Re: 4/29/04 - [NPCT] Nanopierce Technologies, Inc. et al vs. The Depository Trust and Clearing Corporation et al (part 2 of 5)
As and For a First Claim for Relief for Violation
of Nevada Revised Statutes 90.570 and 90.660
Misrepresentations as to the Nature of the Stock Borrow Program
65. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 64 of the Complaint as if fully set forth herein.
66. Defendants have each misrepresented to the Plaintiffs that the NSCC is borrowing shares from lending Members of the Stock Borrow Program to cover fail to deliver positions in the clearing and settlement process, when, in fact, the transfer of shares from lending Members to the NSCC to cover such fail to deliver positions is actually a “sale” of securities. This transaction is actually a sale because the NSCC delivers the borrowed shares to the buyer who acquires all right, title and interest in the shares, including the right to vote, receive dividends and resell the shares, without further encumbrance or any reservation of rights.[6]
67. The misrepresentations and omissions by the Defendants alleged above were false and misleading when made.
68. The misrepresentations and omissions of the Defendants as alleged above were material.
69. In making the misrepresentations and omissions, the Defendants acted with scienter. The Defendants have a major financial motivation to make the misrepresentations and omissions alleged herein because they have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public since questions or doubts as to the efficiency of the DTCC, the NSCC, the Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
70. The misrepresentations and omissions by the Defendants were made in their Annual Statements, on their websites and various press releases issued to the investing public, which include the Plaintiffs.
71. In reliance upon these misrepresentations and omissions by Defendants, Plaintiffs traded Nanopierce shares, which trades were cleared and settled by and through the Defendants without knowledge of Defendants’ violation of Nevada securities laws.
72. Alternatively, Plaintiffs relied on the Defendants’ material and public misrepresentations and omissions and traded Nanopierce shares in the stock market without knowledge of Defendants’ fraud-on-the-market through the clearing and settlement services they provided.
73. DTCC, through its subsidiary, the NSCC and the Depository Trust, offers to sell and actually sells securities by means of communications which contain material misrepresentations and omissions, in violation of Nevada Revised Statutes 90.570 and NRS 90.660.
74. During the relevant period, the Defendants carried out a plan, scheme and course of conduct which was intended to, and throughout the period, did (i) deceive Plaintiffs; and (ii) cause Plaintiffs to purchase and/or sell Nanopierce shares at artificially depressed prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants each took the actions set forth herein which are in violation of Nevada Revised Statutes 90.570 and NRS 90.660.
75. The misrepresentations and omissions by the Defendants detailed above have damaged and injured Plaintiffs, which relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
76. As a result of the Defendants’ violation of Nevada Revised Statutes 90.570 and NRS 90.660 and the wrongs herein alleged, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
As and For a Second Claim for Relief for Violation of Nevada Revised Statutes 90.570 and 90.660
Misrepresentations regarding the clearing and settlement of trades
77. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 76 of the Complaint as if fully set forth herein.
78. The Defendants have each represented to Plaintiffs that they efficiently clear and settle trades. In fact, the DTCC, the NSCC and the Depository Trust are not clearing and settling trades that result in open fail to deliver positions because these trades are processed through the Stock Borrow Program and therefore remain unsettled for extended periods of time.
79. In connection with its services to the marketplace, the DTCC, itself and by and through the NSCC and the Depository Trust, made the following representations to Plaintiffs on its Annual Statements, its websites and various press releases:
(i) that through the CNS System, it maintains an orderly flow of security and money balances;
(ii) that through the Stock Borrow Program, Members lend NSCC stock from their accounts at the Depository Trust to cover temporary shortfalls in the CNS System; and
(iii) that securities loaned to the NSCC through the Stock Borrow Program enable the NSCC to satisfy CNS delivery obligations not filled through normal deliveries.
80. Notwithstanding these representations, upon information and belief, the Defendants are each aware that sellers routinely fail to deliver securities and that unfulfilled obligations to deliver securities can have negative effects on the market when fails to deliver persist for an extended period of time.
81. Further, the Defendants are each aware that open fail to deliver positions covered by shares borrowed through the Stock Borrow Program actually increase the supply of shares in the marketplace by the number of shares borrowed, resulting in the artificial inflation of the issued and outstanding shares of issuers.
