                                      In the

      United States Court of Appeals
                     For the Seventh Circuit
                          ____________________  

No.  14-­‐‑1986  
RONALD   R.   PETERSON,   as   Trustee   for   the   estates   of   Lancelot  
Investors  Fund,  Ltd.,  et  al.,  
                                                      Plaintiff-­‐‑Appellant,  
                                         v.  

MCGLADREY  LLP,  et  al.,  
                                                         Defendants-­‐‑Appellees.  
                          ____________________  

            Appeal  from  the  United  States  District  Court  for  the  
              Northern  District  of  Illinois,  Eastern  Division.  
                No.  10  C  274  —  Elaine  E.  Bucklo,  Judge.  
                          ____________________  

          ARGUED  APRIL  16,  2015  —  DECIDED  JULY  7,  2015  
                    ____________________  

    Before  BAUER,  EASTERBROOK,  and  SYKES,  Circuit  Judges.  
    EASTERBROOK,  Circuit  Judge.  Gregory  Bell  established  five  
mutual   funds   (“the   Funds”),   raised   about   $2.5   billion,   and  
invested  most  of  the  money  in  vehicles  managed  by  Thomas  
Petters,   who   said   that   he   was   financing   Costco’s   consumer-­‐‑
electronics   inventory.   Instead   he   was   running   a   Ponzi  
scheme,   which   collapsed   in   September   2008.   Both   Bell   and  
Petters  have  been  sent  to  prison  for  fraud  (Bell  threw  in  his  
2                                                                     No.  14-­‐‑1986  

lot  with  Petters  in  2008).  Ronald  Peterson  was  appointed  as  
the   Funds’   trustee   in   bankruptcy   to   conserve   what   assets  
remained  and  recover  additional  assets  from  solvent  parties  
who  may  have  borne  some  of  the  fault.  
     Trustee  Peterson  has  filed  multiple  suits,  which  have  led  
to  three  decisions  (so  far)  by  this  court.  Peterson  v.  McGladrey  
&  Pullen,  LLP,  676  F.3d  594  (7th  Cir.  2012)  (McGladrey  I);  Pe-­‐‑
terson  v.  Somers  Dublin  Ltd.,  729  F.3d  741  (7th  Cir.  2013);  Pe-­‐‑
terson  v.  Winston  &  Strawn  LLP,  729  F.3d  750  (7th  Cir.  2013).  
The  current  appeal  is  McGladrey  II.  
     McGladrey   &   Pullen   (now   known   as   McGladrey   LLP)  
was  one  of  the  Funds’  auditors.  (There  are  other  defendants;  
we   use   McGladrey   as   the   example   to   simplify   the   exposi-­‐‑
tion.)   It   did   not   perform   the   sort   of   spot   checks   that   would  
have   revealed   that   Petters   had   no   business   other   than   recy-­‐‑
cling  investors’  funds  while  skimming  some  off.  Trustee  Pe-­‐‑
terson  contends  that  McGladrey  is  liable  to  the  Funds  under  
Illinois   law   for   accounting   malpractice;   McGladrey   insists  
that,  if  it  is  culpable,  so  are  the  Funds,  and  that  the  doctrine  
of  in  pari  delicto  blocks  liability.  We  explained  in  McGladrey  I  
that  this  doctrine  rests  on  “the  idea  that,  when  the  plaintiff  is  
as  culpable  as  the  defendant,  if  not  more  so,  the  law  will  let  
the  losses  rest  where  they  fell.”  676  F.3d  at  596.  See  also  Pin-­‐‑
ter  v.  Dahl,  486  U.S.  622  (1988).  
      We   held   three   things   in   McGladrey   I:   (i)   that   McGladrey  
cannot  be  liable  to  the  Funds  for  failing  to  detect  and  reveal  
what  Bell  himself  knew;  (ii)  that  at  this  stage  of  the  litigation  
Bell   cannot   be   charged   with   knowing   about   Petters’s   fraud  
in   2006   and   2007,   just   because   he   joined   it   in   2008;   and   (iii)  
that   federal   bankruptcy   law   does   not   supersede   a   state-­‐‑law  
in  pari  delicto  defense.  We  remanded  so  that  the  district  court  
No.  14-­‐‑1986                                                                     3  

