In a victory for accounting firm BDO Seidman, a federal appeals court judge reversed a district court decision and ruled this week that a group of investors can't sue BDO Seidman over the sale of an illegal tax shelter, and instead must arbitrate their claim.

Nine investors, led by Thomas Denney, sued Chicago-based BDO Seidman and Deutsche Bank in 2003 over the sale of a tax shelter known as Currency Options Bring Reward Alternatives, or Cobra, that was deemed abusive and banned by the Internal Revenue Service.

In April 2004, U.S. District Court Judge Shira A. Scheindlin denied the accounting firm's motion to compel arbitration because she said that the contracts the investors signed with the firm were "mutually fraudulent," rendering the arbitration clauses unenforceable.

In his ruling, Circuit Judge Jose Cabranes reversed the district court's findings that the agreements are void because of mutual fraud and that the services provided by BDO Seidman fell outside the scope of the consulting agreements, and vacated Scheindlin's order denying the defendants' motion to compel the investors to arbitrate their claims.

"The district court's finding that plaintiffs were not required to arbitrate their claims was in error as to both fact and law," Cabranes wrote in his decision. "The district court's factual finding that the parties represented to the court that they deliberately mischaracterized their business relationship in their consulting agreements in order to conceal the nature of the Cobra transactions is clearly erroneous because it is simply not supported by the record."

Cabranes said that the district court's conclusion that plaintiffs could avoid arbitration because the consulting agreements were mutually fraudulent "fails to take into account controlling law ... which indicates that, where an arbitration provision is severable from the contract in which it is embedded, arbitration provisions may indeed be enforceable even if aspects of the underlying agreements are not."

He said that the district court "erred in concluding that plaintiffs' claims against BDO were not governed by the consulting agreements' broad arbitration provisions." Cabranes left it to Judge Scheindlin to decide whether Deutsche Bank should be part of the mandatory arbitration.

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