Six investors in Lancelot Investors, a Cayman Islands hedge fund, were suckered by the operator of a billion-dollar Ponzi scheme. They sued Lancelot’s auditors in Cook County, where the offshore company is headquartered. The lawsuit alleged that fraudulent and negligent audit reports duped the six investors into pumping $79 million into Lancelot from 2004 to 2008, when the pyramid scheme was imploded, wiping out their investment.
However, the trial judge concluded that the internal-affairs doctrine required application of the United Kingdom’s “reflective loss” rule granted the defendants’’ motion to dismiss based on the investors’ lack of standing.
Applying Illinois law, the appellate court explained that there is “no meaningful difference” between “the shareholder standing rule followed in Illinois” and the U.K.’s reflective loss doctrine. And looking at the essence of the complaint, the Illinois Appellate Court for the First District reversed because “Lancelot’s conduct and the like have not been put at issue” and the plaintiffs were pursuing “a direct claim involving accounting fraud and misrepresentation that occurred in Illinois,” not “an indirect claim implicating the internal affairs of the Cayman Islands hedge fund.”