The opinion of the court was delivered by: Frank Maas, United States Magistrate Judge
Plaintiffs Dover Limited ("Dover") and Wendy Sui Cheng Yap ("Yap") (together, "Plaintiffs") bring this action for money damages and other relief alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and Rule 10b-5. (See Docket No. 25 (Amended Complaint ("Am. Compl."))). Plaintiffs also assert claims for common law fraud, conspiracy to commit fraud, conversion, breach of contract, breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation. The defendants are A.B. Watley, Inc. ("ABW"); A.B. Watley Group, Inc. ("Group"); A.B. Watley Direct, Inc. ("Direct") (together, the "ABW Companies"); Robert Malin ("Malin"), the President of ABW; John J. Amore ("Amore"), ABW's former Chief Executive Officer; two ABW employees, Keith Sorrentino ("Sorrentino") and John Coakley ("Coakley") (together, the "ABW Defendants"); Elfort Company, S.A. ("Elfort"),*fn1 an affiliate of ABW; and Alain Assemi ("Assemi"), who is alleged to be an agent of ABW and principal in Elfort. (See Docket No. 25). Malin, Amore, Sorrentino and Coakley are hereinafter referred to, collectively, as the "Individual Defendants." The ABW Companies, Malin, Amore, Sorrentino, Coakley and Assemi are hereinafter referred to, collectively, as the "Defendants."
In three separate motions, the Defendants now have moved to dismiss the Amended Complaint, pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78-u4(b), for failure to state a claim or plead with the requisite particularity. (Docket Nos. 39, 41, 42, 44).*fn2
In November 2004, the parties consented to my exercise of jurisdiction over this matter pursuant to 28 U.S.C. § 636(c). (See Docket No. 13). Pursuant to that authority, for the reasons set forth below, the motions filed by the ABW Defendants and Assemi are granted in part and denied in part. Additionally, Amore's motion is granted.
The Plaintiffs' request for leave to amend the Amended Complaint also is granted insofar as the defects set forth in this Motion to Dismiss can be corrected through repleading.
The following facts alleged in the Amended Complaint must be taken as true.
Plaintiff Dover is a Singapore corporation in the business of "investment holding," and plaintiff Yap is a resident of Singapore and director of Dover. (Am. Compl. ¶¶ 3-4 & Ex. B at 8).
At all relevant times, ABW was a broker-dealer and retail securities firm, incorporated and having its principal place of business in New York. (Id. ¶ 5). Group and Direct also were broker-dealers and retail securities firms operated by the same employees and conducting the same business out of the same location as ABW. (Id. ¶¶ 6-7).
Amore served as Chief Executive Officer of ABW until September 2003. (Id. ¶¶ 11, 49). Malin was the President of ABW and Group. (Id. ¶ 8). Sorrentino and Coakley were ABW employees. (Id. ¶¶ 9-10).
Assemi was the sole principal of Elfort, a California company affiliated with ABW. (Id. ¶¶ 12-13). Each of the individual defendants was also a licensed securities broker. (Id. ¶¶ 8-12).
On or about May 25, 2003, Yap discussed with Assemi the prospect of Dover investing $10 million in a "Non-Depletion of Capital Growth Program" ("Non-Depletion Account" or "Account") allegedly offered by ABW in the United States. (Id. ¶ 23). Assemi told Yap that Dover's investment was guaranteed by ABW not to deplete or depreciate, and that Dover would realize a profit of no less than $5 million by September 15, 2003, four months after the funds were received. (Id. ¶ 24). In exchange for the assurance of this high return and security, Dover was to split the profits received with ABW. Assemi, in turn, was to be paid directly by ABW. (Id. ¶ 25).
Assemi's statements to Yap about the account were false because ABW did not offer a Non-Depletion Account to its customers, nor did it have an investment program which guaranteed the security of its customers' funds while also affording them a high rate of return within six months.*fn3 (Id. ¶ 33). Worse yet, at the time these misrepresentations were made, the Defendants intended to invest Dover's money in high risk, speculative securities, if invested at all. (Id. ¶ 35).
On May 26, 2003, Yap completed the ABW Account Application and Registration forms necessary to open an account for Dover and faxed them to Sorrentino. (Id. ¶ 27 & Ex. B). After making certain corrections and changes to the forms requested by Sorrentino, Yap forwarded the fully executed application to him on May 29, 2003. (Id.).
On June 4, 2003, at 2:00 a.m. (Singapore time), Coakley called Yap and explained that ABW's "legal department" required that she change the Dover application to indicate that its investment objective was not "Growth," but "Aggressive Growth/Speculation." (Id. ¶ 29 & Ex. B). Coakley insisted that Yap fax the revised form immediately, even though it was the middle of the night in Singapore. (Id. ¶ 30). Within minutes after she finished talking to Coakley, Assemi called Yap to ensure that she would fax the form immediately. (Id.).
