Kolbeck v. LIT America, Inc.

• Decision Date: 24 April 1996
• Docket Number: No. 95 Civ. 1420 (MBM).,95 Civ. 1420 (MBM).
• Citation: Kolbeck v. LIT America, Inc., 923 F.Supp. 557 (S.D. N.Y. 1996)
• Parties: Matthis KOLBECK, et al., Plaintiffs, v. LIT AMERICA, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

923 F. Supp. 557

Matthis KOLBECK, et al., Plaintiffs, v.LIT AMERICA, INC., et al., Defendants.

No. 95 Civ. 1420 (MBM).

United States District Court, S.D. New York.

April 24, 1996.

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Phillip Karasyk, Dienst & Serrins, New York City, John E. Dolkart, Dolkart & Associates(Attorney for Plaintiffs), Chicago, IL, for Plaintiffs.

Walter C. Greenough, Francine N. Tobin, Schiff Hardin & Waite, Chicago, IL, for DefendantLIT America, Inc.

Bradley J. Andreozzi, Mayer, Brown & Platt, New York City, Howard J. Roin, Robert M. Dow, Jr., Mayer, Brown & Platt, Chicago, IL, for DefendantsRefco, Inc. and Leonard Alpert.

MUKASEY, District Judge.

PlaintiffsGeorg Kolbecket. 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 Commodity 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.

I.

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, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80(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¶ 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, 112 S.Ct. 1561, 118 L.Ed.2d 208(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. ¶ 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.¶ 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.¶ 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.¶ 20)Schindler never registered any of these companies with the Commodities Futures Trading Commission("CFTC"), in violation of § 4d(1) of the Commodity 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. ¶ 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.¶ 20)Schindler ultimately collected more than $6 million from foreign investors — approximately $4 million of which was contributed by plaintiffs in this case.(Id.¶ 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.¶ 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.¶ 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.¶ 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.¶ 29), and he and Refco continued to work with Schindler and his companies until January 1993.(Id.¶ 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.¶ 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.¶ 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.¶ 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 DefendantM. 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.¶ 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.)Schindler 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.¶¶ 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.¶ 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.¶ 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...