AKRO INVESTICNI SPOLECNOST, A.S.v.A.B. WATLEY, INC

United States District Court, S.D. New YorkMar 12, 2003
01 Civ. 7693 (LAP) (S.D.N.Y. Mar. 12, 2003)

01 Civ. 7693 (LAP)

March 12, 2003


MEMORANDUM AND ORDER


LORETTA A. PRESKA, United States District Judge

Plaintiffs AKRO Investicni Spolecnost, A.S. and Bozena Konvalinkova bring this action for money damages and other relief arising from defendant A.B. Watley, Inc.'s alleged violations of New York common law and federal securities laws and regulations. Defendants now move to dismiss Counts I-XI and XIV-XVII of the Amended Complaint brought by plaintiff Konvalikova and Counts I-V and VII-XI brought by plaintiff AKRO pursuant to Fed.R.Civ.Pro. 12(b)(1), 12(b)(6) and 9(b).

BACKGROUND

Plaintiff AKRO Investicni Spolecnost, A.S. ("AKRO") is a company organized under the laws of the Czech Republic, with its principal place of business in Prague, Czech Republic. (Amended Complaint ("Am. Compl.") ¶ 5). Plaintiff Bozena Konvalinkova is the Czech Receiver of Private Investors, a company organized under the laws of the Czech Republic, with its principal place of business in Prague, Czech Republic. (Id. ¶¶ 6-7). Private Investors is a Czech-based securities broker-dealer and is not licensed to act as a broker-dealer in the United States. (Id. ¶ 9). Defendant A.B. Watley, Inc. ("Watley") is a corporation organized under the laws of the State of New York, with its principal place of business in New York. (Id. ¶ 8). Watley is licensed to act as a broker-dealer in U.S. securities markets. (Id. ¶ 13). The Amended Complaint states that plaintiff Konvalikova "sues in her capacity as Czech Receiver of Private Investors" and that she "was also appointed trustee of the assets of Private Investors, including the claims at issue here." (Id. ¶ 7). According to plaintiffs, "the creditor's committee [of Private Investors] has approved the prosecution of the claims asserted on behalf of the creditors and customers of Private Investors herein" and therefore Konvalinkova "is duly authorized to bring this action." (Am. Compl. ¶ 7).

Plaintiffs allege that Private Investors opened brokerage accounts with U.S. broker-dealers in order to allow its Czech and Slovak customers, such as AKRO, the opportunity to trade in U.S. securities markets. (Id. ¶¶ 15-16). Private Investors' customers fell into one of two categories: first, those who, like AKRO, had a standard commission agreement under which Private Investors had no discretionary authority to trade on the customer's behalf, and second, those who had a managed account agreement under which Private Investors did have some discretionary authority to trade on the customer's behalf. (Id. ¶ 17). However, plaintiffs maintain that under neither type of agreement could Private Investors pledge securities belonging to one customer as collateral for margin trades on behalf of another customer. (Id.). Plaintiffs also claim that no customers authorized Private Investors to co-mingle the securities held by one customer with another customer's securities or with securities held by Private Investors for its own account. (Id. ¶ 18). According to plaintiffs, Private Investors opened its first account with Watley through a standard form Customer Account Agreement in or about February 2000. (Id. ¶¶ 28-29). Plaintiffs state that "[t]rades executed through this account were effected directly by Private Investor's customers in the Czech Republic." (Am. Compl. ¶ 30). On or about August 15, 2000, Private Investors opened a second account with Watley as a margin account and deposited into this account securities it previously held in an account at E-Trade, including securities owned by AKRO, among other customers. (Id. ¶¶ 31-32). At some point, Private Investors opened a third account at Watley for securities traded through OnLine Investor Slovakia, Private Investors' subsidiary in Slovakia. (Id. ¶ 35).

