United States of America v. Rogers et al

Filing 29

MEMORANDUM Opinion Signed by the Honorable Samuel Der-Yeghiayan on 6/15/2011: Mailed notice (mw,)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA,

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Plaintiff,
v.
JOHN E. ROGERS, et al.,
Defendants.

No. 10 C 7068

MEMORANDUM OPINION
SAMUEL DER-YEGHIAYAN, District Judge
This matter is before the court on Defendants’ motion to dismiss and motion in
the alternative to strike. For the reasons stated below, the court denies the motion to
dismiss and the motion to strike.

BACKGROUND
Plaintiff United States of America brought the instant action against
Defendants. Defendant John E. Rogers (Rogers) is allegedly a self-professed tax
expert and attorney who creates and promotes abusive tax avoidance schemes.
Defendant Sugarloaf Fund LLC (Sugarloaf) and Defendant Jetstream Business
Limited (Jetstream) were allegedly created by Rogers. The Government contends
that Rogers also created the Distressed Asset Debt (DAD) tax shelter and the
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Distressed Asset Trust (DAT) tax shelter. Defendants allegedly engaged in three
types of transactions that constituted fraud: (1) DAD transactions, (2) DAT
transactions, and (3) secured partnership transactions governed by 26 U.S.C. § 743(f)
(Section 743(f)). The DAD and DAT tax schemes allegedly employed by
Defendants allegedly generated over $370 million of fictitious tax deductions for
Rogers’ customers. The Government brought the instant action to enjoin Defendants
from engaging in activities in violation of the Internal Revenue Code (IRC) and for
an award of monetary penalties owed under the IRC. The Government includes in
the complaint claims brought pursuant to 26 U.S.C. § 7408 and 26 U.S.C. § 6700
(Section 6700) (Count I), claims brought pursuant to 26 U.S.C. § 7402 (Count II),
claims brought pursuant to 26 U.S.C. § 7407, 26 U.S.C. § 6694, and 26 U.S.C. §
6695 (Count III), and claims brought pursuant to 26 U.S.C. § 7408 and 26 U.S.C. §
6707, and 26 U.S.C. § 6111 (Count IV). Defendants have moved to dismiss the
action and in the alternative to strike the complaint.

LEGAL STANDARD
In ruling on a motion to dismiss brought pursuant to Federal Rule of Civil
Procedure 12(b)(6) (Rule 12(b)(6)), a court must “accept as true all of the allegations
contained in a complaint” and make reasonable inferences in favor of the plaintiff.
Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (U.S. 2009)(stating that the tenet is
“inapplicable to legal conclusions”); Thompson v. Ill. Dep’t of Prof’l Regulation, 300
F.3d 750, 753 (7th Cir. 2002). To defeat a Rule 12(b)(6) motion to dismiss, “a
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complaint must contain sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.” Iqbal, 129 S.Ct. at 1949 (internal quotations
omitted)(quoting in part Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
A complaint that contains factual allegations that are “merely consistent with a
defendant’s liability . . . stops short of the line between possibility and plausibility of
entitlement to relief.” Iqbal, 129 S.Ct. at 1949 (internal quotations omitted).
Pursuant to Federal Rule of Civil Procedure 12(f), a “court may strike from a
pleading an insufficient defense or any redundant, immaterial, impertinent, or
scandalous matter.” Id.

DISCUSSION
Defendants argue that the Government has failed to plead the fraud-based
claims with particularity. Defendants also contend that the instant action should be
dismissed because of its impact on current and future litigants in other cases.
Defendants also argue that the complaint does not contain a short and plain statement
of the claims, that it should be stricken, and that the Government should be ordered
to provide a more definite statement for relief.

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I. Motion to Dismiss

A. Rule 9(b)
Defendants argue that the Government has failed to plead the fraud-based
claims with particularity in accordance with Federal Rule of Civil Procedure 9(b)
(Rule 9(b)). Pursuant to Rule 9(b), all claims that “sound[] in fraud” must be pled
with particularity. Borsellino v. Goldman Sachs Group, Inc., 477 F.3d 502, 507 (7th
Cir. 2007)(internal quotations omitted). In order to plead a claim with particularity, a
plaintiff must allege the “who, what, when, where, and how” of the fraud. Id.
(internal quotations omitted).