On June 5, 2003, Coakley sent Yap a fax containing a copy of the amended account opening form, along with same-day instructions for the transfer of Dover's funds into the Account. (Id. ¶ 31). Later that day, the Plaintiffs faxed the same documents to Sorrentino, along with "two (2) amended pages for the ABW account application indicating the demanded change from 'Growth' to 'Aggressive Growth.'" (Id.). Coakley's statements to Yap were false, because Dover did not need to list "Aggressive Growth/Speculation" as its objective in order to open a Non-Depletion Account, or any other account, with ABW. (Id. ¶ 34).
That same day, pursuant to Sorrentino's instructions, Yap transferred $10 million to ABW. (Id. ¶ 32). Yap also executed and returned an ABW Profit Split Agreement that Coakley had requested. (Id.). The next day, Coakley faxed to Yap a PFS Limited Trading Authorization naming Amore as Plaintiffs' authorized agent. (Id.). The Amended Complaint does not state that Yap signed and returned this authorization, but it appears that she did.
By June 17, 2003, Yap received an ABW account statement indicating the "loss or absence" of $2,667,739 from the Account for the seven-day period from June 6 to June 13, 2003. (Id. ¶ 39). ABW apparently had allocated this sum to a margin account, not owned by Yap or Dover, that sold certain shares of J.P. Morgan Chase stock on June 1, 2003. (Id. ¶ 40). Similarly, when Yap received a statement for the Account for the period from June 1 through June 30, 2003, it reflected an opening account value of only $6,988,859.84, more than $3 million less than Dover had remitted. (Id. ¶ 32).
Upon learning of the initial loss in the Account, Yap called Assemi, who told her that the loss shown on the statement was due to a "computer error" which he would ensure was corrected by the end of the week. (Id. ¶ 41). Assemi further advised Yap that the Account actually had an "'equity' value of approximately $15 million and that ABW was going to 'piggy back' Dover's 'equity' to 'other's equity' to obtain a total of $50 million and then enter Dover into a 'bigger payout program.'" (Id.).
Despite these assurances, on July 13, 2003, Plaintiffs received a letter from ABW, dated July 3, 2003, which stated that the Account had "declined in value from $10,000,000 to $7,005,173.90." (Id. ¶ 42). The letter requested that Yap sign and return the letter to ABW. (Id.). Instead, Yap contacted Assemi, who sent her a fax the following day, which stated that the letter she had received from ABW did not require her signature and that she should "rest assured that [ABW] is responsible and accountable for [the] funds remaining at their establishment." (Id. ¶ 43 & Ex. C). The letter stated further that, "Mr. Robert Malin, the president of [ABW], assured me this morning that they will be depositing profits into your account." (Id. Ex. C). Assemi also wrote that Yap's "$6.75 [million] ha[d] been transferred to a non-deplet[ion] account," and that "[she would] be more than pleased after [her] great patience." (Id.).
On or about July 15, 2003, Assemi explained to Yap that the program had been slow to generate the promised profits, because the total amount invested had to be at least $25 million. (Id. ¶ 45). On July 30, 2003, because Dover had yet to receive any profits, Yap sent Assemi an email in which she reminded him of his promise that Dover would be "paid under ABW account end of July." (Id. Ex. D). Yap's email also stated that "nothing ha[d] come in yet and [Dover had] not received confirmation regarding [$] 3.25 [million] balance in ABW." (Id.). Later that day, Assemi emailed Yap that he had been unsuccessful in trying to reach her and that "at [the] absolute latest [August] 15th you can take $5 [million] profit." (Id.).
In an "urgent" email dated September 11, 2003, Yap advised Assemi that Dover "still [had] not received any funds from the Programs," and that if $5 million were not remitted by September 16, Dover would send a letter requesting the entire $10 million investment be returned. (Id. Ex. E at 6-7). In a follow-up email the next day, Yap explained that she needed the money by September 16 because of an "investment option that [she had] to exercise." (Id. at 8). Shortly after these emails, Assemi informed Yap that ABW had terminated Amore due to his "reckless trading, including reckless trading of Dover's account." (Id. ¶ 49).
When Dover's money had not been returned by late September 2003, Yap wrote to ABW and demanded that the balance of the original $10 million investment, or $3,250,000, be returned to Dover, and that she wished to terminate Dover's participation in the Non-Depletion Capital Growth program. (Id. ¶ 50). On September 25, 2003, Yap received from ABW's counsel, Michael H. Ference, Esq. ("Ference"), a letter responding to her demand.*fn4 (Id. ¶ 51). In his letter, Ference wrote that ABW "does not offer any service or product titled 'Non-Depletion of Capital Growth,'" and that he was "at a complete loss" as to how Yap could request the return of the balance of $10 million since the Account balance was less. (Id.). Despite this letter, however, Yap continued to receive oral and written assurances from Assemi and Malin that ABW would return the full amount that Dover had originally invested through further trading. (Id. ¶ 53).
