Brown & Wood and others defend $1bn client action

Brown & Wood (now Sidley Austin Brown & Wood), top 50 US firm Jenkens & Gilchrist and Ernst & Young (E&Y) and its US-allied law firm McKee Nelson are being sued by 10 former clients for more than $1bn (£622.5m) for their advice on a tax scheme

The plaintiffs are alleging claims under the Racketeer Influenced and Corrupt Organization Act (Rico) of breach of fiduciary duty, fraud, negligence, breach of contract constituting professional malpractice and conspiracy to breach fiduciary duty.

The claim asserts that E&Y, Jenkens & Gilchrist and Brown & Wood acted in concert to promote an unlawful and unregistered tax shelter.

The defendants “abused their position of trust by collecting millions of dollars of fees for putting into effect a scheme to reduce the individual plaintiffs’ income taxes that all of those defendants knew, or should have known, was a sham,” the claim states. “Indeed, both Jenkens & Gilchrist and Brown & Wood provided the individual plaintiffs with lengthy and detailed opinion letters confirming the propriety of the scheme.”

The claim also alleges that the $2.037m (£1.27m) fee charged by Jenkens & Gilchrist and the $75,000 (£467,000) fee charged by Sidley Austin Brown & Wood were unethically excessive, irrespective of the quality of the advice offered.

McKee Nelson and E&Y, according to the claim, also breached fiduciary duty by then revealing the details of their clients using the scheme to the Internal Revenue Service (IRS).

Acting on behalf of the plaintiffs, Manhattan lawyer Blair Fensterstock of Fensterstock & Partners said this suit might lead to further such cases in the US. “I’ve been contacted by people all over the country since the claim was filed,” he said.

An E&Y statement said: “We believe that the allegations are frivolous, and we intend to defend ourselves vigorously.”

Sidley Austin Brown & Wood declined to comment.