that the court has supported our position and that this issue should be resolved through arbitration, as called for in Mr. Camferdam's agreement."

But Mr. Deary said that Ernst & Young had in fact not given Mr. Camferdam an arbitration agreement when he bought his tax shelter. "We do not believe the plaintiffs ever agreed with Ernst & Young to arbitrate," he said.

This may only deal with the accounting folks though.