In the

United States Court of Appeals

For the Seventh Circuit

____________

No. 07-1992

EDWARD T. JOYCE, et al.,

Plaintiffs-Appellants,

v.

MORGAN STANLEY & CO., INC.,

Defendant-Appellee.

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Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 06 C 4754—Samuel Der-Yeghiayan, Judge.

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ARGUED JANUARY 25, 2008—DECIDED AUGUST 19, 2008

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Before BAUER, WOOD, and EVANS, Circuit Judges.

WOOD, Circuit Judge. Edward T. Joyce and his fellow

plaintiffs were shareholders and option holders in 21st

Century Telecom Group, Inc. (“21st Century”). (We refer

to them here as the Shareholders.) This case is one of

many that arose when the telecommunications industry

fell upon hard times around the end of the 1990s. 21st

Century and a company called RCN Corporation entered

into a merger agreement on December 12, 1999, under
2 No. 07-1992

which RCN was to acquire all of 21st Century’s common

shares. Defendant Morgan Stanley & Co., Inc. (“Morgan

Stanley”) advised 21st Century in connection with the

deal. To the Shareholders’ great dismay, between the

date of the merger agreement and the effective date of the

merger, April 28, 2000, the market value of RCN stock

plummeted. In the end, the Shareholders’ newly acquired

RCN stock was worthless.

The Shareholders believe that Morgan Stanley ought to

compensate them for their losses. Although Morgan

Stanley was acting as the financial advisor to the 21st

Century corporation, they maintain that it should also

have given advice to the Shareholders about how to

minimize their exposure to a potential loss in value of

RCN stock. Morgan Stanley did not do so, in their opinion,

because implementation of the proper hedging strategies

probably would have depressed the value of RCN

stock—an outcome Morgan Stanley sought to avoid

because it was operating under a conflict of interest caused

by its prior business relationship with RCN. Morgan

Stanley moved to dismiss the complaint based on the

Shareholders’ alleged lack of standing, their failure to

state a claim, and their failure to sue within the

statutory limitations period. The district court granted the

motion to dismiss, and we affirm the dismissal on the

merits.

I

In its motion to dismiss, Morgan Stanley argued that

the Shareholders did not have standing to sue because
No. 07-1992 3

their claim is derivative rather than direct. It contends that

they are bringing a suit that should be brought by the

corporation, and they have not gone through the proper

channels to obtain authority to bring the suit in a derivative capacity. Morgan Stanley comes to this conclusion

by observing that the Shareholders’ damages resulted

from the drop in stock price, and that type of harm is

generally a direct harm to the corporation through the

diminution of its assets and only an indirect harm to the

Shareholders; in addition, the harm is not unique to these

plaintiffs but rather is common to all shareholders.

This argument misconceives the Shareholders’ claim,

and to the extent that the district court relied on “standing”

as a ground for dismissing the case, it erred. Whether or

not the argument is compelling, the Shareholders are

actually asserting that the failure to hedge, rather than the

drop in stock prices, caused their losses. In other words,

they think that Morgan Stanley prevented them from

taking self-help measures that would have insulated their

personal portfolios from the drop in value suffered by

RCN. The Shareholders may not rely on the drop in

stock value as the cause or measure of their damage,

because (as they concede) Morgan Stanley had nothing

to do with that price drop. By contrast, it is possible to

see the failure to hedge as a cause-in-fact of the Shareholders’ financial loss, and they have alleged that this

failure was caused by a breach of an alleged duty that

Morgan Stanley owed to them. Because 21st Century as a

corporation did not suffer any loss related to a lack of

advice about hedging (since 21st Century received no

RCN stock in the transaction), the Shareholders assert
4 No. 07-1992

that their claim is direct rather than derivative. We are

willing to go this far (but little farther) with their argument. The real issue is whether any such duty exists at all.

II

Turning to the merits, Morgan Stanley argues that the

Shareholders have failed to state a claim. The law recognizes two types of fraud, actual and constructive. The

Shareholders concede that they failed to allege actual

fraud. Instead, they say that they are pleading some

type of constructive fraud, and they add that this kind of

claim should not be subject to the heightened pleading

requirements of FED. R. CIV. P. 9(b). Unlike actual fraud,

constructive fraud “requires neither actual dishonesty nor

intent to deceive, being a breach of legal or equitable

duty which, irrespective of the moral guilt of the wrongdoer, the law declares fraudulent because of its tendency

to deceive others.” Pottinger v. Pottinger, 605 N.E.2d 1130,

1138 (Ill. App. Ct. 1992). Constructive fraud includes “any

act, statement or omission which amounts to positive fraud

or which is construed as a fraud by the courts because of its

detrimental effect upon public interests and public or

private confidence.” Id. This claim requires the existence

of a confidential or fiduciary relationship. Indeed, a

plaintiff claiming constructive fraud “must show that

defendant (1) breached the fiduciary duty he owed to

plaintiff and (2) knew of the breach and accepted the

fruits of the fraud.” Prodromos v. Everen Secs., Inc., 793

N.E.2d 151, 158 (Ill. App. Ct. 2003).

