## Facts

- Lancelot Investors Fund, Ltd. and Colossus Capital Fund, Ltd. (the Funds) invested heavily in notes tied to entities controlled by Thomas Petters.
- The Funds’ materials represented that the Funds would verify underlying inventory and that repayments would go to lockboxes controlled by financial institutions.
- Petters’s business was a Ponzi scheme; the Funds collapsed in 2008, and a Chapter 7 trustee was appointed.
- The Funds retained Winston & Strawn LLP in 2005 to revise an offering circular used to solicit investors beginning in 2006.
- The trustee alleged that the Funds’ manager told Winston that the Funds were not verifying inventory and that repayments were not being made through lockboxes, yet the revised circular continued to describe those controls.
- The trustee also alleged Winston should have informed the Funds’ directors (located abroad and delegating day-to-day control to the manager) about these deviations and related risks.

## Issues

1. Whether the complaint plausibly alleged that outside counsel breached a professional duty by drafting an offering circular that included management-provided descriptions of investment controls allegedly not followed in practice.
2. Whether Illinois law recognizes a malpractice duty requiring outside counsel to inform a company’s board of directors about a manager’s disclosed misconduct or operational deviations.
3. Whether the complaint plausibly alleged non-speculative causation—that informing the directors or changing the circular would likely have prevented the Funds’ losses—under federal pleading standards.

## Decision

- The Seventh Circuit affirmed dismissal under Rule 12(b)(6).
- The court held the complaint did not plausibly allege a breach of a recognized duty owed by Winston to the Funds.
- The court rejected the proposed “report up to the board” malpractice theory, noting the absence of Illinois authority imposing such liability for failure to report a manager’s acts to directors.
- The court held causation allegations were speculative because the complaint did not plausibly allege that director notice would have changed the outcome.
- The court applied Twombly/Iqbal plausibility requirements and found the allegations insufficient.

## Legal Principles

- A legal-malpractice complaint must plead facts making it plausible (not merely possible) that counsel breached a cognizable duty and that the breach caused damages.
- Under Illinois law as applied, no established malpractice duty required outside counsel to bypass management and report a corporate manager’s acts to the board of directors.
- Where a causation theory depends on hypothetical board action, the plaintiff must plead concrete facts supporting that the board was uninformed and would likely have intervened effectively; speculation is insufficient.

## Conclusion

The Seventh Circuit affirmed dismissal because the trustee failed to plead a plausible breach of a recognized Illinois duty by outside counsel or plausible, non-speculative causation showing that different drafting or a board report would have prevented the Funds’ losses.


Peterson v. Winston & Strawn LLP, 729 F.3d 750 (7th Cir. 2013)