MEMORANDUM & ORDER
Plaintiff STMicroelectronics (“ST”) seeks to hold defendant Credit Suisse Group (“CSG”) liable under Securities Exchange Act Section 20(a) as a “controlling person” of non-party subsidiary Credit Suisse Securities (“CSS”), for the intentional breach of investment obligations by *531 the pair of Credit Suisse brokers in charge of ST’s account. ST brings related claims for conversion, unjust enrichment and aiding and abetting common law fraud. Additionally, ST moves to amend its complaint to bolster allegations of wrongdoing by Credit Suisse entities and their employees, and to add a claim against CSG for primary liability under Exchange Act Section 10(b) and Rule 10b-5. ST further requests a modification of the discovery stay imposed by the Private Securities Litigation Reform Act (“PSLRA”) to allow for the production of identified categories of documents.
Defendant CSG moves to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, and likewise argues thаt amendment would be futile. In the alternative, CSG asks the Court to dismiss the action in the absence of subsidiary CSS or to stay this action pending the appeal by CSS of an arbitration award confirmed in ST’s favor on March 19, 2010, by the Honorable Deborah Batts of the Southern District of New York. The Court grants ST’s motion to amend its complaint, allows ST’s claims under Exchange Act Sections 10(b) and 20(a) to proceed, dismisses ST’s state law claims with the exception of the conversion claim and denies as moot ST’s request to modify the PSLRA stay.
I. Background.
The following facts are contained in the plaintiffs Amended Complaint (“AC”) and are assumed to be true. Given the prior criminal prosecution of the individual brokers involved, many of the facts regarding their activities are beyond dispute.
A. The parties.
Plaintiff ST, a major producer of semiconductors, is a Netherlands corporation with headquarters in Switzerland. ST’s shares are publicly traded on the New York Stock Exchаnge and other markets. Defendant CSG is a multi-national banking institution with offices around the globe, including the New York headquarters of wholly-owned subsidiary CSS. CSG is registered as a foreign issuer with the Securities and Exchange Commission (“SEC”).
B. ST’s investment agreement with CSS.
In April 2006, two directors in Credit Suisse’s Private Banking Division, Julian Tzolov and Eric Butler, approached ST with the specific offer of investing in auction-rate securities backed by federally guaranteed student loans (“SLARS”). On several occasions, Tzolov and Butler touted the SLARS as being virtually risk-free and highly liquid. 1 Based on these representations and given “ST’s corporate treasury policies, which did not allow investments in structured or speculative securities,” (AC ¶ 35), ST opened an account with CSS for the express purpose of investing exclusively in SLARS, with the limited exception of investing in overnight commercial paper to act as a bridge between auctions. ST made these restrictions clear to Tzolov and Butler, who confirmed their understanding. During their presentations to ST, moreover, Tzolov and Butler had not refer *532 enced any other securities. In May 2006, ST wired an initial $200 million into the newly opened account. By August 2007, ST had funded the account with over $450 million.
C. CSS breaches the investment agreement.
Although ST’s funds were to be invested solely in SLARS, Tzolov, Butler and their assistants bought and sold other securities without ST’s authorization and contrary to ST’s investment criteria. These securities included, for example, auction-rate securities that were not investment grade and collateralized debt obligations (“CDOs”) backed by subprime mortgages. The brokers, however, “repeatedly sent email messages to ST stating falsely that ST’s portfolio consisted entirely of student loan securities.” (Id. ¶ 38.) In trade confirmations sent via email, Butler and Tzolov changed the names of non-authorized securities' — by deleting words such as “CDO” and adding words like “funding” or “student loan” — to lead ST to believe that these securities were SLARS. 2 Although Tzolov and Butler “сonfirmed to ST in writing” that additional investments would “be invested in the 28-day Aaa/AAA rated student loan issues,” (id. ¶ 42), they did not provide ST with a private placement prospectus containing a description and risk profile of any “of the 28 different issues of non-student loan securities in which they invested ST’s money between May 2006 and August 2007,” (id. ¶ 44).