Plaintiffs allege that starting in or about September 2000 through in or about May 2001, Watley executed numerous trades in one or more of the three Private Investors accounts without the authorization of Private Investors' customers and that "[m]any of these trades resulted in significant losses, which in turn resulted in margin calls." (Id. ¶¶ 36-37). From in or about November 2000 through May 2001, plaintiffs claim that Watley liquidated securities in one or more of the Private Investors accounts to cover margin calls. (Id. ¶ 39). On or about December 1, 2000, Watley, with Private Investors' consent, linked the first and second account together "so that each account collateralized the other." (Id. ¶ 41). The assets of both accounts decreased dramatically from September 2000 to August 2001. (Am. Compl. ¶¶ 44-45).

In August 2001, the Investigation Bureau of the Police of the Czech Republic issued and delivered a "letter of conviction" to Dusan Tejkal, the general manager and CEO of Private Investors. (Id. ¶ 46). Criminal proceedings against Tejkal and other former employees of Private Investors are pending in the Czech Republic. (Id. ¶¶ 47-48).

Plaintiff AKRO brings claims under New York law for money damages for conversion (Count I), replevin (Count II), aiding and abetting conversion (Count III), aiding and abetting fraud (Count IV), breach of fiduciary duty (Count V), aiding and abetting breach of fiduciary duty (Count VI), and tortious interference (Count VII). AKRO also brings claims under the Exchange Act and the rules promulgated thereunder, including violations of Section 10(b) and Rule 10b-16 (Count VIII), Rule 10b-5 (Count IX), and Section 8(c) and Rules 8c-1 and 15c-1 (Count X). Finally, AKRO brings a claim for rescission of contract under Section 29(b) of the Exchange Act (Count XI). Plaintiff Konvalinkova joins in Counts I-XI on behalf of the customers of Private Investors. In addition, Konvalinkova brings claims in her capacity as Receiver for money damages for conversion (Count XII), replevin (Count XIII), aiding and abetting embezzlement (Count XIV), tortious interference (Count XV), constructive trust (Count XVI) and contribution and indemnity (Count XVII). Defendant now moves to dismiss on the grounds that (1) plaintiff Konvalinkova lacks standing to bring the claims asserted in Counts I-XI on behalf of the customers of Private Investors, (2) plaintiff Konvalinkova lacks standing to bring the claims asserted in Counts XIV-XVI on behalf of Private Investors, (3) Counts I-V and Counts VII-XI of the Amended Complaint fail to state a claim and/or are not pleaded with sufficient particularity and (4) plaintiff Konvalinkova's claims for contribution or indemnification are premature.

Defendant states in its reply papers that Counts XII and XIII are now moot because Watley has delivered to the Receiver the assets held in the three Private Investors accounts. (Defendant's Reply Memorandum of Law in Support of Its Motion to Dismiss the Amended Complaint ("Def's Reply Memo.") at 10 n. 13).

DISCUSSION

Standing

I.

I turn first to the jurisdictional question of standing. The Constitution limits the judicial power of the federal courts to deciding cases or controversies. U.S. Const. art. III, § 2, cl. 1. To have standing, a plaintiff must allege personal injury that is fairly traceable to the defendant's allegedly unlawful conduct and which is likely to be redressed by the requested relief. See Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1091 (2d Cir. 1995) (citing Allen v. Wright, 468 U.S. 737, 751 (1984)). A party must "assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth v. Seldin, 422 U.S. 490, 499 (1975). Standing is a jurisdictional matter, and the plaintiff must "allege facts demonstrating that he is the proper party to invoke jurisdictional resolution of the dispute." Solow v. Stone, 994 F. Supp. 173, 178 (S.D.N.Y.) (quotation omitted), aff'd, 163 F.3d 151 (2d Cir. 1998).

Defendant challenges the standing of plaintiff Bozena Konvalinkova to bring Counts I-XI and XIV-XVII of this action in her capacity as the Czech Receiver of Private Investors. Specifically, defendant argues that although Konvalinkova may have standing to assert certain claims on behalf of Private Investors, she does not have standing to assert claims on behalf of the customers of Private Investors (Counts I-XI), nor does she have standing to assert claims for injuries that resulted from Private Investors' own misconduct (Counts XIV-XVII).

