In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 12-‐‑3512
RONALD R. PETERSON, as Trustee for the estates of Lancelot
Investors Fund, Ltd., and Colossus Capital Fund, Ltd.,
Plaintiff-‐‑Appellant,
v.
WINSTON & STRAWN LLP,
Defendant-‐‑Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 11 C 2601 — Matthew F. Kennelly, Judge.
____________________
ARGUED APRIL 8, 2013 — DECIDED SEPTEMBER 6, 2013
____________________
Before EASTERBROOK, Chief Judge, and POSNER and SYKES,
Circuit Judges.
EASTERBROOK, Chief Judge. Ever since Gregory Bell’s mu-‐‑
tual funds, known as the Lancelot or Colossus group (collec-‐‑
tively “the Funds”), folded in late 2008, their trustee in bank-‐‑
ruptcy has been seeking assets from solvent third parties.
Last year we considered the Trustee’s claims against the
Funds’ auditor. Peterson v. McGladrey & Pullen, LLP, 676 F.3d
No. 12-‐‑3512 2
594 (7th Cir. 2012). This appeal concerns the Trustee’s claim,
on behalf of two Funds, against one of their law firms. Other
appeals, also decided today, arise from avoidance actions
against some of the investors.
The Funds invested most of their money in ventures run
by Thomas Petters, who claimed to be operating as a com-‐‑
mercial factor—that is, a lender financing other businesses’
inventory. A factor advances money to purchase inventory,
takes a security interest in the inventory, and is repaid as the
inventory is sold. The Funds’ offering circulars told their in-‐‑
vestors that the Funds would verify the inventory’s existence
and ensure that repayments were made to a “lockbox”—that
is, made directly to financial institutions that would ensure
the money’s proper application.
The Funds did not keep these promises and could not do
so, because Petters was running a Ponzi scheme in which
new investments were used to pay off older investments ra-‐‑
ther than to finance an operational business. Petters has been
convicted of fraud. United States v. Petters, 663 F.3d 375 (8th
Cir. 2011). Bell concedes that he learned of, and joined, Pet-‐‑
ters’s scam early in 2008; Bell pleaded guilty to fraud. But
both Bell and the Funds’ Trustee maintain that until 2008
Bell was ignorant of the Ponzi scheme. The events in ques-‐‑
tion concern years during which, we must assume (because
this suit was resolved on the pleadings), Bell honestly if in-‐‑
competently thought Petters’s businesses legitimate.
The Funds hired Winston & Strawn in 2005 to revise their
offering circular (the “Confidential Information Memoran-‐‑
dum”) shown to persons thinking about investing in the
Funds. According to the Trustee’s complaint, Bell told the
law firm that Petters refused to allow the Funds to verify the
3 No. 12-‐‑3512
existence of inventory and that repayments did not come
through lockboxes. The law firm prepared a revised offering
circular, which the Funds started using in 2006; this circular,
like the 2003 version, represents that the Funds will verify
the existence of inventory and ensure that factors use lock-‐‑
boxes. The Trustee contends that the law firm committed
malpractice, but the district court, invoking the doctrine of in
pari delicto, dismissed the suit after concluding that Bell’s
knowledge was at least as great as the law firm’s. 2012 U.S.
Dist. LEXIS 147653 (N.D. Ill. Oct. 10, 2012).
The Trustee has no greater rights against the law firm
than the Funds themselves had, and the law firm maintains
that the Funds had none because Bell (and thus the Funds)
knew as much as the law firm did about Petters’s activities.
One potential problem with this perspective is that people
and corporations often hire law firms for advice about what
to do. Suppose we take it as established that Bell had learned
of Petters’s scheme by 2005. He and the Funds might well
have needed to know what should happen next. If a law
firm gave incompetent advice, it could not defend by assert-‐‑
ing that Bell already knew the facts. The fault would not be
equal, because Bell would have hired the law firm for legal
expertise rather than factual information. Similarly, if Bell
had been indicted for securities fraud and supplied a law
firm with facts showing that the prosecution was untimely,
and the law firm failed to invoke the statute of limitations, it
could not defend a malpractice suit by observing that Bell
knew all the facts. When the goal of hiring a professional
adviser is to cope with the consequences of known facts, the
parties’ equal access to the facts is beside the point.
No. 12-‐‑3512 4
Nonetheless, the Trustee’s complaint was properly dis-‐‑
missed, because it does not plausibly allege that the law firm
violated any duty to the Funds. The Trustee does not con-‐‑
tend that Winston & Strawn should have provided better, or
even different, legal advice. Instead he contends that it
should have done two things on learning that Petters would
not allow verification of inventory and did not use a lock-‐‑
box: The law firm should have alerted the Funds’ directors
and should have revealed the truth in the 2006 offering cir-‐‑
cular.