By November 2006, non-conforming securities comprised approximately 37% of ST’s account holdings. By February 2007, the figure reached 100%, and CSS “did not place a single conforming security in ST’s account” from that point forward. (Id. ¶ 68.)
D. ST discovers the fraud.
In July 2007, ST observed that $21 million of its funds had been invested in a security with a credit rating below the SLARS’ normal Aaa/AAA rating. ST objected in writing, telling Tzolov and Butler to “stick to the mandate to buy only” SLARS. (Id. ¶ 45.) The brokers responded that the $21 million would be promptly reinvested in SLARS, but they failed to execute on that promise and made further unauthorized investments the “very next day.” (Id. ¶ 46.)
In August 2007, when the market for auction-rate securities was liquid, ST instructed Tzolov аnd Butler to liquidate $200 million of the $476 million in ST’s account and not to make new purchases for the account. The brokers ignored these instructions and made a non-authorized purchase the following day. ST again objected in writing, after which the managing director of Credit Suisse’s Private Banking Division in New York “reassured ST that it had high-quality investments in its account and that ST had nothing to worry about.” 3 (Id. ¶ 50.)
After demanding to no avail that CSS immediately liquidate any non-conforming holdings, in September 2007, ST reported the problem to CSG management in Switzerland, who admitted to ST that the “directors and brokers who handled ST’s account violated ST’s mandate to buy only” SLARS. (Id. ¶ 53.) Since that time, however, the market for auction-rate securities *533 has collapsed and ST has been unable to withdraw any funds from its account. 4 These events allegedly have forced ST to arrange costly alternative financing while recording impairments of over $300 million due to the illiquidity and degraded rаtings of the securities within its account.
E. CSG’s alleged role in the fraud.
In the Amended Complaint, ST alleges that parent company CSG either knew about or ignored warning signals of the fraud perpetrated by CSS. ST alleges, in somewhat hazy fashion, that a supervisor reviewed doctored emails sent by Tzolov and Butler and that the same (or another) supervisor repeatedly caught Tzolov and Butler using unapproved marketing materials. In late 2006, CSG recognized that subprime CDOs and auction-rate securities, the types of securities being placed in ST’s account, could be unsafe investments. To quote CEO Bradley Dugan, “ ‘all along [CSG] had a clear view that this was a market that was going to have difficulty,’ ” a concern allegedly expressed by high-level CSG executives as early as 2005. (Id. ¶¶ 67, 76.) Due to this concern, Credit Suisse allegedly “had an intentional strategy of reducing its exposure” to these holdings, which resulted in the press lauding CSG for weathering the credit crisis better than its competitors. (Id. ¶ 67.) During this same period, CSS “was selling risky and unsuitable [auction-rate securities] through its Corporate Cash Management Group, whose customers typically require extremely low-risk, highly liquid investments that can be treated as cash equivalents.” (Id. ¶70.) In 2008, moreover, after writing down $2.65 billion due to unrelated misconduct by brokers involved with CDOs and asset-backed securities, CSG publicly conceded the ineffectiveness of its internal controls.
In 2007, details regarding CSG’s knowledge of the fraud began to emerge. In October 2007, The Wall Street Journal published a story in which an attorney for Butler and Tzolov admitted that at least one customer had received a “misleading email.” (Id. ¶ 60.) Credit Suisse publicly minimized the scope of the alleged misconduct as relating to a “ ‘limited number of clients’ ” with whom Credit Suisse was in “ ‘active discussions.’ ” (Id.) A month earlier, however, after ST informed CSG management about the unauthorized trading, CSG’s general counsel had allegedly “falsely stated that ST was the only victim.” (Id. ¶ 53.) In July 2008, The Wall Street Journal published another story in which Credit Suisse admitted that it had “‘detected prohibited activity’ ” by Butler and Tzolov nearly a year earlier and “ ‘immediately suspended’” them for “‘violating] their obligations’ ” to Credit Suisse and to clients. (Id. ¶ 82.)
