The opinion of the court was delivered by: MUKASEY
MICHAEL B. MUKASEY, U.S.D.J.
Plaintiffs Georg Kolbeck et. al. are 32 German, Austrian, Swiss and Italian investors suing four brokerage companies -- LIT America, Inc., Refco, Inc., Angus Jackson, Inc., and Augustine Management -- and four individuals, Michael E. Rose, Leonard Alpert, John C. Jennison III, and Lawrence Rose, for fraud and conversion under the Commodities Exchange Act, ("CEA"), and fraud, negligence, and breach of fiduciary duty under New York common law. Defendants LIT America, Refco, and Alpert have moved jointly to dismiss the complaint pursuant to Fed. R. Civ. P. 9(b), for failure to plead fraud with particularity, and Fed. R. Civ. P. 12(b)(6), for failure to state a claim upon which relief can be granted. For the reasons that follow, defendants' joint motion is granted.
The following facts are alleged by plaintiffs in the complaint and attached documents, and on this motion, are construed in the light most favorable to the plaintiffs. Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Fed. R. Civ. P. 10(c) permits the court to consider any exhibits mentioned in and attached to the pleadings even on a Rule 12(b)(6) motion to dismiss. Fed. R. Civ. P. 10(c) ("A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes."); 2A James W. Moore et al., Moore's Federal Practice P 10.06 (2d ed. 1995). Review of and reliance on these supplemental documents on a motion to dismiss is permissible because their inclusion in the pleadings affords the opposing party notice and an opportunity to respond, and makes it unnecessary to convert the motion into one for summary judgment. Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992). Here, plaintiffs have attached several exhibits to their amended complaint, including notices of termination of their trading accounts with Christian Schindler, a German national now serving three years for embezzlement, and an alleged assignment of rights from Schindler to plaintiffs. Those documents will be considered in addition to the complaint on this motion.
This action results primarily from the fraudulent financial activities of Schindler, who now resides in Bernau Prison outside Munich, Germany. (Compl. P 15) In 1991, German authorities began investigating Schindler's financial activities and issued a warrant to arrest him for embezzlement. Schindler fled Munich for New York. (Id. P 16)
Upon arrival in New York, Schindler established several companies to solicit money from Europeans for investment in the commodity futures and options markets in the United States. Schindler set up: (1) Falcon Investment Corp., incorporated in Delaware in 1991; (2) FIC, Inc., incorporated in the Cayman Islands in 1991; (3) Investment Banker's Brokerage, Inc., incorporated in Delaware in 1991; and (4) IB Brokerage, also known as IBB, incorporated in the Cayman Islands in 1990 (together, "the Schindler Companies"). (Id. P 18) These companies operated out of offices at 52 Wall Street and 40 Wall Street in New York City, and offices in Miami, Florida. (Id. P 20) Schindler never registered any of these companies with the Commodities Futures Trading Commission ("CFTC"), in violation of § 4d(1) of the Commodities Exchange Act ("CEA"), 7 U.S.C. § 6d(1) (1988), even though he obtained a legal opinion from attorney Bradley Beckman, advising him of the need to do so. (Compl. P 19)
Despite his failure to register, Schindler, through the Schindler Companies, solicited millions of dollars from German, Austrian, and other European nationals for investment in American commodities markets. In aid of this enterprise, Schindler employed German-speaking salesmen who "used high pressure sales tactics," with "the lure of quick profits and no risk, to convince clients to invest monies with his companies." (Id. P 20) Schindler ultimately collected more than $ 6 million from foreign investors -- approximately $ 4 million of which was contributed by plaintiffs in this case. (Id. P 18)
In or about March 1991, one of Schindler's employees, Anthony Colazzo, introduced Schindler to Refco, Inc. and Leonard Alpert, two of the defendants in this case. Refco is a New York brokerage firm and futures commission merchant ("FCM"), that clears commodity futures trades for its investor customers. Alpert is an employee of Refco, and is registered as an associated person ("AP") of Refco under the CEA and as a member of the National Futures Association ("NFA") . (Id. P 10) Although Colazzo allegedly explained to Alpert that Schindler was not registered with the CFTC, Alpert began dealing with Schindler without requiring him to register. Alpert also helped Schindler complete "commodity customer agreements that purported to show that no public customers were involved in the brokerage business between them," and that Schindler was investing exclusively his own funds. (Id. P 24) This assertion that no public customers were involved apparently was submitted under oath to the CFTC. Plaintiffs contend that when made, this sworn statement was "false and a lie," and that "at all times relevant herein, Defendant Alpert knew