A. Claims brought by Konvalinkova on Behalf of the Customers of Private Investors (Counts I-XI)

Plaintiff Konvalinkova does not contest defendant's assertion that the claims contained in Counts I-XI are brought only on behalf of the customers, and not Private Investors itself. Indeed, plaintiffs do not allege any injury to Private Investors relating to any of these claims.

With respect to Counts I-XI, defendant argues that plaintiff Konvalinkova lacks standing because her role as Receiver of Private Investors enables her to assert only those claims that are made on behalf of Private Investors. Plaintiffs contend that Czech law applies to my determination of whether plaintiff Konvalinkova has standing to sue on behalf of the customers of Private Investors. According to plaintiffs, under Czech law a Receiver such as Konvalinkova can be endowed with the capacity to sue on behalf of the customers of the bankrupt entity. Defendant maintains that New York law applies and that it is well settled under New York law that a Receiver in bankruptcy lacks standing to sue on behalf of the estate's creditors or customers. Alternatively, defendant argues that Czech law does not support plaintiffs' interpretation and that regardless of the law applied, Konvalinkova lacks standing to assert claims on behalf of the customers.

Although plaintiffs maintain that Czech law governs the issue of the Receiver's capacity to sue, plaintiffs do not dispute that New York law governs their claims for conversion, replevin and the like.

Konvalinkova was named "Administrator of Receivership" of Private Investors and appointed trustee of the assets of Private Investors by a Czech court. (Am. Compl. ¶ 7). According to plaintiffs, the Creditors' Committee of Private Investors "approved the prosecution of the claims asserted on behalf of the creditors and customers of Private Investors" by vote, and therefore Konvalinkova "is duly authorized to bring this action." (Id.). Plaintiffs liken Konvalinkova to a bankruptcy trustee under federal bankruptcy law in that, under Czech law, "all rights to act with regard to the property in liquidation pass to the Receiver." (Plaintiffs' Memorandum of Law in Opposition to Defendant's Motion to Dismiss the Amended Complaint ("Pl's Memo. in Opp.") at 4). However, plaintiffs also argue that Czech law authorizes Konvalinkova "to bring claims against third parties on behalf of the creditors of the entity in receivership for the benefit of the property in liquidation." (Id.). Defendant disagrees with this interpretation of Czech law, arguing that the Czech Receivership and Liquidation Act does not provide that a Receiver "may represent the creditors or bring third party claims `on behalf of the creditors.'" (Def.'s Reply Memo. at 3). Both parties have submitted opinion letters from Czech lawyers supporting their interpretation.

1. Czech Law

Accepting for the moment plaintiffs' contention that Czech law applies to the determination of Konvalinkova's standing, I first note that the interpretation of foreign law is entirely within the discretion of the Court. See Fed.R.Civ.P. 44.1; Rutgerswerke AG Frendo S.P.A. v. Abex Corp., No. 93 Civ. 2914, 2002 WL 1203836, at *16 (S.D.N.Y. June 4, 2002) (noting that Rule 44.1 provides "wide latitude in resolving issues of foreign law"); Argonaut Partnership, L.P. v. Bankers Trustee Co. Ltd., Nos. 96 Civ. 1970, 96 Civ. 2222, 1997 WL 45521, at *9 (S.D.N.Y. Feb. 4, 1997) ("A court may reject the opinion of an expert on foreign law or give it whatever probative value the court believes it deserves.").