Additionally, ST alleges that parent company CSG had a motive to ignore signals that Credit Suisse brokers may have been defrauding customers like ST. Credit Suisse allegedly “benefited from the substantially higher fees” earned on the nonconforming securities by capturing the excess return for itself while shifting the increased risk to consumers. (Id. ¶¶ 63, 70.) For some of these issues, Credit Suisse entities earned additional fees as collateral manager or for making the initial placement on the underwriter’s behalf. CSG also allegedly created the incentive structure which led Butler and Tzolov to elevate short-term profits over clients’ long-term goals. 5
*534 Finally, ST alleges that CSG, through its officers, exercised authority over Butler and Tzolov аnd conducted negotiations arising from the brokers’ misconduct. For instance, in late 2007, the CEO of CSG’s Private Banking Division traveled to New York to discuss the brokers and the accounts they managed. At around that time, CSG met with ST in Europe on multiple occasions regarding how to deal with ST’s account. After negotiating with state regulators, CSG allegedly authorized the repurchase by Credit Suisse of securities held by individual and institutional investors, but not ST. And it allegedly was CSG, rather than CSS, that years earlier had announced Butler and Tzolov’s promotions.
F. The arbitration, criminal and SEC proceedings.
In February 2008, ST commenced an arbitration against CSS with the Financial Industry Regulatory Authority (“FIN-RA”). In the FINRA arbitration, ST asserted claims under Exchange Act Section 10(b) and Rule 1 Ob-5, as well as for common law fraud, misrepresentation, fraudulent concealment, breach of contract, breach of fiduciary duty, unjust enrichment, unsuitability, unauthorized transactions and failure to supervise. See Award, FINRA Dispute Resolution, Case No. 08-00512, http://finraawardsonline. finra.org/turing.aspx?doc=41723. While the arbitration was pending, ST filed its initial complaint with this Court in August 2008.
In February 2009, on the strength of “a record replete with evidence of Credit Suisse’s fraud, and devoid of any impropriety on behalf of the arbitrators,” the FINRA panel unanimously awarded ST over $406 million plus post-award interest exceeding $50,000 per day. (3/19/10 Order, 09 CY 1388(DAB), Dkt. # 21, at 8.) The award, in the nature of rescission, requires CSS “immediately” to pay ST in exchange for ST’s transferring ownership of the securities in its account back to CSS. (Id. at 4.) In March 2010, Judge Batts of the Southern District of New York confirmed the award. In later rejecting CSS’s motion to alter the judgment, Judge Batts expressed that CSS had exhibited “remarkable gall” by requesting credit for funds ST had received from a third party, “particularly where Credit Suisse has yet to satisfy even a sou of the hundreds of millions it owes ST under the Award.” (8/25/10 Order, 09 CV 1388(DAB), Dkt. # 31, at 5.) After posting a sizeable bond, CSS filed a timely notice of appeal. The Second Circuit hеard oral argument in the case on March 28, 2011; a decision is pending.
In August 2009, after a trial before the Honorable Jack B. Weinstein, a jury convicted Butler of three counts of securities fraud. Judge Weinstein sentenced Butler to concurrent five-year prison terms and imposed a $6 million fine.
See United States v. Butler,
Tzolov, who fled prosecution and was apprehended in Spain, pleaded guilty and testified at Butler’s trial. Tzolov’s sentеncing is scheduled for April of this year.
In September 2008, moreover, the SEC commenced a successful civil enforcement *535 action against both defendants, who are now permanently enjoined from violating Exchange Act Sections 10(b) and 17(a). See SEC v. Tzolov, 08 CV 7699 (S.D.N.Y.). In June 2010, Tzolov consented to judgment without admitting liability. In January 2011, the court granted the SEC’s motion for summary judgment against Butler, who has since appealed to the Second Circuit.
II. Claims against CSG.
The Court assesses the merit of ST’s proposed Amended Complaint by the familiar Rule 12(b)(6) standard.
See Lucente v. IBM Corp.,
A. ST has sufficiently pled a Section 20(a) claim.
As the parties acknowledge, ST’s successful arbitration against CSS does not bar a claim for controlling person liability against CSG.
See Boguslavsky v. Kaplan,
i. Primary violation.