82. By utilizing the Stock Borrow Program to cover open fail to deliver positions in Nanopierce stock and consequently creating artificial Nanopierce shares, the Defendants have misrepresented to Plaintiffs that these artificial shares are issued and outstanding shares of Nanopierce, when in fact these shares have not been issued or authorized by Nanopierce. This misrepresentation by the Defendants adversely affected the sale of Nanopierce stock and was relied upon by Plaintiffs when deciding to purchase and/or sell Nanopierce shares.
83. The representations and omissions by the Defendants alleged above were false and misleading when made.
84. In making the misrepresentations and omissions, the Defendants acted with scienter. The Defendants have a major financial motivation to make the misrepresentations and omissions alleged herein because they have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public since questions or doubts as to the efficiency of the DTCC, the NSCC, the Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
85. Defendants’ misrepresentations and omissions, as alleged above were material.
86. In reliance upon these misrepresentations and omissions by Defendants, Plaintiffs traded Nanopierce shares, which trades were cleared and settled by and through the Defendants without knowledge of Defendants’ violation of Nevada securities laws.
87. Alternatively, Plaintiffs relied on Defendants’ material and public misrepresentations and omissions and traded Nanopierce shares in the stock market without knowledge of Defendants’ fraud-on-the-market through statements they made about the clearing and settlement services they provided.
88. The Plaintiffs have suffered substantial damages from the Defendants’ misrepresentation that they use the Stock Borrow Program to efficiently clear and settle trades, when in fact they are not using the Stock Borrow Program to clear and settle trades efficiently but rather to mask inefficiencies in their clearance and settlement process by covering open fail to deliver positions with borrowed shares for millions of shares and extended periods of time. As a result, the Defendants have created additional unregistered and unauthorized Nanopierce shares and artificially increased the supply of Nanopierce shares in the marketplace and decreased the stock’s value.
89. The misrepresentations and omissions by the Defendants detailed above are in violation of Nevada Revised Statutes 90.570 and NRS 90.660 and have damaged and injured Plaintiffs, which relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
90. As a result of the Defendants’ violation of Nevada Revised Statutes 90.570 and NRS 90.660 and the wrongs herein alleged, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
As and For a Third Claim for Relief for Violation of Nevada Revised Statutes 90.570 and 90.660
Misrepresentations as to the number of shares held in lending Members’ NSCC and Depository Trust accounts
91. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 90 of the Complaint as if fully set forth herein.
92. The Defendants have misrepresented to Plaintiffs the number of Nanopierce shares actually held by the lending Members at the Depository Trust by providing misleading information in the lending Members’ Depository Trust and NSCC account statements.
93. When shares are borrowed by the NSCC from a lending Member, the lending Member’s Depository Trust account reflects a debit of the number and value of the shares borrowed and a balance which is minus the borrowed shares. The borrowed shares are credited to a separate account that reflects all the shares loaned by the lending Member. However, because the Depository Trust records the borrowing by balancing the aforementioned two accounts, the lending Member’s total Depository Trust account is not reduced to exclude the number and value of the loaned shares. Therefore, when shares are borrowed, the lending Member’s Depository Trust account misleadingly reflects an amount and value of shares that are not actually held by the lending Member at the Depository Trust.
94. Further, the NSCC records the borrowing of the shares by balancing the lending Member’s CNS sub-accounts,[7] so that the net change in holdings of the lending Member is not reduced to exclude the number and value of the loaned shares. Therefore, when shares are borrowed, the lending Member’s NSCC account statement misleadingly reflects an amount and value of shares that are not actually held by the lending Member at the Depository Trust.
95. But for Defendants’ inaccurate and misleading accounting of the borrowed shares, the number of shares borrowed would not exceed the number of lendable shares on deposit with the Depository Trust.
96. The representations and omissions by the Defendants alleged above were false and misleading when made.
97. In making the misrepresentations and omissions, the Defendants acted with scienter. The Defendants have a major financial motivation to make the misrepresentations and omissions alleged herein because they have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public since questions or doubts as to the efficiency of the DTCC, the NSCC, the Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
98. The misrepresentations and omissions of the Defendants, as alleged above, were material.
99. In reliance upon these misrepresentations and omissions by Defendants, Plaintiffs traded Nanopierce shares, which trades were cleared and settled by and through the Defendants and without knowledge of Defendants’ violation of Nevada securities laws.