In support of their position, plaintiffs have put forth the opinion letter of Jiri Kovanda describing the position and powers of the Receiver under the Czech Receivership and Liquidation Act, Act no. 328/1991 Coll. (the "RLA"). (Kovanda Opinion Letter ("Kovanda Op."), Ex. to Plaintiffs' Memorandum of Law in Opposition to Defendants' Motion to Dismiss the Amended Complaint ("Pl's Memo. in Opp.")). At the outset of the opinion letter, Mr. Kovanda states that the "purpose of [the RLA] is to properly assort the property of a bankrupt debtor," by "achiev[ing] a proportionate satisfaction of the creditors' claims from the property in liquidation. . . ." (Kovanda Op. at 3). He then cites a portion of the RLA providing that "the disputes which concern the claims against the property in liquidation or the claims which should be settled from said property can be initiated only per the motion of the Receiver, or by other persons against the Receiver. . . ." (Kovanda Op. at 4). Interpreting this section, Mr. Kovanda states, "[I]n other words, the Receiver is authorized to bring claims against third parties on behalf of the creditors of the entity in Receivership, for the benefit of the property in liquidation. . . ." (Id.). He then goes on to acknowledge that "the law doesn't specifically state that the Creditors' Committee should direct the Receiver to take actions such as bringing suit against third parties on behalf of the creditors. . . ." (Id.).

Defendant has provided an English translation of various excerpts from the RLA, including the portion cited by Mr. Kovanda, which provides that "proceedings concerning claims relating to property belonging to the bankrupt's estate, or to be settled from this property, may only be opened if this is proposed by the trustee or if directed against the trustee." (Ex. A to Def's Reply Memo. at 4). With respect to this particular provision, I find no significant difference in meaning between the two translations put forth by the parties. The difference lies in the parties' interpretation of this provision. Mr. Kovanda would have the Court believe that this provision entitles the Receiver to sue third parties on behalf of the creditors — in this case, the customers — of the bankrupt entity. As defendant points out, this interpretation is not borne out by the language or intent of the RLA itself.

Defendant offers the opinion letter of Vlad Petrus, wherein he notes that Mr. Kovanda fails to identify language within the RLA specifically entitling the Receiver to represent the creditors of the bankrupt entity. (Petrus Opinion Letter at 2, Ex. C to Def's Reply Memo). Mr. Petrus also states that "no person may under Czech law represent two (or more) parties with different interests," and "[s]ince the interests of Private Investors and the creditors are not the same, these two parties to the proceedings cannot be represented by one person." (Id.). I am inclined to agree with Mr. Petrus. Defendant's opinion is based on the plain language of the RLA as accepted by both parties. I decline to accept Mr. Kovanda's interpretation, not taken from the plain language of the RLA, when the RLA itself sets forth the Receiver's duties with specificity. Furthermore, I accept Mr. Petrus' opinion that it does not make sense for a Receiver to be allowed to represent the interests of the creditors of the bankrupt entity as a matter of course because those two parties may have very different interests at stake in the distribution of the bankrupt's property. As Mr. Kovanda acknowledges, the Receiver's purpose under the RLA is to distribute the bankrupt's property proportionally, a goal that might in some circumstances be at odds with various creditors' interests. Accordingly, I accept defendant's interpretation of Czech law and find that plaintiff Konvalinkova does not have standing to bring claims on behalf of the customers of Private Investors under Czech law.

In making this finding, I also reject plaintiffs' argument that the customers assigned their right to sue to Konvalinkova through the Creditors' Committee. Plaintiffs fail to point to a provision of the RLA that would allow the Creditors' Committee to make such an assignment to the Receiver. Indeed, as noted above, Mr. Kovanda acknowledges that "the law doesn't specifically state that the Creditors' Committee should direct the Receiver to take actions such as bringing suit against third parties." (Kovanda Op. at 4). Rather, the portion of the RLA cited by Mr. Kovanda provides only that the Creditors Committee "supervises the activities of the Receiver." (Id.). Moreover, plaintiffs' assignment argument must be rejected because plaintiffs fail to explain how AKRO, an individual customer of Private Investors, has the right to bring this action along with Konvalinkova, the Receiver, if all of the customers' claims have been assigned to the Receiver through the Creditors' Committee.