could  resolve  McGladrey’s  defense  after  developing  a  factu-­‐‑
al   record   about   the   state   of   Bell’s   knowledge   in   2006   and  
2007.  
     Back  in  the  district  court,  McGladrey  took  a  new  tack.  In-­‐‑
stead  of  trying  to  show  that  Bell  was  in  on  Petters’s  scam  be-­‐‑
fore   2008,   McGladrey   contended   that   Bell   had   committed   a  
fraud  of  his  own.  The  documents  that  the  Funds  sent  to  po-­‐‑
tential   investors   represented   that   the   money   the   Funds   lent  
to  the  Petters  entities  was  secured  by  Costco’s  inventory  and  
that   repayment   would   be   ensured   by   a   “lockbox”   arrange-­‐‑
ment  under  which  Costco  would  make  its  payments  into  ac-­‐‑
counts   that   the   Funds   (rather   than   Petters)   would   control.  
Bell   has   admitted   that   this   is   not   how   the   arrangement  
worked,   and   that   he   knew   this   from   the   outset.   The   money  
in  the  accounts  came,  not  from  Costco,  but  from  a  Petters  en-­‐‑
tity  known  as  PCI.  This  meant  that  the  Funds  had  no  assur-­‐‑
ance  that  Costco  was  the  source  of  the  money  placed  in  the  
lockbox  accounts,  and  no  assurance  that  Petters  would  con-­‐‑
tinue  paying.  Indeed,  it  was  materially  misleading  to  use  the  
word   “lockbox,”   which   in   commercial   factoring   is   under-­‐‑
stood  as  a  device  to  ensure  that  third  parties  do  not  intercept  
the   merchant’s   payments.   Yet,   Bell   concedes,   he   caused   the  
Funds   to   lie   to   actual   and   potential   investors,   thinking   (no  
doubt  correctly)  that  they  would  feel  more  secure  if  they  be-­‐‑
lieved   that   money   came   directly   from   Costco   and   that   re-­‐‑
payment  was  outside  Petters’s  control.  
    The   district   court   concluded   that   the   Funds’   misconduct  
(the   documents   were   issued   in   the   Funds’   names   and   are  
their   responsibility,   see   Janus   Capital   Group,   Inc.   v.   First   De-­‐‑
rivative   Traders,   131   S.   Ct.   2296   (2011))   was   at   least   equal   in  
gravity  to  McGladrey’s,  if  not  a  greater  fault—for  the  Trustee  
4                                                                     No.  14-­‐‑1986  

does  not  accuse  McGladrey  of  fraud.  What’s  more,  the  court  
concluded,   the   Funds’   representations   and   McGladrey’s   er-­‐‑
rors   (if   any)   led   to   the   same   loss:   investors’   money   went  
down   a   rabbit   hole.   Either   truth   by   the   Funds   (leading   to  
smaller   investments),   or   McGladrey’s   discovery   of   Petters’s  
scam,   would   have   protected   the   investors   from   loss   during  
2006  and  2007,  when  the  Funds  were  growing  rapidly.  This  
led  the  court  to  dismiss  the  suit  against  McGladrey  and  the  
other   defendants   under   the   in   pari   delicto   doctrine,   without  
considering   whether   McGladrey   had   failed   to   perform   its  
duties.   Peterson   v.   General   Electric   Co.,   2014   U.S.   Dist.   LEXIS  
48688  (N.D.  Ill.  Apr.  8,  2014).  
    Trustee  Peterson  concedes  that  Bell  and  the  Funds  made  
false  statements  to  prospective  investors  (though  the  Trustee  
denies  that  the  falsity  amounts  to  fraud).  But  he  insists  that  
the   pari   delicto   doctrine   in   Illinois   applies   only   when   the  
plaintiff   and   the   defendant   commit   the   same   misconduct.   If  
they  commit  different  misconduct  that  contributes  to  a  single  
loss   then,   according   to   the   Trustee,   the   pari   delicto   doctrine  
drops  out.  
    The   Trustee   does   not   refer   to   any   case   in   Illinois   stating  
such  a  principle,  however.  He  has  found,  and  quotes,  lots  of  
language   saying   that   the   doctrine   applies   when   two   parties  
commit   or   abet   a   single   wrong—see,   e.g.,   Vine   St.   Clinic   v.  
Healthlink,   Inc.,   222   Ill.   2d   276,   297   (2006)   (“the   law   will   not  
aid  either  party  to  an  illegal  act,  but  will  leave  them  without  
remedy   as   against   each   other”)—but   he   has   not   found   any  
decision  holding  or  even  saying  in  dictum  that  it  applies  only  
when  two  parties  participate  in  a  single  wrong.  
   As  far  as  we  can  tell,  Illinois  regularly  disallows  litigation  
between   one   wrongdoer   (here,   Bell   and   the   Funds)   and   an-­‐‑
No.  14-­‐‑1986                                                                    5  