1. Who, What, When, Where and How Elements
Defendants argue that the Government has not pled fraud, misrepresentations,
and deceptive misconduct with particularity, and thus has not alleged the “who, what,
when, where, and how” elements relating to the alleged fraudulent schemes.
Defendants also contend that the complaint does not satisfy Rule 9(b) because the
allegations are unclear and speculative.

a. The “Who” Element
The Government clearly indicates the “who” element involved in the alleged
fraud. The Government provides allegations explaining that Rogers was allegedly
personally involved in drafting the core transactional documents for the schemes,
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how Rogers created Sugarloaf and Jetstream, and how Rogers created other entities
to further the schemes. The Government also provides allegations explaining how
Rogers promoted the tax schemes. Further, the Government provides allegations
explaining how Rogers disseminated the alleged fraudulent statements to customers
and that certain other individuals assisted Rogers in disseminating the alleged
fraudulent statements, such as Michael Hartigan, Thomas Agresti, and Jonathan
Greer. (Compl. Par. 6-7, 16-17, 33, 62). The Government also points out that many
of Rogers’ customers whom he convinced to utilize his fraudulent tax shelters are
matter of public record.

b. The “What” and “How” Elements
The Government also explains the “what” and the “how” elements relating to
the alleged fraudulent schemes. In great detail, the Government explains how
Rogers and his associates promoted with false statements the DAD and DAT tax
shelters and otherwise violated the IRC. (Compl. Par. 55-125). The Government
even identifies specific documents that allegedly contained false statements. (Compl.
Par. 105, 112, 117, 123, 147-50, 185-88, 193). In addition, after an extensive section
of detailed general facts in the complaint, the Government provides additional
detailed factual allegations explaining how the fraud was perpetrated in regard to
each claim being brought by the Government. (Compl. Par. 169-254). The
Government thus specifically connects the allegations in the complaint to each
specific cause of action brought by the Government. (Compl. Par. 114, 118-23, 147,
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172-221).

c. The “When” Element
The Government has shown the “when” element relating to the alleged
fraudulent schemes. The Government identifies the specific years when Rogers
allegedly began each of the alleged fraudulent schemes. For example, the
Government alleges that Rogers created the DAD tax shelter in early 2003. (Compl.
Par. 63). The Government also alleges that Rogers continued to promote the DAD
tax shelter at the time when the complaint was filed. (Compl. Par. 17). The
Government has provided sufficient details and the level of specificity sought by
Defendants is not required at the pleadings stage, even under Rule 9(b).

d. The “Where” Element
The Government has shown the “where” element relating to the alleged
fraudulent schemes. The Government alleges that Rogers drafted the core documents
for the DAD and DAT tax shelter schemes while working at a law firm in Chicago,
Illinois. (Compl. Par. 33, 66, 114, 151, 177-78, 180-82, 185g, 186 a-e). The
Government also alleges that Rogers continues to promote certain fraudulent
schemes and that Rogers currently works in Chicago, Illinois, and resides in
Kenilworth, Illinois. Thus, the Government has alleged sufficient facts to show the
“who, what, when, where, and how” elements relating to the alleged fraudulent
schemes.
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2. Knowledge
Defendants also argue that the Government has not alleged that Rogers had
actual knowledge that his statements were false or fraudulent. However, actual
knowledge is not the only way to prove such claims under the law. The Government
can also prove such claims by showing that Rogers had a reason to know that the
statements were false. Section 6700, for example, which deals with “promoting
abusive tax shelters, etc.,” and the “[i]mposition of penalty” in such cases, provides
that “[a]ny person who. . . makes or furnishes or causes another person to make or
furnish (in connection with such organization or sale) . . . a statement with respect to
the allowability of any deduction or credit, the excludability of any income, or the
securing of any other tax benefit by reason of holding an interest in the entity or
participating in the plan or arrangement which the person knows or has reason to
know is false or fraudulent as to any material matter. . . shall pay” a monetary
penalty. 26 U.S.C. § 6700(a)(2)(A)(emphasis added). Thus, in the instant action, the
Government need only show that Rogers had reason to know his statements were
false or fraudulent. The Government has alleged sufficient facts to indicate that
Rogers had reason to know that his statements were false or fraudulent. This court
notes that even when pleading under Rule 9(b), a plaintiff is not required to provide
the detail demanded by Defendants in the instant motion. Thus, the Government
alleged sufficient facts regarding knowledge to satisfy Rule 9(b).