By letter dated September 26, 2003, Yap replied to Ference's letter and described "ABW's representations to her that Dover's $3 million was not lost, but was available to ABW to [invest to] make Dover 'lots of money.'" (Id. ¶ 52). Neither Ference nor ABW responded to this letter. (Id.).
On June 2, 2004, Yap (and two of her relatives) met with Assemi and Steven Malin (Robert Malin's brother). (See id. Ex. F at 3). Prior to the meeting, Assemi had sent to Yap a "Restitution Proposal" prepared by Robert Malin "to remedy the financial chaos that Jay Amore ha[d] left behind in his wake." (Id. at 1). According to Assemi, Malin had agreed to produce to Yap information concerning the FBI/NASD investigation of Amore and ABW's pending lawsuit against him, in exchange for the retention of Dover's remaining funds at ABW, which would trade them, with the returns applied against Dover's balance and an offer of shares in ABW "before an anticipated increase in value within the next year." (Id.).
Steven Malin allegedly was present on June 2 because Robert Malin "had to attend another meeting." (Id. at 3). During the meeting, Steven Malin told Yap that ABW had insurance which might cover the Plaintiffs' investments. (Id.). He also suggested using the balance of Dover's funds as part of a "private placement," which, together with more funds from Dover, might enable ABW to return all of Dover's money in two years or more. (Id.). Yap believed that this differed from what Assemi previously had told her, which was that Dover would see a return on its investment within six months to one year without investing more money. (Id.). Throughout the meeting, "[Assemi] had nothing to say even though [what Steven Malin said] contradicted what [Assemi previously told Yap]." (Id. at 4).
On August 27, 2004, the National Association of Securities Dealers ("NASD") expelled ABW and revoked its license for "fail[ure] to pay [$26,000 in] fines and . . . costs" in connection with two prior disciplinary actions. (Id. Ex. A at 3 (block capitalization deleted)). In one of those proceedings, ABW was found to have failed to comply with securities disclosure requirements; in the other, it was found to have run advertising that "contained statements which were exaggerated, misleading, unwarranted, and without basis." (Id. at 9-10 (block capitalization deleted)). The Plaintiffs allege that ABW was expelled on or about April 4, 2004 (see id. ¶ 19), but that neither Malin nor Assemi informed Yap of the revocation or the pending rebirth of ABW as Direct or Group. (Id. ¶ 56). The NASD report annexed to the Amended Complaint indicates, however, that the "revocation/expulsion" did not occur until August 27, 2004, two months after the meeting. (See id. Ex. A at 5).
During the June 2 meeting, Yap rejected the ABW restitution proposal and requested that the balance in the Account be returned immediately. (Id. ¶ 61). On June 10, 2004, ABW returned the balance. (Id.). Yap contends that ABW, rather than Amore, misallocated or converted Dover's funds, resulting in a net loss of $2,994,597.84, excluding interest. (Id. ¶¶ 62-63).
On June 25, 2004, Plaintiffs' counsel asked Ference whether the reference to mandatory arbitration in the Account opening forms was binding, because the Plaintiffs preferred to seek restitution in federal court. (Id. ¶¶ 64-65 & Ex. B (Customer Agreement) §§ 12-13)). Plaintiffs' counsel also asked Ference whether ABW was still in business. (Id. ¶ 69).
The response from ABW's counsel, dated July 9, 2004, enclosed a copy of Dover's Customer Agreement and directed opposing counsel's attention to Section 13 thereof, which provided for mandatory arbitration. (Id. ¶ 66 & Ex. B). Counsel's letter also stated that ABW "will consent to arbitrate any such claims before the NASD." (Id. ¶ 66 & Ex. A at 5). As a result, Plaintiffs refrained from filing a suit in this Court and "instead futilely expended time, effort, and money filing an arbitration demand with the NASD," which was not the proper forum once ABW's membership was terminated by the NASD on August 27, 2004. (Id. ¶ 68).
The Plaintiffs eventually commenced this action by the filing of their Complaint on September 15, 2004. (Docket No. 1). After the Defendants moved to dismiss the Complaint on various grounds, the Plaintiffs filed the Amended Complaint which mooted those motions. (Docket No. 25). The present round of motion practice then ensued.
Counts I and II of the Amended Complaint allege violations of the Exchange Act. In Count I, the Plaintiffs claim that all of the Defendants violated Section 10(b) of the Act, and Rule 10b-5 thereunder, by engaging in a scheme to induce the Plaintiffs to invest $10 million in a fictitious Non-Depletion Account. (See Am. Compl. ¶¶ 70-86). Count II alleges that the Individual Defendants are liable ...