In the

United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 07-1992

E DWARD T. JOYCE, et al.,
                                                Plaintiffs-Appellants,
                                  v.

M ORGAN S TANLEY & C O ., INC.,
                                                 Defendant-Appellee.
                          ____________
             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
           No. 06 C 4754—Samuel Der-Yeghiayan, Judge.
                          ____________

    A RGUED JANUARY 25, 2008—D ECIDED A UGUST 19, 2008
                          ____________



  Before B AUER, W OOD , and E VANS, Circuit Judges.
  W OOD , 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 deriva-
tive 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 Share-
holders’ 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 argu-
ment. 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 recog-
nizes 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 F ED. R. C IV. 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 wrong-
doer, the law declares fraudulent because of its tendency
to deceive others.” Pottinger v. Pottinger, 

,
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.” 

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., 

, 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.” (Em-
phasis 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.” (Empha-
sis added).
  The Shareholders also pleaded a conflict of interest
relating to the fiduciary duty that Morgan Stanley alleg-
edly owed to them. In the engagement letter, Morgan
Stanley explicitly disclosed the potential conflict of inter-
est: “Morgan Stanley has been advising RCN Corpora-
tion (’RCN’) in connection with the Transaction. RCN and
21st Century have requested that Morgan Stanley dis-
continue 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 con-
tinuing 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 trans-
action 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 com-
plaining 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 Share-
holders may “point to (or even hypothesize) facts con-
sistent 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.,

, 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 rela-
tionship with Morgan Stanley possessed the “special
circumstances” necessary to give rise to an extra-contrac-
tual 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, 

, 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, 

(7th Cir.
2008), where we observed that investment banks’ responsi-
bilities are set by contract; the fact that someone wishes
that a different contract had been written is not a basis for
liability. 

  In addition to the explicit disclaimers we have high-
lighted, the conflict waiver clauses reinforce the fact that
Morgan Stanley did not accept a duty toward the Share-
holders. 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 inter-
est 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 pro-
tection 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 informa-
tion 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, 

, 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 V ACATE the judgment and R EMAND 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 A FFIRMED.




                          8-19-08