In addition, I reject plaintiffs' argument that the powers of a Receiver under Czech law are analogous to those of a trustee under the Securities Investor Protection Act ("SIPA") and that, therefore, Konvalinkova has standing to sue third parties for the benefit of the customers, but in her own name. (Pls' Memo. in Opp. at 7). Plaintiffs contend that a Czech receiver, like a SIPA trustee, "is responsible for marshalling [sic] and returning the property belonging to the customers of the defunct brokerage firm." (Id.). Based on my review of the provisions of the RLA put forward by both parties, I disagree. As noted above, plaintiffs' proffered description of the Receiver's task under the RLA includes assorting the property of the liquidated entity "properly," but plaintiffs cite no provision in the RLA itself which authorizes the Receiver to sue in her own name for the benefit of the customers, rather than for the benefit of the liquidated entity itself. In fact, Mr. Kovanda's opinion cites a portion of the RLA providing that "proceedings which concern the claims against the property in liquidation or the claims which should be settled from said property are halted [by the start of receivership proceedings], with exceptions, but can be resumed per the motion of the Receiver, whereupon the Receiver becomes a party to such proceedings instead of the bankrupt entity." (Kovanda Op. at 4). This provision indicates that the Receiver can stand only in the shoes of the liquidated entity, not in the shoes of the creditors or customers. Accordingly, I find that Konvalinkova does not have standing to sue on behalf of the customers in her own name.

2. New York Law

Although I have already determined that plaintiff Konvalinkova does not have standing to assert claims of behalf of the customers under Czech law, I find that the outcome does not differ under New York law. The Court of Appeals discussed issues of standing pertaining to a bankruptcy trustee in Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991). It is well established that when a bankruptcy trustee brings a claim, it stands in the shoes of the bankrupt corporation and has standing to assert a claim that the bankrupt corporation could have instituted had it not petitioned for bankruptcy. See Hirsch, 72 F.3d at 1093 (citing Wagoner, 944 F.2d at 118 (collecting cases)). It is also well settled that a bankruptcy trustee generally has no standing to sue a third party on behalf of the estate's creditors. See Wagoner, 944 F.2d at 118. Plaintiffs argue that in so holding courts have been guided by concerns about depleting the debtor's assets and the danger of duplicative recoveries but that those concerns are not present here because (1) the customers' claims may be asserted by the Receiver under Czech law and (2) the customers have assented to the litigation by assigning their claims to the Receiver through the Creditors' Committee. For the reasons stated above, I do not accept these arguments and, therefore, I find that plaintiff Konvalinkova lacks standing to assert claims on behalf of the customers of Private Investors under New York law.

Plaintiffs request the opportunity to replead and add the individual customers as plaintiffs in the event of a finding that plaintiff Konvalinkova lacks standing. (Pls' Memo. in Opp. at 6 n. 6). Plaintiffs' request is granted, subject to the usual requirements regarding the amount in controversy.

Accordingly, each of the claims brought by Konvalinkova on behalf of the customers in Counts I-XI is dismissed.

B. Claims Brought by Konvalinkova on Behalf of Private Investors (Counts XIV-XVI)

Defendant argues that plaintiff Konvalinkova also lacks standing to seek recovery for injuries incurred by Private Investors' own misconduct under the rule established by Shearson Lehmann Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991). In Wagoner, a bankruptcy trustee asserted a claim against a broker for the alleged aiding, abetting and undue influencing of a sole shareholder and decisionmaker in the making of bad trades that dissipated corporate funds. 944 F.2d at 119. There, the sole shareholder and decisionmaker knew of the bad investments and also actively forwarded them. See id. at 120. The Court held that "a claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation." Id. at 120. Subsequently, the Wagoner rule has been interpreted as resting on a "finding that all relevant shareholders and/or decisionmakers are involved in the fraud." Wechsler v. Squadron, Ellenoff, Plesent Sheinfeld, L.L.P., 212 B.R. 34, 36 n. 1 (S.D.N.Y. 1997). See also In re Mediators, 105 F.3d 822, 826-27 (2d Cir. 1997) (applying Wagoner rule when sole individual shareholder and decisionmaker was party to fraud); Lippe v. Bairnco Corp., 218 B.R. 294, 302 (S.D.N.Y. 1998) (considering Wechsler's requirement of allegations of "innocent members of management" in the complaint but deciding that standing did not exist because the complaint alleged "sufficient unity between Keene [the company] and [management] defendants to implicate Keene in the alleged wrongdoing").

