Proskauer Blames Accountants for Tax Strategy Issues

, Commercial Litigation Insider

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An outside accountant to Johnson & Johnson stockholders is battling a third-party lawsuit filed by Proskauer Rose that claims his accounting firm should be held fully liable for any damages allegedly suffered by shareholders after a tax avoidance strategy backfired.

Proskauer Rose itself is defending a $40 million fraud suit brought by Seward Johnson, Jr., the grandson of the company founder, his wife Joyce Johnson and two J&J trusts over legal advice that the firm provided in 2000 relating to the sale of company stock.

The Johnsons allege they were induced to enter into a certain tax transaction that would supposedly eliminate their exposure to capital gains taxes upon the sale of shares.

Proskauer, the complaint alleges, partnered with tax strategists James Haber and The Diversified Group to effect a deal allegedly part of a larger scheme involving other high net-worth clients. The Johnsons paid close to $1.4 million in fees to Diversified, with $425,000 going to Proskauer.

Starting in 2006, the trusts were hit with hefty IRS taxes, penalties and interest stemming from their involvement in this tax program, identified by the IRS as a potentially abusive tax shelter. The Johnsons' liability allegedly was magnified for their failure to participate in a 2002 IRS amnesty program relating to these transactions.

The Johnsons sued Proskauer, attorney Jay Waxenberg and the former head of its tax department, Ira Akselrad, for legal malpractice, fraud and unjust enrichment. In January, Manhattan Commercial Division Justice Lawrence Marks narrowed the suit, dismissing all claims except those for fraud as against Proskauer and Waxenberg plus punitive damages seeking $100 million.

In March, Proskauer—on the same day it filed an answer to the trusts' amended complaint—filed a third-party suit against Robert Matthews, a certified public accountant and trustee for the J&J trusts, alleging that Matthews' longtime tax planning advice to the plaintiffs renders him solely responsible for covering any damages in this suit.

Proskauer's complaint alleges that Matthews and his accounting firm, Matthews & Co., owed the Johnsons a fiduciary duty to "make prudent investment decisions and engage in prudent tax planning."

"The Johnsons would not have proceeded with the transaction without Matthews's review and final approval," Proskauer argued, in a complaint signed by Proskauer partner David Lederkramer and senior counsel Elise Yablonski.

The firm argues that to the extent it is liable in the underlying action, it is entitled to contribution and indemnification from Matthews, as his actions were the "sole and proximate cause of the Johnsons' alleged damages."

In a May 9 motion to dismiss the complaint, Matthews, represented by member attorney Sophia Ree and associate Jennifer Wu of Landman Corsi Ballaine & Ford, argues these claims are a "bad faith attempt" to harass him and mask Proskauer's role in pushing for this transaction.

"Not only is such an argument audacious in light of prior judicial findings against the Proskauer defendants, but it is a transparent attempt to manipulate the legal system in order to evade any ownership of their own misconduct," the motion asserts.

The underlying case is John Seward Johnson, Jr. v. Proskauer Rose, 652075/2011 and the third-party suit is Proskauer Rose v. Robert Matthews, 652075/2011.

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