The Shareholders did assert that Morgan Stanley owed

them a fiduciary duty and that there was a confidential
No. 07-1992 5

relationship between themselves and Morgan Stanley.

They attached to their second amended complaint a

fairness opinion issued by Morgan Stanley to the board of

directors of 21st Century. Morgan Stanley’s opinion notes

that 21st Century “ha[s] asked for our opinion as

to whether the Consideration to be received by the

holders of shares . . . is fair from a financial point of view

to such [share]holders.” (Emphasis added). The complaint

alleges that “[a]t the time Morgan Stanley was engaged, it

knew . . . that the persons to be benefitted by its services

were the 21st Century stockholders . . . .”; it continued with

the allegation that “Morgan Stanley knew its fairness

opinion would be relied on by RCN’s shareholders [sic—

apparently it meant 21st Century’s shareholders] in

deciding to vote for the merger sale to RCN.” (Emphasis added). Finally, it asserted that “[a]s a result of

its engagement, Morgan Stanley owed 21st Century and

The Shareholders a duty of full and fair disclosure.” (Emphasis added).

The Shareholders also pleaded a conflict of interest

relating to the fiduciary duty that Morgan Stanley allegedly owed to them. In the engagement letter, Morgan

Stanley explicitly disclosed the potential conflict of interest: “Morgan Stanley has been advising RCN Corporation (’RCN’) in connection with the Transaction. RCN and

21st Century have requested that Morgan Stanley discontinue providing services to RCN and instead provide

services to the Company. The Company understands

that Morgan Stanley may use the same team members

for this engagement.” The Shareholders allege that there
6 No. 07-1992

was a nefarious purpose behind RCN’s suggestion that

Morgan Stanley advise 21st Century:

Unbeknownst to 21st Century, the real reason why

RCN wanted Morgan Stanley to be 21st Century’s

advisor was to ensure that RCN’s interests would not

be harmed by the advice given to 21st Century’s

shareholders. Morgan Stanley understood that this

was RCN’s motivation for recommending Morgan

Stanley to 21st Century.

Ironically, 21st Century was eager to hire Morgan Stanley

not despite but because of its prior relationship with RCN.

The Shareholders’ complaint comes perilously close to

suggesting that 21st Century was simply hoping that

the breach of fiduciary duty would cut the other

way—that is, that Morgan Stanley would violate continuing duties of loyalty with respect to RCN’s confidential

information by using that information for 21st Century’s

benefit. It says, for example, “21st Century knew that

Morgan Stanley had represented RCN’s interests in

other significant transactions; i.e., that there was a

technical conflict[,]” but 21st Century nonetheless agreed

to engage Morgan Stanley “[i]n the belief that Morgan

Stanley was intimately aware of RCN’s business, capital

structure and other significant information regarding

RCN . . . .” (Emphasis added).

Be that as it may, 21st Century’s motivations are not

relevant for our purposes. What is important is that the

Shareholders alleged that Morgan Stanley breached its

supposed duty to the Shareholders. The Shareholders

charged that the “fairness opinion was not based on an
No. 07-1992 7

independent investigation by Morgan Stanley and it

failed to address serious risks associated with the transaction and ways to hedge those risks.”

Despite the fact that the preceding language of the

complaint explicitly locates the breach in an alleged

deficiency in the fairness opinion, the Shareholders

have now told us (in an effort to distinguish various

cases cited by Morgan Stanley) that they “are not complaining about Morgan Stanley’s fairness opinion.” Rather,

they say, they are claiming that Morgan Stanley owed

them “an extra contractual duty [to advise them about

hedging] that arose out of the special circumstances of

the relationship between Morgan Stanley and plaintiffs.”

(Emphasis added). The complaint, however, makes no

mention of any extra-contractual duty. While the Shareholders may “point to (or even hypothesize) facts consistent with the existing language of the complaint[,]” they

“may not amend the complaint on appeal to state a new

claim . . . .” Am. Inter-Fidelity Exch. v. Am. Re-Insurance Co.,

17 F.3d 1018, 1022 (7th Cir. 1994) (emphasis added).

Even if we put aside this failure to put Morgan Stanley

on notice of an alleged extra-contractual duty, we see

no way that the Shareholders can show that their relationship with Morgan Stanley possessed the “special

circumstances” necessary to give rise to an extra-contractual fiduciary duty. One such necessary “circumstance” is

that the allegedly superior party must have accepted a

duty to guard the interests of the dependent party. Pommier

v. Peoples Bank Marycrest, 967 F.2d 1115, 1119 (7th Cir. 1992)

(“The fact that one party trusts the other is insufficient. We
8 No. 07-1992

trust most people with whom we choose to do business.

The dominant party must accept the responsibility, accept

the trust of the other party before a court can find a

fiduciary relationship.”) (internal citations omitted).