Plaintiffs attempt to distinguish Wagoner by arguing that New York's adverse interest exception applies here. That legal doctrine is an exception to the general rule in New York that knowledge acquired by an agent acting within the scope of his agency is imputed to his principal and the latter is bound by such knowledge. See Farr v. Newman, 14 N.Y.2d 183, 187, 250 N.Y.S.2d 272, 275, 199 N.E.2d 369 (1964). The general rule operates on the presumption that the agent has "discharged his duty to disclose to his principal all the material facts coming to his knowledge with reference to the subject of his agency." Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 784, 497 N.Y.S.2d 898, 899, 488 N.E.2d 828 (1985) (quotation omitted). The adverse interest exception rebuts that presumption precisely because the agent is involved in a scheme to defraud the principal for the agent's individual benefit. See Center, 66 N.Y.2d at 784, 497 N.Y.S.2d at 899, 488 N.E.2d 828. This exception is narrow, however, and it applies only when the agent has totally abandoned the principal's interests. See id. 66 N.Y.2d at 784-85, 497 N.Y.S.2d 898, 488 N.E.2d 828. Thus, the exception does not apply when the agent acts both for himself and for the principal, though the primary motivation for the acts is inimical to the principal. See In re Crazy Eddie Sec. Litig., 802 F. Supp. 804, 817 (E.D.N.Y. 1992). Plaintiffs argue that because Private Investors' general manager and CEO, Dusan Tejkal, acted solely for his individual benefit, Private Investors should not be held responsible for those fraudulent activities.

In Wechsler v. Squadron, Ellenoff, Plesent Sheinfeld, L.L.P., 212 B.R. 34 (S.D.N.Y. 1997), Judge Knapp analyzed the interaction between the adverse interest exception and the Wagoner rule. That case involved litigation pertaining to the fallout from a Ponzi scheme involving the Towers Financial Corporation. There, the bankruptcy trustee brought claims against the defendant, attorney for Towers Financial Corporation, alleging that "it had breached its fiduciary duty to the company and committed legal malpractice in failing to stop the fraud `personally overseen and directed' by Towers' CEO Steven Hoffenberg `and his cohorts.'" 212 B.R. at 35. There, the Court found that the complaint had not alleged the "existence of an innocent member of Towers' management who would have been able to prevent the fraud had he known about it." Id. at 36. The Court noted that absent such an allegation, the trustee did not have standing to assert the claims under Wagoner. See id. The Court then granted the motion to dismiss but allowed the plaintiffs to replead if there was any member of management who did not know of the ongoing fraud and who, if advised of those facts, would have taken steps to bring the fraudulent conduct to an end. See id.

Here, I note that the Amended Complaint reveals that there is a criminal case against Tejkal proceeding in the Czech Republic. (Am. Compl. ¶ 47). Furthermore, the Amended Complaint alleges that "there are also other governmental prosecutions or proceedings against Tejkal and other former employees of Private Investors pending in the Czech Republic." (Id. ¶ 48). These pleaded facts strongly suggest the existence of "sufficient unity" between Tejkal and Private Investors' management to deprive the Receiver of standing, as the Court found in Lippe. Recognizing that the Wagoner standard involves all management or shareholders, however, my decision rests on the absence of any allegation in the Complaint that a member of Private Investors' management was innocent of the fraud and could have stopped it. In their papers, plaintiffs state that they "are not aware of any other individuals [who] have been indicted." (Pls' Memo. in Opp. at 8). That reference in a brief, however, is insufficient for purposes of standing. Accordingly, plaintiff Konvalinkova does not have standing to assert claims on behalf of Private Investors in the Amended Complaint as it currently exists; defendant's motion is therefore granted on that ground. If she can do so consistent with Fed.R.Civ.P. 11, Konvalinkova may, within 20 days from the date hereof, replead this claim to allege the existence of an innocent member of Private Investors' management who could have prevented the fraud.