Given the FINRA award and earlier criminal proceedings, CSG no longer disputes that ST has adequately alleged a primary Section 10(b) violation by CSS. Nor could it; any argument by CSG denying the existence of a well pleaded underlying violation would be quickly rejected. As discussed below, liability hinges on a “determination of [CSG]’s control of the primary violator as well as [CSG]’s particular culpability.”
Boguslavsky,
ii. Control over primary violator.
ST has properly alleged CSG’s control over CSS and, by extension, Butler and Tzolov. To allege control, as with any other element, a “plaintiff[ ] must plead only sufficient factual matter, accepted as
*536
true, to state a claim to relief that is plausible on its face.”
Cornwell v. Credit Suisse Grp.,
CSG did not dispute the control element in its initial opposition brief. In opposing ST’s motion to amend, CSG argues in conclusory fashion that it cannot control employees of CSS because the latter cannot delegate control over its individual brokers. In support of this argument, CSG cites to a single district court case,
AXA Distributors, LLC v. Bullard,
Here, ST “has sufficiently pled a mix of substantial stock ownership, shared officers and principals, and at least some direct involvement” by CSG in the underlying events to survive a motion to dismiss.
Kalin,
iii. Culpable participation.
The text of Section 20(a) provides an exception from liability where “the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation.” 15 U.S.C. § 78t(a). From this language arise the dual notions of culpability and participation in the underlying fraud. The parties diverge, however, over whether “culpable participation” is an element which a plaintiff must plead to state a claim for controlling person liability.
As this Court previously has noted, the Second Circuit has yet to decide the issue.
See In re CINAR Corp. Sec. Litig.,
The Court agrees with this approach, which the Second Circuit has endorsed in the broker/dealer context. In cases in which a salesperson completes unauthorized “transactions through the employing brokerage house and the brokerage house receives a commission on the transactions, the burden of proving good faith is shifted to the brokerage house.”
Marbury Mgmt., Inc. v. Kohn,
CSG argues that
Kohn
is irrelevant because ST’s Section 20(a) claim is aimed not at the brokers’ direct employer, but rather the employer’s parent company. The fact that CSG may be a corporate level removed from Butler and Tzolov, however, does not necessarily alter the result.
See id.
at 714 (“[Tjhe controlling person provisions were intended to expand ... the scope of liability under the securities laws.”). ST allеges that CSG incorporates CSS’s financial results directly into its own, meaning that any commissions earned by CSS on fraudulent transactions inure ultimately to CSG’s benefit. This burden-shifting rule, moreover, has an outer limit, and will not apply where the relationship between an organizational defendant and the individual brokers is so attenuated as to break the chain of control required by Section 20(a).
See Moss v. Morgan Stanley Inc.,
Even were ST required to plead CSG’s culpable participation in the underlying fraud, ST has adequately done so. Opinions following
Kohn
have held that “the failure to supervise satisfies the culpable participation element to establish liability under Section 20(a).”
CompuDyne Corp. v. Shane,
Contrary to CSG’s contention, ST’s allegations of deficient oversight are not repackaged control allegations. Rather, ST alleges “particularized facts of the controlling person’s conscious misbehavior or recklessness.”
Lapin v. Goldman Sachs Grp., Inc.,
Indeed, the epithets CSG lobs at ST for failing to monitor its own investments—
ie.,
“shocking,” “cavalier” and “irresponsible” (Opp. at 4) — more aptly describe CSG’s alleged failure to prevent or detect the flagrant, calculated and sustained misconduct of brokers within a major global office. In early 2008, after writing down billions of dollars due to a separate intentional fraud by Credit Suisse brokers, CSG publicly stated that its internal controls “ ‘were not effective,’ ” and at least one major ratings agency agreed. (AC ¶ 77.) These allegations, taken together, raise the plausible inference that CSG did not “act[ ]in good faith” and that it “directly or indirectly induce[d] the act or acts constituting the [primary] violation.” 15 U.S.C. § 78t(a). Thus, irrespective of whether culpable participation is required at the pleading stage, ST is “entitled to offer evidence to support” its control person claim.