that Christian Schindler used F.I.C. Inc. as an illegal conduit and means to introduce commodity brokerage business to Defendant Refco without the necessity of registration under the CEAct as either a FCM, IB, CPO and/or CTA." (Id.) More specifically, plaintiffs contend that Alpert knew Schindler was investing other people's money, because in March 1991 Alpert allegedly spoke to Ernst Naderer, who is not a plaintiff in this action, about a trading account at Refco. (Id. P 25) Plaintiffs do not allege anything about what Naderer and Alpert discussed, only that they had some conversation. Alpert earned a brokerage commission on every trade that Schindler made with Refco (id. P 29), and he and Refco continued to work with Schindler and his companies until January 1993. (Id. P 26)
Plaintiffs further allege that, contrary to the sworn statement described above, Alpert actively helped Schindler solicit money from members of the public, including plaintiffs. (Id. P 25) To this end, plaintiffs allege, Alpert led tours of the New York Futures Exchange ("NYFE") trading floor and the Refco offices at One World Financial Center in Manhattan for Schindler and potential investors, including many of the plaintiffs in this action. (Id. P 27) Plaintiffs contend that these tours occurred almost monthly -- in or about February, March, April, May, June, July and December 1992, and in February and June 1993. These tours often lasted several hours, during which Schindler told his guests that Refco and Alpert were his trading partners, that investors would have individual accounts at Refco, and that Refco "would be looking out for the best interests of the clients." (Id. P 30) Plaintiffs contend that Alpert "did nothing to correct these obvious lies, misstatements and half-truths," and that the plaintiffs who made the visits "believed that what they had been told by Christian Schindler was true, including but not limited to, the representation that he was the agent of the Defendant Refco or in the case of visits to the exchange floor with Defendant M. Rose that he was the agent of Defendant LIT." (Id.) Plaintiffs have not specified exactly what Schindler said, in what language Schindler spoke, or whether Alpert understood. Moreover, plaintiffs have made no allegations about statements made by Alpert or anyone else at Refco.
On one occasion in January 1992, Alpert showed Schindler and one of the plaintiffs, Dr. Thilo Lipkow, a prospectus for a Refco commodity pool called "Refco Global Futures Fund, Ltd." The complaint specifies that Alpert distributed the prospectus, and that he gave it to both Schindler and Lipkow. (Id. P 31) Schindler began selling shares in this fund to his clients, including some of the plaintiffs, but Schindler actually diverted the money into his own fund, called the Global Futures Fund, Ltd. (Id.) Shindler eventually raised from plaintiffs more than $ 1.5 million for the Refco Global Futures Fund, which he diverted into his own Global Futures Fund, Ltd. (Id. PP 36-37)
In July 1992, at the suggestion of Lawrence Rose, one of Schindler's employees, Schindler began doing business directly with defendant LIT America and Lawrence Rose's brother, Michael Rose. (Id. P 33) Before that time, Schindler used the services of Michael Rose on a "give up" basis only; i.e., Michael Rose would fill Schindler's trades but then transfer them to another FCM, such as Refco, for confirmation. (Id.) Plaintiffs allege that like Refco and Alpert, LIT and Michael Rose hosted Schindler and his customers at the NYFE trading floor on numerous occasions, although never at their offices. On these tours, plaintiffs allege, Michael Rose would "either affirmatively vouch for [Schindler's] credibility . . . or simply go along with whatever sales pitch Christian Schindler choose [sic] to use at the time." (Id. P 34) Plaintiffs have not specified the content of Schindler's sales pitches, what language they were made in, or whether Michael Rose understood them. Plaintiffs have alleged that Michael Rose "knew that Christian Schindler was doing business with members of the public, failed to be registered under the CEAct, engaged in high pressure boilerroom sales tactics, and charged excessive commissions and fees to his clients" (id.), and that LIT and Michael Rose accepted Shindler's Global Futures Fund for trading even though the prospectus reported Refco as the broker of record. (Id. P 37)
Not surprisingly, Schindler's illegal activities generated a spate of public and private litigation. In October 1991, one of Schindler's Austrian clients, Paul Gunter Transportgesellschaft GmbH, sued Schindler and the Falcon Investment Corp. for fraud in New York Supreme Court, in an action styled Gunter v. Schindler, No. 91-29247 (Sup. Court New York County 1991) (Id. P 26) In December 1992, Fredrich Wieder and Hans Gerd-Munch, two of the plaintiffs in this action, filed a complaint against the Schindler Companies in this court styled Wieder v. F.I.C. Inc., 92 Civ. 9377 (MBM) (the "Wieder Action"). (Id. P 35) The 30 other plaintiffs in this case were added to the Wieder Action on March 25, 1993.