The exhibits leave no doubt that Morgan Stanley did not

accept any such responsibility, and so no fiduciary

duty toward the Shareholders ever arose. The engagement

letter, which defines the advising relationship, explicitly

noted that Morgan Stanley was working only for the

corporation: “Morgan Stanley will act under this letter

agreement as an independent contractor with duties solely

to 21st Century.” (Emphasis added). “We have acted as

financial advisor to the Company in connection with

this transaction . . . .” (Emphasis added). The fairness

opinion also disclaimed a duty to the Shareholders:

It is understood that this letter is for the information of the

Board of Directors of the Company, except that this

opinion may be included in its entirety in any filing

required to be made by the Company in respect of the

Merger. Morgan Stanley expresses no opinion as to the

relative valuations of each of the voting and non-voting

21st Century Common Stock and the 21st Century Preferred

Stock. In addition, this opinion does not in any manner

address the prices at which the RCN Common Stock will

trade following announcement or consummation of

the proposed Merger, and Morgan Stanley expresses no

opinion or recommendation as to how the holders of the 21st

Century Common Stock should vote at the shareholders’

meetings held in connection with the Merger.

(Emphasis added). Thus, Morgan Stanley never owed any

contractual nor extra-contractual duty to the Shareholders.
No. 07-1992 9

We rejected a similar claim in HA2003 Liquidating Trust v.

Credit Suisse Securities (USA) LLC, 517 F.3d 454 (7th Cir.

2008), where we observed that investment banks’ responsibilities are set by contract; the fact that someone wishes

that a different contract had been written is not a basis for

liability. Id. at 458-59.

In addition to the explicit disclaimers we have highlighted, the conflict waiver clauses reinforce the fact that

Morgan Stanley did not accept a duty toward the Shareholders. It required 21st Century to waive all claims

based on conflict of interest but made no mention of the

Shareholders: “21st Century agrees that it will not assert

any damage, conflict of interest, or other claim against

us, our affiliates or such other party arising out of our

relationship with RCN on the basis of a conflict of interest or otherwise.” “[B]oth RCN and 21st Century have

waived any potential conflict of interest.”

Despite all these explicit disclaimers of a duty to anyone

but 21st Century, the Shareholders argue that Morgan

Stanley’s unsuccessful attempt to negotiate a price protection feature into the stock-for-stock sale of 21st Century

to RCN demonstrates that it had voluntarily accepted a

fiduciary duty to look out for the stockholders’ interests.

This is not enough; we are not aware of any authority to

support the proposition that an attempt to facilitate an

outcome that would benefit a party automatically

makes the attempter a fiduciary of that party.
10 No. 07-1992

III

Although we could affirm the district court solely on

the basis of its dismissal for failure to state a claim, we note

for completeness that the statute of limitations is an

alternative ground on which its judgment can be upheld.

The parties agree that under Illinois law the limitations

period for this type of claim is five years. See 735 ILCS

5/13-205. This case was filed on August 2, 2006. Morgan

Stanley argues that the Shareholders experienced (and

were aware of) their injury on the effective date of the

merger, April 28, 2000, by which date the stock price of

RCN had fallen substantially below the price that prevailed

at the time the merger was approved on December 12,

1999. The Shareholders concede the drop in price but argue

that in April 2000 they were (still) not familiar with

hedging strategies and consequently were unaware that

their loss could have been averted. They thus claim that

they did not know that they had been wrongfully

injured until they learned, in December 2002 or later,

that hedging strategies would have helped.

The standard for knowledge is an objective rather than

a subjective one. “Persons have knowledge that an injury

is wrongfully caused when they possess enough information about the injury to alert a reasonable person to the need

for further inquiries to determine if the cause of the injury is

actionable at law.” La Salle Nat’l Bank v. Skidmore, Owings &

Merrill, 635 N.E.2d 564, 567 (Ill. App. Ct. 1994) (emphasis

added). Morgan Stanley argues, and the district court

agreed, that upon experiencing the financial loss in April

2000, the Shareholders were put on notice of the need to
No. 07-1992 11

investigate whether they were wrongfully deprived of a

means to prevent this loss. This makes sense. It might

take thirty years for a stockholder who has no particular

interest in learning about hedging strategies to come

across this information by happenstance. The statutory

period cannot depend on each individual plaintiff’s

diligence. In this case, it would have taken little effort

for the Shareholders to discover these hedging strategies

(not only after the loss but indeed beforehand) by, for

example, contacting the Chicago Board of Trade (“CBOT”)

publications department and asking for any available

CBOT literature on ways to minimize exposure to a

potential decline in the price of a stock.

* * *

To the extent that the judgment of the district court was

based on “standing” or, more accurately, indirect injury,

we VACATE the judgment and REMAND for it to be

changed to a dismissal on the merits. To the extent that

the judgment reflects a dismissal for failure to state a

claim and untimeliness, it is AFFIRMED.

8-19-08