Villager Pond, Inc. v. Town of Darien,
B. ST has sufficiently pled a Section 10(b) claim.
In the Amended Complaint, ST asserts that CSG committed the fraud and, therefore, is primarily liable under Section 10(b) and Rule 10b-5. Citing to the Second Circuit’s holding in Boguslavsky, CSG responds that because the FINRA panel has already determined the amount of damages сaused by Butler and Tzolov’s primary violations, ST is collaterally es-topped from asserting a Section 10(b) claim against CSG. Such a reading of Boguslavsky is misguided.
The plaintiff in Boguslavsky commenced an arbitration proceeding with FINRA’s predecessor, the National Association of Securities Dealers (“NASD”), alleging violations of Section 10(b) and Rule 10b-5 for material omissions in connection with the purchase of securities from a broker/dealer’s inventory. Among the named defendants were a law firm and lawyer who acted as voting trustee for all of the broker/dealer’s outstanding shares. The law firm “refused to submit to the NASD panel’s jurisdiction, so it was not a party to the arbitration.” Id. at 718. The plaintiff then filed Section 10(b) claims, along with claims for “control person” liability under Exchange Act Section 20(a), against the lawyer and law firm in the Southern District of New York. After the NASD panel issued an award in the plaintiffs favor, the District Court dismissed the subsequently filed lawsuit.
The Second Circuit agreed that to the extent the plaintiff “sought to relitigate the issue of damages for violations of Rule[ ] 10b-5,” collateral estoppel barred the plaintiffs claim. Id. at 720. The plaintiffs “claim that the defendants were liable as controlling persons under § 20(a) was *539 not collaterally estopped,” however, as that claim involved issues which “could not have been resolved in the NASD proceeding.” Id. at 721. Congruent with its holding regarding the Section 10(b) claim, the Second Circuit concluded that recovery under Section 20(a) could not “exceed the damages assessed by the arbitrators” and limited the plaintiffs “recovery to the unrecovered portion of the arbitration award.” Id. at 721.
As the parties recognize,
Boguslavsky
controls. Under these circumstances, the fact that CSG refused to submit to the FINRA panel’s jurisdiction does not “prevent! ] it from invoking collateral estoppel.”
Id.
at 719 n. 3. Because CSG would not submit to arbitration, however, its own liability under Section 10(b) “could not have been resolved in the [FINRA] proceeding.”
Id.
at 721;
see also Dean Witter Reynolds, Inc. v. Byrd,
Thus, the Court will allow ST’s claim under Section 10(b) to proceed on an actual agency theory.
7
The same allegations which support the element of control under Section 20(a), as described above, raise the plausible inference that CSS may have acted as CSG’s agent in dealing with ST. Indeed, “[t]he element of control often is deemed the essential characteristic of the principal-agent relationship.”
In re Parmalat Sec. Litig.,
CSG correctly asserts that “[t]he presence of a parent’s logo on documents created and distributed by a subsidiary, standing alone, does not confer authority upon the subsidiary to act as an agent.”
Fletcher v. Atex, Inc.,
“Importantly, whether such an agency exists depends upon the actual interactions of the putative agent and principal and not on the perception a third party may have of the relationship.”
Manchester Equip. Co., Inc. v. Am. Way,
Likewise, ST may not prosecute its Section 10(b) claim utilizing a respondeat superior theory that would impute liability for Butler and Tzolov’s acts directly to CSG.
See Suez Equity,
Nor has ST plausibly alleged that CSG is CSS’s alter ego, which “cannot be inferred from the close relationship and overlap in executives.”
In re Parmalat,
The legal theory, if any, upon which ST might hold CSG liable may ultimately prove irrelevant. Despite ST’s argument that the amount of the arbitration award does not represent the full extent of its damages, “[t]he issue of compensatory damages,” whether under Section 10(b) or 20(a), “is totally precluded from relitigation in the District Court.”
Boguslavsky,
C. State law claims.
In addition to federal securities claims, ST brings claims against CSG for unjust enrichment, aiding and abetting common law fraud and conversion. Of these, only the conversion claim survives.
i. Unjust enrichment.
Collateral estoppel bars ST’s claim for unjust enrichment. When a party secures an arbitration award for “violation of federal securities laws,” any “claims under state law [a]re barred under the doctrine of collateral estoppel [if] they were actually and necessarily decided in the arbitration.”