In or about June 1992, the CFTC began investigating Schindler and his companies. As part of that investigation the CFTC issued document requests to Refco, asking in part for another affirmation that Schindler was not doing business with the public. Schindler signed a statement to that effect, and plaintiffs contend that Refco and Alpert "knew that it was false." (Id. P 32) On April 26, 1993 the CFTC investigation culminated in the filing in this court of a civil complaint against Schindler and his companies for multiple violations of the CEA and its regulations. Commodity Futures Trading Comm'n v. Schindler, No. 93 Civ. 2765 (MBM) (the "CFTC Action"). In that action, by order dated October 30, 1995, I granted summary judgment for plaintiff CFTC and permitted the law firm of Gusrae, Kaplan & Bruno to withdraw as Schindler's counsel. Commodity Futures Trading Comm'n v. Schindler, No. 93 Civ. 2765, 1995 U.S. Dist. LEXIS 15920, *1, 1995 WL 635001 *1 (S.D.N.Y. Oct. 30, 1995). In a subsequent order, dated January 29, 1995 I again granted summary judgment for plaintiff in the CFTC Action, on different claims, ruling that Schindler and his companies: (1) acted as Futures Commission Merchants without registering as such, in violation of § 4d(1) of the CEA, 7 U.S.C. § 6d(1) (1994); (2) committed commodities fraud, in violation of § 4b(a)(i) of the CEA, 7 U.S.C. § 6b(a)(i) (1994); (3) made false commodities reports, in violation of § 4b(a)(ii) of the CEA, 7 U.S.C. § 6b(a)(ii) (1994); (4) acted as Commodity Pool Operators ("CPO") without being registered as such, in violation of § 4m(a) of the CEA, 7 U.S.C. 5 6m(1) (1994); and (5) committed fraud as CPOs, in violation of § 4o(1) of the CEA, 7 U.S.C. § 6o(1) (1994). I permanently enjoined Schindler and his companies from further engaging in the prohibited conduct, froze all of their assets, and appointed Richard E. Nathan, Esq. Permanent Equity Receiver of their property.
On March 11, 1996 the Receiver issued a report on the status of defendants' assets. The Receiver concluded, inter alia, that it was unlikely that further assets would be obtained, and that the cost of pursuing any such assets greatly outweighed the likelihood of success. (Report of the Permanent Equity Receiver at 5) The Receiver also stated that he "is not aware of any facts that would support a good-faith claim on behalf of [Schindler and his companies] against [LIT, Refco, Angus Jackson and Augustine] or individuals or anyone else." (Id. at 6)
In July 1993, Schindler was arrested in Manhattan pursuant to an international extradition warrant issued by the prosecutor in Munich, Germany. The warrant, the product of the investigation that led to Schindler's flight to the United States, had been issued sometime in 1991 and internationalized in May 1993. (Compl. P 14) Schindler was convicted of felony criminal fraud in Munich and sentenced to approximately three years in prison. An identical sentence was imposed in Traunstein, Germany in September 1995. Schindler is currently serving those sentences, and is scheduled to be released in April 1998. (Id. P 15)
The plaintiffs in the present action first filed their complaint on March 1, 1995. After meeting with Schindler in Germany, plaintiffs filed an amended complaint on December 8, 1995, seeking relief on nine separate claims, denominated "counts." The first group of counts concern LIT, Angus Jackson, Jennison, Michael Rose and Lawrence Rose, of whom only LIT currently moves to dismiss: Count I alleges violations by LIT, Angus Jackson, Augustine, Jennison, Michael Rose and Lawrence Rose, of § 4b and § 4o -- the anti-fraud provisions -- of the CEA; Count II alleges a violation by LIT of § 4d, the conversion provision of the CEA, 7 U.S.C. § 6d; Count III alleges that LIT negligently did business with an unregistered trader; Count IV alleges breach of fiduciary duty by LIT, Angus Jackson, Augustine, Jennison, Michael Rose and Lawrence Rose; and Count V alleges common law fraud by Michael Rose, LIT, Angus Jackson, Augustine and Jennison. The last set of counts concerns only Refco and Alpert: Count VI alleges violations of § 4b of the CEA by Refco and Alpert; Count VII alleges Refco's negligence; Count VIII alleges Refco's and Alpert's breach of fiduciary duty; and Count IX asserts Refco's and Alpert's common law fraud. (Compl. PP 41-77) Defendants Refco, Alpert and LIT move to dismiss all of plaintiffs' claims against them. Because each of the counts includes one or more defendants presently moving to dismiss, each will be discussed in this opinion.