II. The Fraud-Related Claims (Counts IV and IX)

Defendant moves to dismiss the fraud-related claims (Counts IV and IX) of the Amended Complaint under Rule 12(b)(6) and Rule 9(b) for failure to state a claim and failure to plead with particularity. Plaintiffs request the opportunity to replead any deficiency with respect to particularity because, they argue, defendant should have raised such an objection in response to the Court's directive in the Revised Scheduling Order that before filing its motion to dismiss defendant must raise curable deficiencies with plaintiffs. (See Pl's Memo. in Opp. at 2 n. 2; Order filed 4/25/02, Docket no. 20 ("all amendments to the pleadings have been made; unless in response to a pleading deficiency perceived by defendant plaintiffs wish one final chance to amend")). Plaintiffs maintain that the only deficiency put forward by defendant in response to the Court's order was a typographical error; thus, plaintiffs did not choose to amend. Defendant argues that plaintiffs should not be allowed to replead "because even `further detail' as to the extent of the omissions unrelated to the purchase or sale of the securities would not create an actionable 10b-5 claim." (Def's Reply Memo. at 9 n. 10). I decline at this point to make a finding with respect to the sufficiency of plaintiffs' allegations because defendant did not put plaintiffs on notice that it would challenge the allegations regarding fraud under Rule 9(b) as the Court's order instructed. Plaintiffs' request to replead these allegations is granted.

III. The Remaining Claims

Given my decision to allow plaintiffs to replead to add additional plaintiffs, to attempt to overcome application of the Wagoner rule, and to restate the allegations of fraud with more particularity, I decline consideration of the remaining allegations at this time. Defendant's motion to dismiss the remaining claims is denied without prejudice to renewal upon plaintiffs' repleading.

In addition, the parties may — either in repleading or in renewing the motion to dismiss — reference or rely on the "Internet Trading Access Agreement" (the "Agreement") that is attached as an exhibit to defendant's reply papers in support of its motion. (Ex. B to Def's Reply Memo.). Although defendant does not reference the Agreement in its submissions, it appears to be relevant to at least some of the claims at issue here. The Agreement is dated as of February 18, 2000 and made by and between Watley and Private Investors. In the Amended Complaint, plaintiffs allege that the first of Private Investors' accounts at Watley was opened "in or about February 2000," (Am. Compl. ¶ 28), which appears to be a reference to the account opened pursuant to this Agreement. Indeed, counsel represented to the Court during a conference that the Agreement covered one of the accounts under which plaintiffs bring their claims, although that fact is not reflected in the record. The first account is one of the accounts for which plaintiffs provide information regarding particular transactions during which securities were allegedly sold to cover margin calls. (Id. ¶¶ 38, 43). The Agreement contains a warranty provision and an indemnification provision, both of which might impact the scope of Watley's liability with respect to the account opened under this Agreement. Because the Agreement is incorporated by reference in the Amended Complaint and appears integral to at least some of the claims, I may consider it on a motion to dismiss. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991) ("The complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference."); International Audiotext Network, Inc. v. ATT Co., 62 F.3d 69, 72 (2d Cir. 1995) ("[a]lthough the amended complaint . . . does not incorporate the Agreement, it relies heavily upon its terms and effect; therefore, the Agreement is `integral' to the complaint" and may be considered on motion to dismiss). Thus, the parties should make reference to the Agreement as they deem appropriate.

CONCLUSION

Defendant's motion to dismiss (docket no. 23) is denied without prejudice to renewal upon plaintiffs' repleading. Plaintiffs shall replead within 20 days from the date hereof.

SO ORDERED