Once again, the defense of in pari delicto has saved a defendant from a claim of professional
negligence in a Ponzi scheme case. This time the case is Peterson v. Winston & Strawn, LLP, 2012 U.S. Dist. LEXIS 147653
(N.D. Ill. Oct. 10, 2012). Ronald Peterson is the trustee of two hedge funds, Lancelot
Investors Fund, Ltd. and Colossus Capital Fund, Ltd. (the "Funds"), which
invested in entities run by Thomas Petters. As we know, the Petters' entities
turned out to be massive Ponzi schemes. Winston & Strawn had been the Funds'
In his complaint, Peterson first alleged that the law firm
failed in its duty to disclose to the Funds that their manager, Greg Bell, was
not complying with the investment restrictions set forth in a Confidential
Information Memorandum ("CIM") that the Funds had published to investors. According
to the complaint, Bell had told the law firm shortly after it was retained in
August 2005 that he was not complying with the CIM. Specifically, Bell stated
that Petters would not allow him to verify the inventory and that the Funds did
not have any lock-box arrangements with any of Petters' businesses.
Peterson's complaint further alleged that the law firm
drafted an amended CIM in March 2006, which had the same investment
restrictions, giving the "false impression" that Bell was complying with those restrictions.
Finally, the complaint stated that Bell became suspicious
of Petters in December 2007 and that he expressed those concerns to the law
firm in January 2008 when he sought individual representation from the law
firm. Peterson alleged that the law firm again failed in its to duty to disclose
this to the Funds and to address potential harm to them.
The law firm responded to the suit with a motion to
dismiss based on in pari delicto, and
the court granted the motion. The court relied heavily on the Seventh Circuit's
decision applying in pari delicto in another
malpractice lawsuit that Peterson had filed against the Fund's auditors. Peterson
v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th Cir. 2012). In that case
the court held that the in pari delicto
defense did apply to Peterson's claims to the extent they arose after Bell
joined in Petters' fraud in April 2008. In the court's view, "The Funds knew
what Bell knew . . .", and because Peterson stood in the Funds' shoes, in pari delicto barred the claims that
arose after April 2008. However, the court made a crucial distinction. It held
that Peterson could maintain the claims that arose before April 2008 because
the complaint did not allege that Bell knew of Petters' fraud before then.
In its decision on Peterson's claim against the law firm,
however, the court refused to apply the Seventh Circuit's distinction on the
grounds that everything that the law firm learned about the funds came from
In the present case, however, Peterson's claims against
Winston & Strawn rest entirely on facts that the firm only learned through
Bell's disclosures. Specifically, Peterson contends that Winston & Strawn
breached its duties of disclosure and due care in failing to notify and advise
the Funds regarding Bell's stated failure to comply with the investment restrictions
in the CIMs. As indicated above, Bell's actions are imputed to the Funds. Thus
the Funds cannot sue Winston & Strawn for failing to advise them of facts
that they already knew through Bell.
The court then concluded that because Peterson alleged
only that the law firm was negligent and Peterson admitted that Bell was
negligent, "Peterson, standing in the shoes of the Funds, is thus equal in
culpability to Winston & Strawn and, therefore, the Court finds that in pari delicto bars Peterson's claims."
As in every case in which the in pari delicto doctrine is invoked to dismiss a trustee's claims
in a Ponzi scheme case, the result here is that innocent victims are denied a potential
source of recovery. Obviously, these victims would argue that this result is
both inequitable to them and ineffective in deterring the defendant's wrongful
conduct. On the other hand, proponents of the doctrine argue that this result is
required by Butner v. United States,
440 U.S. 48 (1979), and 11 U.S.C. § 541.
And in the case law at this time, that is certainly the prevailing
For more on Peterson v. McGladrey & Pullen, LLP, see my blog of April 9, 2012, The "In Pari Delicto" Battle in Ponzi Cases Rages On.
subscribers can access enhanced versions of the opinions, as well as annotated
versions of the statutes, cited in this article:
v. Winston & Strawn, LLP, 2012 U.S. Dist. LEXIS
147653 (N.D. Ill. Oct. 10, 2012)
v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th Cir.
v. United States, 440 U.S. 48 (1979)
U.S.C. § 541
Read additional articles at The Ponzi Scheme
Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with
Hon. Steven Rhodes. The Ponzi Book is available for purchase at www.lexisnexis.com/ponzibook,
and more information about the book can be found at www.theponzibook.com.
more information about LexisNexis products and solutions connect with us
through our corporate site.