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August 26, 1996

MATTHIS KOLBECK, et al., Plaintiffs, against LIT AMERICA, INC., et al., Defendants.

The opinion of the court was delivered by: MUKASEY


 Plaintiffs Georg Kolbeck et al. -- 32 German, Austrian, Swiss and Italian investors -- move to amend their complaint, following dismissal of their prior amended complaint, to allege that LIT America, Angus Jackson, Michael Rose, Lawrence Rose, Refco and Leonard Alpert aided and abetted a breach of fiduciary duty in violation of New York law. Defendants Refco and LIT America have opposed that motion. For the reasons that follow, plaintiffs' motion is denied.


 In a prior opinion, reported at 923 F. Supp. 557 (S.D.N.Y. 1996), familiarity with which is assumed for present purposes, I dismissed plaintiffs' claims for fraud under the Commodity Exchange Act ("CEA") and common-law fraud, for failure to plead with particularity, Fed. R. Civ. P. 9(b), and I dismissed plaintiffs' claims for conversion under the CEA, negligence and breach of fiduciary duty for failure to state a claim upon which relief could be granted, Fed. R. Civ. P. 12(b)(6). I permitted plaintiffs to replead only a state-law claim for participating in a breach of fiduciary duty, according to the terms to be set at a pretrial conference. Those terms, set at a conference on May 7, 1996, and embodied in an order dated May 17, 1996, required plaintiffs to submit a proposed second amended complaint, and factual support for their claim. (5/17/96 Order)

 The facts alleged in the proposed pleading and the accompanying exhibits, many of which mirror the allegations in the first amended complaint, are as follows: German national Christian Schindler established the Falcon Investment Corporation ("FIC") and other companies to solicit money from Europeans for investment in American commodity futures and options markets. Plaintiffs collectively invested approximately $ 4 million with Schindler's companies. (Compl. P 2) Schindler did not register his companies with the Commodities Futures Trading Commission ("CFTC"), in violation of § 4d(1) of the CEA, 7 U.S.C. § 6d(1) (1994).

 On March 26, 1991, FIC opened its first account with Refco, a New York brokerage firm and registered futures commissions merchant ("FCM"). (Id. PP 8, 12, 12(a)) To set up that account, Schindler completed Refco's Customer Agreement and represented therein that he was the President and Secretary of FIC. Schindler listed no other corporate officers. (Id. P 12(d)) Schindler stated that he and Ernst Naderer were authorized to trade in and withdraw money from the account. (Id. P 12(j)) Schindler failed to meet Refco's request for FIC's most recent financial statement. (Id. P 12(g)) At approximately the same time the first account was approved, FIC opened two additional accounts at Refco. (Id. P 12(1)) At all relevant times, defendant Leonard Alpert was a Refco employee and the account executive for FIC's accounts. (Id. P 9)

 From April through June 1991, there was heavy trading in the three FIC accounts at Refco. The first account, number A923-56299, opened on April 23, 1991 with $ 370,000.00. (Id. PP 12(e), 12(k)) During the following week, that account traded over 800 "roundturn futures contracts" and on April 30 had a balance of $ 264,007.31. The next month, that same account traded over 2000 roundturn futures contracts and on May 31 had a balance of $ 82,917.09. In June, the account traded over 400 roundturn futures contracts and had shrunk to only $ 1,000.00 by June 29, 1991. (Id. P 15) From April 23 to October 29, 1991, $ 4,600 was withdrawn from the three FIC Refco accounts to pay the salary of defendant Lawrence Rose, one of Schindler's employees. (Id. P 16)

 On October 28, 1991, an Austrian shipping company, Paul Gunther Transportgesellschaft GmbH ("Gunther"), sued Schindler and FIC in New York Supreme Court, in an action styled Paul Gunther Transportgesellshaft m.b.h. v. Schindler & Falcon Investment Corp. (the "Gunther action"). (Id. P 17) The Gunther complaint alleged that Schindler and FIC breached their contract with Gunther by failing to maintain a minimum balance of $ 400,000 in the Gunther account, and by failing to pay those funds to Gunther upon demand. (Gunther Compl. PP 6-7)

[FIC] is a foreign corporation not qualified to do business in the state and defendants, with intent to defraud their creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff's favor, has [sic] disposed of, or secreted property, or removed it from the state, that several causes of action for a money judgment exist in favor of plaintiffs against said defendants for the sum of $ 400,000.00 . . . and that it is probable that plaintiffs will succeed on the merits . . . .

 (Compl. Ex. A at 2) Justice Karla Moskowitz signed the OSC restraining Schindler, FIC and "all other persons and garnishees . . . from transferring or paying any assets . . . or personal property [of Schindler and FIC] . . . to the extent of $ 400,000," and scheduled a hearing to determine whether Schindler or FIC's assets should be attached. (Id. at 3)

 Supporting the OSC was the affidavit of Gunther's attorney, Manfred Linden. Linden alleged that Ernst Naderer, a Gunther employee and the only person other than Schindler authorized to trade the first FIC account, supra p. 2, embezzled $ 400,000 of Gunther's funds and used that money to open the Gunther account with FIC. (Linden Aff. PP 2, 7) The agreement between Gunther and FIC originally provided that the funds were to be placed with Cargill Investors, but later was changed to designate Refco as the brokerage firm. (Id.) The agreement was amended also to require that a "minimum of the amount of $ 400,000.00 is to remain in this account for Mr. Ernst Naderer's use at all times." (Id. P 4) Linden alleged that Schindler and FIC ignored both Naderer's demands to return the funds and Linden's own attempts at communication, (Id. PP 5-6, 8-9) and that:

As a result of the actions of Mr. Schindler, [Gunther is] being frustrated in the enforcement of a judgment that might be rendered in [its] favor in action for recovery of these sums and Mr. Schindler is secreting these funds.

 (Id. P 10) Attached to Linden's affidavit were: the investment agreement between Gunther and FIC; the supplemental agreement providing that the account would maintain a minimum balance of $ 400,000.00; and FIC's Refco customer account application. (Compl. P 17(b))

 Attached also to the OSC were Naderer's July 1, 1991 letter to Schindler directing the maintenance of the $ 400,000 safety fund and Naderer's September 2, 1991, facsimile to Schindler citing an unmet deadline for payment and threatening legal action. James M. Kenney, Linden's attorney, filed an affidavit stating that FIC was evicted from its office at 40 Wall Street in Manhattan and had moved to Miami; that FIC was not registered to do business in New York; and that Alpert informed him FIC had no funds in Gunther's account but funds in other Refco accounts. (Kenney Aff. PP 2-5) There was also a letter dated May 18, 1990 to Schindler from his attorneys, Beckman and Associates, warning him not to trade commodities in the U.S. without registering under the CEA.

 On October 29, 1991, a copy of the complaint and OSC was served on Ivan M. Brawer, the Secretary/Controller of Refco. The OSC was served also on three other investment firms -- Lehman Brothers, Prudential Securities, Inc. and Dominick & Dominick, Inc. (Manning Aff. PP 2, 4-5) The OSC was not served on any of the other defendants here.

 A week later, on November 6, 1991, Schindler filed an affidavit in opposition to Gunther's motion for an attachment. There, Schindler stated that:

the monies presently restrained by the temporary order of this Court which are in the possession of Refco, do not belong to [Schindler or FIC], but instead are being held on ...

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