                                      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  