other  (here,  McGladrey)  whose  acts  may  have  added  to  the  
loss  or  failed  to  reduce  it.  See,  e.g.,  Gerill  Corp.  v.  Jack  L.  Har-­‐‑
grove  Builders,  Inc.,  128  Ill.  2d  179,  206  (1989);  Neuman  v.  Chi-­‐‑
cago,   110   Ill.   App.   3d   907,   910   (1982);   Wanack   v.   Michels,   215  
Ill.  87,  94–95  (1905).  These  decisions  involve  contribution  or  
equitable  apportionment  and  do  not  use  the  phrase  “in  pari  
delicto,”  but  they  conclude  that  a  wrongdoer  cannot  recover  
compensation  from  a  third  party  who  may  have  made  things  
worse   or   missed   a   chance   to   avert   the   loss.   Other   decisions  
in   Illinois   take   the   same   view   through   still   other   language.  
See   Mettes   v.   Quinn,   89   Ill.   App.   3d   77   (1980)   (client   cannot  
recover  from  attorney  for  attorney’s  advice  to  commit  fraud,  
when  harm  to  plaintiff  was  the  result  of  her  own  fraud);  Rob-­‐‑
ins  v.  Lasky,  123  Ill.  App.  3d  194  (1984)  (client  cannot  recover  
from  attorney  for  advice  to  establish  residence  outside  of  Il-­‐‑
linois  to  avoid  service  of  process).  
     The   Supreme   Court   summed   up   the   pari   delicto   doctrine  
as   comprising   two   principles:   “first,   that   courts   should   not  
lend  their  good  offices  to  mediating  disputes  among  wrong-­‐‑
doers;  and  second,  that  denying  judicial  relief  to  an  admitted  
wrongdoer   is   an   effective   means   of   deterring   illegality.”  
Bateman  Eichler,  Hill  Richards,  Inc.  v.  Berner,  472  U.S.  299,  306  
(1985)  (footnote  omitted).  Both  principles  apply  to  a  claim  by  
the  Funds,  which  raised  money  via  deceit,  against  an  auditor  
that   negligently   failed   to   detect   a   different   person’s   fraud.  
(The  Trustee  is  litigating  on  behalf  of  the  Funds  and  is  sub-­‐‑
ject  to  all  defenses  McGladrey  has  against  the  Funds.)  
   All   ways   of   looking   at   the   subject   lead   to   the   same   con-­‐‑
clusion.   The   Trustee   has   not   found   any   Illinois   case   saying  
that  the  in  pari  delicto  defense  applies  only  when  the  two  liti-­‐‑
gants   have   committed   the   same   wrong,   as   opposed   to   one  
6                                                               No.  14-­‐‑1986  

failing   to   mitigate   the   consequences   of   the   other’s   wrong.  
And  the  Trustee  has  not  found  any  case  in  Illinois  recogniz-­‐‑
ing   liability   under   this   situation,   no   matter   what   name   ap-­‐‑
plies.  
    Foreclosing  all  liability  when  two  parties  commit  distinct  
wrongs  might  seem  to  allow  the  failure  of  one  safeguard  to  
knock  out  others.  Corporate  and  securities  law  rely  on  both  
managers   and   accountants   to   protect   investors’   interests.  
There  would  be  a  major  gap  in  those  bodies  of  law  if,  when  
one  turns  out  to  be  a  scamp,  then  the  other  is  excused  from  
performing  his  own  duties,  and  investors  are  left  unprotect-­‐‑
ed.   But   that’s   not   the   outcome   of   applying   the   pari   delicto  
doctrine   to   the   Trustee’s   suit.   The   Trustee   stepped   into   the  
shoes   of   the   Funds,   not   the   shoes   of   the   investors.   People  
who  put  up  money  have  their  own  claims.  
     Claims  against  Bell  may  not  be  worth  much  (he’s  in  pris-­‐‑
on),   and   securities-­‐‑law   claims   against   the   Funds   for   mis-­‐‑
statements  in  the  offering  documents  aren’t  worth  much  ei-­‐‑
ther  (they’re  bankrupt),  but  a  claim  against  McGladrey  may  
offer  some  recompense,  if  the  auditor  was  indeed  negligent  
or  wilfully  blind.  See  225  ILCS  450/30.1(2);  Tricontinental  In-­‐‑
dustries,   Ltd.   v.   PricewaterhouseCoopers,   LLP,   475   F.3d   824,  
837–38  (7th  Cir.  2007)  (Illinois  law);  Kopka  v.  Kamensky  &  Ru-­‐‑
benstein,  354  Ill.  App.  3d  930,  935  (2004);  Builders  Bank  v.  Bar-­‐‑
ry  Finkel  &  Associates,  339  Ill.  App.  3d  1,  7  (2003).  Proceedings  
on  the  investors’  claims  have  been  stayed  pending  resolution  
of  the  Trustee’s  suit.  It  is  time  to  bring  the  investors’  claims  
to  the  fore.  
                                                                   AFFIRMED  