The latter step would not have offered a benefit to the
Funds (as opposed to their investors); to the contrary, it
probably would have precipitated the Funds’ immediate col-‐‑
lapse. The Trustee has stepped into the shoes of the Funds,
not of their investors, who may (or may not) have independ-‐‑
ent claims based on the contents of the 2006 circular. Lance-‐‑
lot Investors Fund and Lancelot Investment Management (of
which Bell was the sole principal) issued that circular and
thus vouched for the truth of the statements it contained.
Winston & Strawn did not sign the document or warrant the
truth of its contents. Cf. Janus Capital Group, Inc. v. First De-‐‑
rivative Traders, 131 S. Ct. 2296 (2011) (discussing who is re-‐‑
sponsible for statements in documents used to sell securi-‐‑
ties). As administrator of the Funds’ estate, the Trustee is in
no position to collect from the law firm on the theory that
factual representations in the 2006 circular were false, when
the Funds represented them to be true.
As for the Trustee’s assertion that the law firm should
have alerted the Funds’ directors, the initial problem is that
the law firm was not hired to blow the whistle on Bell, and
the Trustee does not identify any rule of Illinois law (which
5 No. 12-‐‑3512
governs here) treating failure to do so as a tort. The SEC’s
rules sometimes require disclosure or “noisy withdrawal,”
but the Funds were established in the Cayman Islands, and
the Trustee does not contend that federal law governs the
law firm’s responsibilities. Rule 1.13 of the Illinois Rules of
Professional Responsibility, which does apply (because the
law firm rendered its services in Illinois), sometimes requires
a lawyer to report to the highest corporate authority—which
may well have been Bell, but we’ll assume that the board is a
higher authority. And we can assume, without deciding, that
Rule 1.13 required the law firm to do more than it did. The
problem for the Trustee is that no court in Illinois has held
that failure to report a corporate manager’s acts to the board
of directors exposes a law firm to damages for malpractice.
Rules of professional conduct are enforced through the dis-‐‑
ciplinary mechanism rather than by awards of damages. The
Trustee does not argue otherwise.
Nor does the complaint plausibly allege that alerting the
directors would have made a difference. The offering circu-‐‑
lar says that the four directors appointed Bell’s firm, Lance-‐‑
lot Investment Management, to be responsible for conduct-‐‑
ing all of the Funds’ investment-‐‑management operations.
Thus Bell was as firmly in charge of the Funds as he was of
his advisory firm—and we said exactly that in McGladrey &
Pullen when holding that anything Bell knew, the Funds
knew. 676 F.3d at 596. McGladrey & Pullen rejects the Trus-‐‑
tee’s argument that Bell’s knowledge should not be imputed
to the Funds because he was acting adversely to their inter-‐‑
ests. Id. at 599. The Trustee repeats that argument, which
fares no better the second time.
No. 12-‐‑3512 6
One of the four directors lived in Hong Kong and the
other three in the Bahamas. Nothing in the complaint sug-‐‑
gests that any of the four ever exercised any responsibility
over the Funds other than to delegate all powers and duties
to Bell. The Trustee might have bolstered his claim by con-‐‑
ducting an investigation into the four directors’ careers and
learning how they had responded if or when other firms
with which they were affiliated had encountered troubled
investments or balky borrowers (Petters’s ventures fit both
descriptions). But the Trustee conceded at oral argument
that he had not conducted any pre-‐‑filing investigation, and
he did not ask for discovery in order to learn whether the
directors were independent of Bell in any realistic sense.
That is equally true with respect to the “loan acquisition
officer,” a position that the 2006 circular said would be cre-‐‑
ated. The Trustee does not know whether the job was
filled—or, if it was, what the incumbent learned from Bell or
Petters—and seems remarkably uncurious about those sub-‐‑
jects. This makes it hard to advance a plausible claim that the
law firm had a duty to bypass Bell and present the facts
about Petters to the “loan acquisition officer.”
The complaint and briefs stop with the assertion that the
directors had a legal duty to ride herd on Bell and thus
would have done so. That may be a correct statement of their
duties, but the Trustee has not offered anything to make
plausible a contention that the directors would have fulfilled
them, even if the law firm had a duty to bypass Bell. Given
the plausibility standard added to federal pleading law by
Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ash-‐‑
croft v. Iqbal, 556 U.S. 662 (2009), this complaint was properly
dismissed.
7 No. 12-‐‑3512
AFFIRMED