Federal Class Action Alleges Massive ‘Captive Insurance Strategy’ Conspiracy

PR Newswire

A group of plaintiffs seeking class status filed suit in the United States District Court for the District of Arizona– Phoenix Division against a group of defendants including Artex Risk Solutions, Inc., Arthur J. Gallagher & Co., TSA Holdings, LLC (formerly known as Tribeca Strategic Advisors, LLC), TBS LLC (doing business as PRS Insurance), Epsilon Actuarial Solutions, LLC, AmeRisk Consulting, LLC, Provincial Insurance, PCC, and various employees of the companies.

The case is No. 2:18-cv-04514-GMS. Plaintiffs and Class are represented in the case by David R. Deary, Ralph Canada, and Jim Flegle of Loewinsohn Flegle Deary Simon LLP.

The suit alleges that Artex/A.J. Gallagher and the other defendants conspired to design, promote, sell, implement, and manage illegal tax-advantaged captive insurance strategies. According to Artex/A.J. Gallagher and the other defendants, these captive insurance strategies provided highly rated insurance and at the same time legally reduced taxes. Artex/A.J. Gallagher and the other defendants promoted and sold these captive insurance strategies for the purpose of receiving and splitting substantial fees.

Instead of providing highly rated insurance and decreasing the plaintiffs' tax burdens – as promised by Artex/A.J. Gallagher and the other defendants – the captive insurance strategies that Artex/A.J. Gallagher and the other defendants designed, implemented, and managed were nothing more than illegal and abusive tax shelters.

The Internal Revenue Service (IRS) ultimately determined that the captive insurance strategies were illegal and abusive tax shelters, disallowed the tax benefits, and assessed the plaintiffs with substantial back taxes, interest, and penalties. The plaintiffs seek recovery of damages associated with their participation in the captive insurance strategies.

"The particulars of captive insurance strategies are complicated, but the defendants' motivation is quite ordinary," said David R. Deary, attorney for the plaintiffs. "Greed. Plain and simple. The defendants sold products and services they knew were illegal and would be disallowed as abusive and illegal tax shelters, resulting in their client sustaining substantial damages, for the sole purpose of earning significant fees and commissions. And they did all this while they were supposed to be acting as loyal fiduciaries."

The suit further alleges that, unbeknownst to plaintiffs, the Artex/A.J. Gallagher and the other defendants entered into undisclosed business arrangements with each other and a nationwide referral network of investment, accounting, and legal advisors to funnel clients to them. Through these arrangements, Artex/A.J. Gallagher and the other defendants systematically identified potential or existing clients who had substantial income in a particular tax year. Artex/A.J. Gallagher and the other defendants then unlawfully abused their positions of trust, confidence, and prestige by fraudulently inducing those clients to pay substantial fees for insurance, legal, accounting, tax, and actuarial advice and services in connection with the captive insurance strategies.

Even after Artex/A.J. Gallagher and the other defendants learned of Tax Court decisions that disallowed deductions claimed through other captive insurance strategies, they continued to advise, promote, and encourage the plaintiffs to use captive insurance strategies and to defend any IRS audit or Tax Court proceeding, assuring plaintiffs that the captive insurance strategies complied with all applicable tax and insurance laws.

Specifically, the plaintiffs bring claims for breach of fiduciary duty, negligence, negligent misrepresentation, disgorgement, rescission, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), violations of Arizona's RICO statute, breach of contract/duty of good faith and fair dealing, civil conspiracy, and aiding and abetting breaches of fiduciary duty and fraud.

"The predatory behavior of the defendants has gone on for too long," added Deary. "We're asking the court to give these plaintiffs – and the potentially hundreds or thousands of other class members around the country – justice, and send a clear message to industry: these practices will not stand."

The plaintiffs seek actual, consequential, incidental, punitive, and treble damages; rescission and disgorgement; pre- and post-judgment interest at the highest legal rate allowed by law; and all attorneys' fees and costs in pursuing this matter.

About Captive Insurance Strategies
Captive insurance is a method some businesses use to supplement traditional commercial insurance. An entity or individual related to the business forms a captive, which issues an insurance policy back to the business. By paying premiums to the captive, a business can insure against risks that may not be covered by its traditional commercial insurance. Captive insurance strategies may also have tax benefits. As long as premiums paid to the captive remain under an IRS cap and the captive provides actual insurance, the premiums are deductible under section 831(b) of the tax code. To qualify as deductible insurance expenses, however, the insurance must comply with and adhere to the laws and requirements of how such insurance is properly underwritten and backed by adequate reserves for the nature of the risk. Further, there must be an understanding of and compliance with all applicable tax and regulatory requirements.

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