Ganguly v. Charles Schwab & Co., Inc.,
ii. Aiding and abetting common law fraud.
Collateral estoppel does not bar assertion of claims that were not presented during the FINRA arbitration.
Boguslavsky,
The pertinent question, which the parties dispute vigorously, is whether ST adequately alleges that CSG substantially assisted the underlying fraud. “ ‘Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur.’ ”
Lerner,
ST argues that CSG substantially assisted and therefore caused the fraud by CSS, Butler and Tzolov by failing to disclose the extent of the fraud in statements to the press and regulators and by refusing to return ST’s funds. None of these actions could have aided and abetted the underlying fraud against ST, which, by the time CSG allegedly learned of it, “already ha[d] been committed.”
United States v. Shulman,
Although banks have a duty to safeguard “funds deposited with them when confronted with clear evidence indicating that those funds are being mishandled,” Ler
ner,
iii. Conversion.
To the extent that ST seeks to hold CSG accountable under New York law for wrongfully retaining the funds in ST’s account, the proper cause of action is conversion. Under New York law, “to establish a claim for conversion, a plaintiff must show that: ‘(1) the property subject to conversion is a specific identifiable thing; (2) plaintiff had ownership, possession or control over the property before its conversion; and (3) defendant exercised an unauthorized dominion over the thing in question, to the alteration of its condition or to the exclusion of the plaintiffs rights.’ ”
AD Rendon Commc’ns, Inc. v. Lumina Ams., Inc.,
CSG argues that ST’s conversion claim should be dismissed as “duplicative of [its] breach of contract claim” decided in the FINRA proceeding.
Id.
at *4. The Amended Complaint, however, sets forth acts by CSG that could be viewed as “unlawful or wrongful as opposed to mere violations of contractual rights.”
Fabry’s S.R.L. v. IFT Int’l, Inc.,
On the merits, CSG disputes both that it controlled ST’s account and that its alleged passivity in the face of ST’s demand could have comprised an exercise of authority over the account. ST asserts the opposite, and further alleges that CSG, rather than CSS, negotiated with account holders regarding the unauthorized purchases after the fraud came to light. Whether proof will support these allegations remains for another day, as does the issue of whether ST may be entitled to the punitive damages it seeks.
(See
AC ¶ 103.) Although the FINRA panel denied ST’s request for punitive damages against CSS, “the imposition of such damages requires an individualized examination of, among other factors, the conduct and state of mind of each defendant.”
Boguslavsky,
III. CSG’s request for Rule 12(b)(7) dismissal or a stay.
CSG requests dismissal under Rule 12(b)(7) for ST’s failure to join CSS as an indispensable party. In the alternative, CSG requests that this Court stay the action pending the resolution of CSS’s appeal of the FINRA award’s confirmation. Both arguments lack merit.
A. Rule 12(b)(7).
CSG offers an array of arguments why this case cannot proceed due to ST’s “failure to join [CSS] under Rule 19.” Fed.R.Civ.P. 12(b)(7). CSG has failed to show, however, that CSS is either a necessary or an indispensable party to this litigation.
“When deciding a Rule 12(b)(7) motion, a court must initially determine if the absent person should be joined as a party.”
Ashley v. Am. Airlines, Inc.,
For the same reasons, CSS’s absence will not subject CSG to “multiple” or “inconsistent obligations,” Fed.R.Civ.P. 19(a)(l)(B)(ii), or mean that “the court cannot accord complete relief among existing parties,” id. 19(a)(1)(A). Either CSG is liable as a controlling person or a сorporate principal under the federal securities laws, or it is not; and either CSG is liable for conversion under state law, or it is not. Any of these results is consistent with the previous finding of primary liability as against CSS. The Court also notes that CSS’s multi-billion dollar parent company, represented here by the same lawyers who represented CSS in the FINRA arbitration, will more than adequately represent any interest of CSS in this litigation.
Even if CSS were considered a necessary party, “Rule 19(b) does not authorize dismissal simply because such a party cannot be joined.”