100. Alternatively, Plaintiffs relied on Defendants’ material and public misrepresentations and omissions and traded Nanopierce shares in the stock market without knowledge of Defendants’ fraud-on-the-market through the clearing and settlement services they provided.
101. The misrepresentations and omissions by the Defendants detailed above are in violation of Nevada Revised Statutes 90.570 and NRS 90.660 and have damaged and injured Plaintiffs, which relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
102. As a result of the Defendants’ violation of Nevada Revised Statutes 90.570 and NRS 90.660 and the wrongs herein alleged, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
As and For a Fourth Claim for Relief for Violation
of Nevada Revised Statutes 90.570 and 90.660
Misrepresentations as to the operation of the Stock Borrow Program
103. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 102 of the Complaint as if fully set forth herein.
104. The Defendants have represented to Plaintiffs that open fail to deliver positions will be cured by buying in the open positions with shares purchased from the marketplace, when in fact, these open positions are actually cured with shares borrowed from lending Members through the Stock Borrow Program.
105. As set forth in the Rules and Procedures of the National Securities Clearing Corporation (effective December 26, 2003), when a seller fails to deliver, the buyer notifies the NSCC that it intends to buy-in the seller’s fail to deliver position. Instead of executing the buy-in by going into the market, the NSCC executes the buy-in by borrowing shares from lending Members of the Stock Borrow Program to satisfy the buyer’s buy-in request and to cover the seller’s fail to deliver position.
106. The representations and omissions by the Defendants alleged above were false and misleading when made.
107. In making the misrepresentations and omissions, the Defendants acted with scienter. The Defendants have a major financial motivation to make the misrepresentations and omissions alleged herein because they have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public since questions or doubts as to the efficiency of the DTCC, the NSCC, the Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
108. The misrepresentations and omissions of the Defendants, as alleged above, were material.
109. In reliance upon these misrepresentations and omissions by Defendants, Plaintiffs traded Nanopierce shares, which trades were cleared and settled through Defendants without knowledge of Defendants’ violation of Nevada securities laws.
110. Alternatively, Plaintiffs relied on Defendants’ material and public misrepresentations and omissions and traded Nanopierce shares in the stock market without knowledge of Defendants’ fraud-on-the-market through the clearing and settlement services they provided.
111. The misrepresentations and omissions by the Defendants detailed above are in violation of Nevada Revised Statutes 90.570 and NRS 90.660 and have damaged and injured Plaintiffs, which relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
112. As a result of the Defendants’ violation of Nevada Revised Statutes 90.570 and NRS 90.660 and the wrongs herein alleged, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
As and For a Fifth Claim for Relief for Violation
of Nevada Revised Statutes 90.580 and 90.660
Market manipulation
113. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 112 of the Complaint as if fully set forth herein.
114. Prior to the establishment of the Stock Borrow Program, the Defendants executed buy-ins by purchasing shares from the open market to cover open fail to deliver positions. These transactions involved a change in beneficial ownership of the affected shares and constituted a purchase and sale of securities which was reported and visible to the marketplace.
115. Since the institution of the Stock Borrow Program and as set forth in Addendum C-1, Rules and Procedures of the National Securities Clearing Corporation (effective December 26, 2003), instead of executing buy-ins by purchasing shares from the open market, the NSCC now executes buy-ins by borrowing shares through the Stock Borrow Program. When a buy-in is executed using shares borrowed through the Stock Borrow Program, the transaction is not reported or visible to the marketplace. This is because the transaction characterized by the NSCC as a loan under the Stock Borrow Program does not involve a change in beneficial ownership, since borrowed shares are not deducted from a lending Member’s total Depository Trust and NSCC account holdings.
116. The purpose of executing buy-ins by borrowing shares through the Stock Borrow Program instead of purchasing shares from the open market is to create a false and misleading appearance with respect to the market for Nanopierce stock.
117. By lending shares to sellers who have failed to deliver, the Defendants have manipulated the market by effecting a transaction in Nanopierce securities which involves no change in the beneficial ownership of the security for the purpose of creating a false or misleading appearance with respect to the market for Nanopierce stock.
118. The Defendants’ execution of buy-ins with shares borrowed through the Stock Borrow Program is in violation of Nevada Revised Statutes 90.580 and NRS 90.660 and has damaged and injured the Plaintiffs.
119. As a result of the Defendants’ violation of Nevada Revised Statutes 90.580 and NRS 90.660 and the wrongs herein alleged, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
(continued...) |
