The question remains a difficult one in light of Norris and Cange. Fortunately, this court need not answer it here.
As noted in the discussion of the state securities claims above, Illinois tolling principles are generally more stringent than federal ones, the former always requiring due diligence while the latter requiring either due diligence or fraudulent concealment to toll the statute. However, because there exists an exception under Illinois law for claims against a fiduciary with a duty to disclose, the plaintiffs' failure to plead due diligence does not prevent them from obtaining equitable tolling under Illinois law. That would seem to suffice as well for federal tolling, but Norris calls this into question.
Norris involved a § 10(b) claim by a trust beneficiary against the trustee. The plaintiff claimed that the limitations period was tolled by the defendant's breach of his fiduciary duty to disclose, citing law to that effect in Illinois. A jury ruled in her favor, but the Seventh Circuit reversed.
The Court first held that even if state law provides that limitations periods are tolled against a trustee until he either "confesses his wrongdoing or repudiates his office," 818 F.2d 1333, that rule had never been applied to state securities cases and would not be adopted for federal ones. It then ruled that because the facts clearly established that the plaintiff could have discovered the wrongdoing had she exercised reasonable diligence, her claim was time-barred.
The defendants maintain that the same result obtains here, noting that the plaintiffs have not pleaded affirmative acts of concealment by Litwin and have not pleaded that they acted with due diligence to discover the fraud. But there is a fatal flaw in this argument. Norris says that the due diligence inquiry is an objective one, so it matters not whether the plaintiff actually used due diligence so long as she could not have discovered the fraud if she had. 818 F.2d 1334. Although the complaint here does not establish the plaintiffs' due diligence, it does allege that the plaintiffs did not discover the fraud until September 1986, and that because of the scheme to cover it up could not have discovered it sooner. Thus, the allegations here suffice to plead equitable tolling under federal law, and the § 10(b) claim cannot be dismissed on statute of limitations grounds.
The defendants, however, have another weapon. They argue that Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 495-97 (7th Cir. 1986), establishes that an attorney may not be held liable for aiding and abetting a § 10(b) violation where his alleged wrongdoing involves only a failure to disclose. That description of Barker is true to a point, but ignores the reasoning of the opinion and its application to the facts alleged here.
Barker did not alter the rule that any person, including an attorney, who participates in a securities fraud with the requisite scienter may be held liable under § 10(b). Instead, the Court held that mere silence on the part of an attorney was not enough to get to the jury on the state of mind element because attorneys have a duty not to disclose their client's wrongdoing. Id. at 496-97. To allow a jury to presume an intent to defraud on the basis of silence, the Court reasoned, would be to ignore the special role of an attorney in his client's affairs.
To show the limited scope of its holding, the Barker Court specifically noted two factors making an inference of fraudulent intent improper there: the attorney had not benefited from the fraud, and the attorney had no duty to disclose. Without these, it just was not possible to infer fraudulent intent from the failure to disclose.
This case, by contrast, has both. The plaintiffs have alleged that Litwin was a direct and intentional participant in the conspiracy who, it may be inferred, benefited as a shareholder and officer of ERI, the general partner in the fraudulent venture. The plaintiffs have also alleged that Litwin purported to serve as their attorney, and therefore had a duty to disclose the wrongdoing to them. These two factors take this case outside of the limited holding in Barker and permit the plaintiffs to proceed with their § 10(b) claims.
b. Count II
Count II alleges a RICO violation -- actually, three of them. This court ruled in Pucci I that the count fails to state a claim because the plaintiffs have not alleged a pattern of racketeering activity. Since the plaintiffs have neither amended this count nor sought reconsideration of the dismissal, Count II will be dismissed again.
The plaintiffs' motion to reconsider is granted and this court's ruling of December 7, 1988 vacated. The defendants' motion to dismiss is granted in part and denied in part. Specifically, Counts II, V, VII, VIII, XI and XII are dismissed.
DATE: April 17, 1989