Jota v. Texaco, Inc.,
B. Request for a stay.
Alternatively to dismissal, CSG requests that this Court stay the action pending “resolution by the Second Circuit” of CSS’s appeal of the arbitration award “in accordance with normal, orderly appellate procedures.” (Ltr. from L. Byrne, Dkt. # 53, at 2.) In the same vein, CSG argues that “this is essentially a collection action that becomes ripe only if [CSS] fails to pay any final non-appealable judgment.” (Opp. to Mot. to Amend, Dkt. # 58, at 6.) These arguments, although somewhat inviting, are not persuasive.
“The decision whether or not to stay or dismiss a proceeding rests with
*545
in a district judge’s discretion.”
Adam v. Jacobs,
In this case, judicial economy mandates resolving ST’s claim. Over time, employees leave, memories fade and documents disappear. For example, CSG allegedly has dismantled its Cash Management Group. In a separate action relating to Butler and Tzolov, moreover, CSG has argued that former employees residing outside of the judicial district could not be compelled to testify. In the meantime, ST alleges that it alone bears the growing costs of its devalued investments, including having to arrange for alternative financing without the half-billion dollars in formerly ready capital sitting frozen in its account. CSG’s representing that CSS will pay the arbitration award if and when it becomes final, so as to justify a stay, is incompatible with its arguing that it cannot represent CSS’s interests, so as to justify Rule 12(b)(7) dismissal. The action will proceed.
IV. Conclusion.
For the above reasоns, ST’s motion to amend its complaint is granted and ST’s Section 10(b), Section 20(a) and conversion claims may proceed. The Court denies as moot ST’s request to modify the PSLRA discovery stay and directs the parties to proceed with discovery.
SO ORDERED.
Notes
. ST alleges that CSS marketing materials falsely represented that the SLARS derived their investment grade (Aaa/AAA) credit ratings from being "over-collateralized” and thus "100% guaranteed.” (AC ¶ 14.) Further, because the SLARS could be sold or repurchased every 28 days at an interest rate (known as a “clearing rate”) determined via auction, Tzolov and Butler described the investments as highly liquid. (Id. ¶¶ 34, 36.) Tzolov has since testified at Butler’s criminal trial that the pair, during sales pitches, lied to prospective clients about the SLARS' return rates, credit ratings, maturity rates, investor profile and overall market value.
. For example, in three mid-2006 emails, South Coast Funding V, "a sub-prime CDO security that ST had not authorized,” was described аs “South Coast Funding St. Loan.” (AC ¶ 41.)
. The same executive also allegedly told clients that their accounts failed due to "market forces,” created false documentation to show that clients had authorized the trades and gave a “pretextual reason” for the change in ST’s account management. (AC ¶¶ 51, 79.)
. ST alleges that "while the ARS market did not 'freeze' until February 2008, the auctions for every single security in ST’s account failed six months earlier.” (AC ¶ 69.)
. In accordance with "widespread” practice, Butler and Tzolov allegedly often purchased auction-rate securities on the secondary market at less than par value, then sold them to customers at market prices and kept the excess part of the purchase price. (AC ¶ 74.)
. In this case, such documents include, for example, the brokers’ fraudulent emails and the written FINRA Resolution.
. Despite CSG’s assertion to the contrary, the Supreme Court’s reaffirmance in
Stoneridge Investment Partners v. Scientific-Atlanta, 552
U.S. 148,
. Of course, that ST no longer can argue that Butler and Tzolov individually were agents of CSG does not exclude the possibility that CSS acted as CSG’s agent in transactions with customers, including ST, in which Butler and Tzolov participated.
. Even in the absence of collateral estoppel, ST’s contract with CSS, the validity of which is undisputed, bars the unjust enrichment claim. As here, "where an express and valid contract exists concerning the rights at issue, quasi-contract claims such as unjust enrichment are precluded” even when asserted against non-signatories to the contract.
SCM Grp., Inc. v. McKinsey & Co., Inc.,
. In the unlikely event that the Second Circuit vacates the confirmation of the arbitration award, the Court expects that CSG will raise this development in defense to ST’s claims.