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3. Reliance on Hindsight
Defendants argue that the complaint includes allegations that only indicate that
Rogers would have had the requisite knowledge in hindsight and that the allegations
do not suggest that he would have had knowledge at the time of his statements.
Defendants contend that, according to the Government, Rogers knowingly made
false and fraudulent statements from 2003-2006, but that the Government relies on
holdings from cases decided after 2006 to show that Rogers should have understood
that what he was saying was false and fraudulent. In response, the Government
explains that although it has cited recent cases, the cases merely reiterate longestablished law. The Government makes clear that it is basing its claims upon longstanding judicial tax doctrines that predated Rogers’ conduct. Thus, the Government
is not seeking to impute knowledge upon Rogers based on hindsight.

4. Allegations Relating to Section 743(f) Scheme
Defendants argue that the Government has failed to allege sufficient
allegations to plead the claims based on Section 743(f) scheme because the
Government indicates that the allegations are made based “upon information and
belief.” (Compl. Par. 167). Defendants argue that such a phrase shows that the
Government’s allegations are speculative and merely reflect a possibility of a
violation of the IRC. However, it is a common and accepted practice to use such
legal phrases in preparing a complaint. The Federal Rules of Civil Procedure do not
require a plaintiff, even when subject to Rule 9(b), to swear that the plaintiff is 100%
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certain that all the facts are true and accurate in a complaint. For example, pursuant
to Federal Rule of Civil Procedure 11, an attorney is only required to sign a
document filed with the court swearing that “to the best of the person’s knowledge,
information, and belief, formed after an inquiry reasonable under the circumstances .
. . the factual contentions have evidentiary support or, if specifically so identified,
will likely have evidentiary support after a reasonable opportunity for further
investigation or discovery.” Fed. R. Civ. P. 11(b). Thus, simply because the
Government includes the phrase “upon information and belief,” does not mean that
the allegations are speculative or uncertain.
Rogers also contends that the allegations as to Section 743(f) scheme do not
indicate that injunctive relief would be warranted. The Government indicates that it
is not relying entirely on Rogers’ newest Section 743(f) scheme. (Ans. Mot. 15).
The Government alleges extensive facts that indicate that Rogers has long been the
mastermind for the DAD and DAT tax shelter schemes that have resulted in the
unlawful deprivation of millions of dollars from the Government and that Rogers has
the education, experience, and other qualifications to promote similar future
fraudulent tax schemes to his customers. Thus, aside from any allegations regarding
the Section 743(f) scheme, the Government has provided a basis for injunctive relief.
Permanent injunctive relief, under Section 6700, may be appropriate to
prevent reoccurrence. United States v. Raymond, 228 F.3d 804, 813 (7th Cir. 2000).
In determining whether injunctive relief is warranted, a court must consider “the

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totality of the circumstances surrounding the [defendants] and their violation of the
law” and consider factors that include: “(1) the gravity of harm caused by the
offense; (2) the extent of the defendant’s participation and his degree of scienter; (3)
the isolated or recurrent nature of the infraction and the likelihood that the
defendant’s customary business activities might again involve him in such
transaction; (4) the defendant's recognition of his own culpability; and (5) the
sincerity of his assurances against future violations.” Id.
In the instant action, the Government has alleged extensive facts relating to
complex tax fraud schemes and the significant gravity of the potential harm to the
public and the Treasury. The Government alleges that Rogers continues to promote
certain fraudulent tax schemes even though Congress has expressly outlawed it. The
Government has presented allegations concerning Rogers’ creation of the tax fraud
schemes, his role in promoting them, and his false statements. The Government has
also alleged that Rogers is a lawyer, and a self-professed tax expert who has never
expressed any recognition of culpability for his prior conduct. Such allegations are
sufficient to state claims for which injunctive relief might be appropriate. The
Government is not required at the pleadings stage to provide evidence to support its
request for injunctive relief. In addition, although certain specific facts must be pled
under Rule 9(b), in a case such as this case that involves extensive and complex tax
schemes, the Government cannot be expected to allege every possible fact regarding
such schemes. Emery v. American General Finance, Inc., 134 F.3d 1321, 1323 (7th

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Cir. 1998)(indicating that Rule 9(b) should not create “a Catch-22 situation in which
a complaint is dismissed because of the plaintiff's inability to obtain essential
information without pretrial discovery (normally of the defendant, because the
essential information is in his possession and he will not reveal it voluntarily) that
she could not conduct before filing the complaint”). Based on the above, the
Government has met all of the requirements of Rule 9(b) in its complaint.

B. Collateral Estoppel and Due Process Rights of Others
Defendants argue that the Government cannot proceed in this case based on
the doctrine of collateral estoppel and because to proceed in this case may have
preclusive effects for other litigants in tax courts and may violate their due process
rights under the Fifth Amendment.

