792 F.3d 785
7th Cir.2015Background
- Gregory Bell built five mutual funds totaling about $2.5 billion and parked most funds with Petters, who hid a Ponzi scheme that collapsed in 2008; Bell and Petters were imprisoned for fraud.
- Ronald Peterson, as Funds’ bankruptcy trustee, sued to recover assets and pursue others liable for losses.
- Trustee’s suit against McGladrey & Pullen (McGladrey LLP) seeks accounting malpractice liability under Illinois law; McGladrey contends in pari delicto bars recovery.
- McGladrey I (676 F.3d 594 (7th Cir. 2012)) held: (i) McGladrey not liable for failing to detect Bell’s knowledge; (ii) Bell’s 2006–07 knowledge not proved from 2008 participation alone; (iii) bankruptcy law does not supersede state-law in pari delicto; remanded for factual record.
- On remand, district court allowed new theory: Bell’s misrepresentation of a “lockbox” arrangement to investors; Bell admitted misrepresentations and that the lockbox money came from a Petters entity, PCI.
- Trustee argues Illinois law permits recovery against McGladrey despite distinct wrongs; district court dismissed under in pari delicto; this appeal seeks to resolve that question and allow claims to proceed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does in pari delicto bar Trustee’s claims against McGladrey? | Trustee argues separate wrongful acts allow recovery. | McGladrey argues doctrine bars any recovery when plaintiff and defendant contributed to the loss. | No; Illinois does not require same wrongful act to apply in pari delicto; claims may proceed against McGladrey. |
| Did bankruptcy law supersede Illinois in pari delicto defense? | Trustee relies on federal bankruptcy framework. | McGladrey contends bankruptcy law governs, potentially foreclosing state-law claims. | Bankruptcy law does not automatically supersede Illinois in pari delicto defense; state-law analysis remains controlling. |
| Are the Funds’ misstatements about the lockbox arrangement actionable against McGladrey? | Misstatements contributed to investor losses and should expose auditor liability. | McGladrey contends it had no duty to uncover Bell’s pre-2008 fraud; misstatements were not caused by McGladrey’s conduct. | Claims may proceed if McGladrey was negligent or willfully blind; the misstatements are actionable under Illinois law. |
Key Cases Cited
- Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th Cir. 2012) (McGladrey I; set framework for pari delicto and knowledge issues)
- Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (U.S. 1985) (two guiding principles of pari delicto)
- Pinter v. Dahl, 486 U.S. 622 (U.S. 1988) (knowledge and reliance in fraud liability)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (U.S. 2011) (regarding liability for misstatements by funds/issuers)
- Kopka v. Kamensky & Rubenstein, 354 Ill. App. 3d 930 (Ill. App. 2004) (Illinois treatment of auditor liability and wrongdoer recovery)