Subject matter jurisdiction for plaintiffs' federal claims arises from 28 U.S.C. § 1331, the federal question statute, and 7 U.S.C. § 25(c), the jurisdictional grant of the private right of action under the CEA. Subject matter jurisdiction for plaintiffs' state claims exists pursuant to 28 U.S.C. § 1367(c), the supplemental jurisdiction statute, and pursuant to 28 U.S.C. § 1332, the diversity-of-citizenship statute. Plaintiffs are all foreign citizens and defendants are all American citizens. Although plaintiffs have not specified how much each seeks, I will assume, for purposes of this motion, that each of the 32 plaintiffs seeks more than $ 50,000, as required by statute. Zahn v. International Paper Co., 414 U.S. 291, 294, 38 L. Ed. 2d 511, 94 S. Ct. 505 (1973) ("multiple plaintiffs with separate and distinct claims must each satisfy the jurisdictional-amount requirement"). That assumption is appropriate here, where plaintiffs combined seek over $ 4 million. That sum divided by 32 (the number of plaintiffs) equals $ 125,000 and suggests that each plaintiff's claim exceeds the $ 50,000 statutory minimum. Venue is proper in this district pursuant to 28 U.S.C. §§ 1391(b)(2) because a substantial part of the events giving rise to both the federal and state claims occurred here.
In their Memorandum of Law plaintiffs suggest incorrectly that my January 29, 1996 ruling in the CFTC Action may have collateral estoppel effect on the present action. Collateral estoppel, or issue preclusion, provides that "once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case." Allen v. McCurry, 449 U.S. 90, 94, 66 L. Ed. 2d 308, 101 S. Ct. 411 (1980). Collateral estoppel requires: (1) an identity of issues, (2) that the issue necessarily have been decided, and (3) that the party against whom the bar is sought had a full and fair opportunity to litigate the issue in the prior suit. See Burgos v. Hopkins, 14 F.3d 787, 792 (2d Cir. 1994).
The judgment for the CFTC in the CFTC Action does not bar litigation of any of the issues in the present case. Those issues are not identical because that action concerns the liability of Christian Schindler while this action concerns the liability of the commodities brokers with whom Schindler traded. As a consequence, most of the facts at issue here were not necessarily decided in the CFTC action. Even if some of the issues, such as Schindler's primary liability, were decided in the CFTC Action, the defendants in the present case, who were not parties or privies of a party to the CFTC Action, did not have a full and fair opportunity to litigate their liability in the CFTC Action. Accordingly, it is necessary to decide each of the issues raised on defendants' motion for the first time here.
The Futures Trading Act of 1982 ("FTA") amended the CEA and codified an investor's private right of action for damages resulting from violations of the CEA. 7 U.S.C. § 25 (1994). Section 25(c) of Title 7 dictates that any private action for CEA violations "shall be brought not later than two years after the date the cause of action arises." 7 U.S.C. § 25(c) (1994). A claim under the CEA arises when plaintiffs are put on inquiry notice of a potential claim. That is, the claim accrues and the limitations period starts to run when circumstances would suggest to a person of ordinary intelligence the probability that he has been defrauded. Benfield v. Mocatta Metals Corp., 26 F.3d 19, 22 (1994); Dodds v. Cigna Secs., Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 128 L. Ed. 2d 74, 114 S. Ct. 1401 (1994). At that point, the investor assumes a duty of inquiry, and knowledge will be imputed to the investor even if he does not make that inquiry. Dodds, 12 F.3d at 350.
Plaintiffs first filed the complaint in this action on March 1, 1995. For his claim to be timely, each plaintiff must not have been put on inquiry notice before March 1, 1993, absent application of a tolling doctrine. However, it is clear that no fewer than eight of the 32 plaintiffs here had actual notice at least of Schindler's fraud well before March 1, 1993. The two plaintiffs who sued Schindler for fraud in December 1992 -- Wieder and Munch -- plainly knew of Schindler's antics before March 1, 1993. Had Schindler's relationship with defendants been deliberately concealed or otherwise difficult to discover, actual notice of Schindler's fraud might not translate into inquiry notice of defendants' alleged wrongdoing. But here, the allegations of agency in the complaint reveal that Wieder and Munch at least had inquiry notice, if not actual notice, by the time they filed their suit against Schindler, that Refco, Alpert and LIT may have helped Schindler to perpetrate his fraud. Accordingly, the CEA claims asserted by Wieder and Munch against Alpert, Refco and LIT are time-barred.
Six other plaintiffs also betrayed their awareness of Schindler's fraud on or before March 1, 1993 by demanding that Schindler return their money and by authorizing their attorney (the same attorney representing them here) to sue Schindler for CEA violations. (Comp. P 38 & Ex. A-P) The exhibits attached to the complaint demonstrate that plaintiffs Anton Pfaab (3/1/93 - Ex. A), Arno Slawinski (3/1/93 - Ex. K), Andreas Walk (2/28/93 - Ex. L), Hannelore Walk (2/28/93 - Ex. M), Frederieke Jenewein (2/28/93 - Ex. N) and Bernard Sernatinger (2/28/93 - Ex. O) all sent official notices to Schindler that they were terminating their accounts with his investment companies, demanding the return of all monies, and seeking "the rescission of each and every trade made for my account based upon your fraudulent misrepresentations to me." (Compl. Ex. A) Further, each of the letters declares that the signatory ...