1. Collateral Estoppel
Defendants argue that the instant action is barred by the doctrine of collateral
estoppel. The doctrine of collateral estoppel bars relitigation of an issue decided in a
prior ruling if the following elements are met: “(1) the issue sought to be precluded
must be the same as that involved in the prior litigation, (2) the issue must have been
actually litigated, (3) the determination of the issue must have been essential to the
final judgment, and (4) the party against whom estoppel is invoked must be fully
represented in the prior action.” H-D Michigan, Inc. v. Top Quality Service, Inc.,
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496 F.3d 755, 760 (7th Cir. 2007). Defendants contend that there are other cases in
federal tax courts on issues such as whether DAT and DAD tax shelters violate the
IRC. However, as the Government points out, there have been no rulings in such
cases and the issues have not been resolved at this juncture. Collateral estoppel is
not applied based on expectations of future unknown rulings. The Government has
the right under the law to bring the instant action to protect the public and the
Treasury and Defendants have not shown that the instant action is barred in any way
by the doctrine of collateral estoppel. The Government has also pointed to authority
that shows that the litigation of a suit such as the instant action against the promoter
of a tax scheme simultaneously with actions in federal tax courts brought against the
promoter’s customers is appropriate and promotes judicial economy. (Ans. Mot. 29).
Defendants cite United States v. Stauffer Chem. Co., 464 U.S. 165 (1984) for
the proposition that under the doctrine of mutual defensive collateral estoppel, the
Government cannot relitigate the same issue against the same party in another case
involving virtually identical facts. (Mem. Dis. 23). However, Defendants have not
shown that any of the issues presented in this action have been resolved in any other
court and therefore such issues are not being relitigated in this case. Thus, Stauffer,
on that basis alone, is inapplicable.

2. Fifth Amendment Due Process Rights
Defendants contend that if this case proceeds it will impact the Fifth
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Amendment due process rights of the customers of Rogers that he represents in
litigation in federal tax courts. However, the Government properly brought the
instant action pursuant to its statutory mandate to protect the public and the Treasury
from Defendants. Defendants have not shown standing to seek to protect the due
process rights of others who are not represented in the instant action. It is also not
logical to conclude that Rogers, by agreeing to represent his customers in federal tax
courts, could prevent the Government from bringing the instant action to prevent the
alleged ongoing harm to the public and to the Treasury. There has been no showing
that any individuals are being deprived of their Fifth Amendment due process rights
by the instant action. Therefore, based on the above, the motion to dismiss is denied
in its entirety.

III. Motion to Strike
Defendants argue in the alternative that the court should strike the complaint.
Federal Rule of Civil Procedure 8 provides that a pleading “must contain . . . a short
and plain statement of the claim showing that the pleader is entitled to relief. . . .”
Fed. R. Civ. P. 8(a). Pursuant to Federal Rule of Civil Procedure 12(f) (Rule 12(f)),
“[t]he court may strike from a pleading an insufficient defense or any redundant,
immaterial, impertinent, or scandalous matter.” Id.
Defendants contend that it would be overly burdensome to respond to the
lengthy complaint in this case. Defendants also contend that the complaint is unclear
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and confusing and includes allegations that are pejorative, superfluous, prejudicial,
and scandalous. The Government has explained how the allegations objected to by
Defendants are indicia of the fraud alleged in the complaint. Defendants have not
shown that the complaint is unclear or confusing or that it contains any facts that
should be stricken. Defendants’ subjective critique of how the complaint could be
written more clearly and what facts should be omitted is not a basis to strike the
complaint.
Defendants also contend that each paragraph does not contain a simple,
concise, and direct statement. The length of the complaint in the instant action is not
excessive given the nature of this case involving an alleged complex unlawful tax
scheme by Defendants that allegedly resulted in millions of dollars being unlawfully
withheld from the Government. To the extent that the complaint contains lengthy
paragraphs, Rule 8 does not provide any express limitations on the number of factual
assertions that can be included in each paragraph. The paragraphs in the complaint
are not such that they fail to comply with Rule 8. Defendants’ contention that such
facts will “confuse the real issues before the Court,” (Mem. Dis. 19), has not merit.
The complaint provides Defendants with adequate notice of the claims brought
against them and Defendants should reasonably be able to respond to the allegations
in the complaint. Therefore, the motion to strike is denied.

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CONCLUSION
Based on the foregoing analysis, Defendants’ motion to dismiss and motion to
strike are denied.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: June 15, 2011

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