Re: 4/29/04 - [NPCT] Nanopierce Technologies, Inc. et al vs. The Depository Trust and Clearing Corporation et al (part 3 of 5)
As and For a Sixth Claim for Relief for Violation of Section 598A.060 of the Nevada Unfair Trade Practices Act
120. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 119 of the Complaint as if fully set forth herein.
121. DTCC, through its subsidiaries, the NSCC and the Depository Trust, provides clearance and settlement services for its members.
122. The Stock Borrow Program purportedly improves the efficiency of the clearance and settlement function by addressing temporary fail to deliver situations. Under the Stock Borrow Program, if a seller fails to deliver shares on Settlement Day, the NSCC borrows the shares from willing lenders and gives the shares to the buyer in settlement of the trade. Membership in both the NSCC and Depository Trust is required in order to be a lender in the Stock Borrow Program.
123. The clearance and settlement services provided by the Defendants are completely separate and distinct from the functions of the Stock Borrow Program, and there is a separate market and demand for each of them.
124. The Defendants have illegally tied the Stock Borrow Program to the separate and distinct functions of clearing and settling stock trades by requiring that open fail to deliver positions be covered with shares borrowed through the Stock Borrow Program, either directly through the NSCC’s daily allocation cycle or indirectly through a buy-in executed with shares borrowed through the Stock Borrow Program.
125. The purpose and effect of this tying arrangement is to prevent buyers from entering the stock market to purchase shares to buy in open fail to deliver positions at competitive market prices, and instead requiring buyers to execute buy-ins through the Stock Borrow Program.
126. The conduct of the Defendants is anticompetitive since they have prevented buyers from entering the stock market to purchase shares to cover open fail to deliver positions, thereby unreasonably restraining competition in the market and violating the Nevada Unfair Trade Practices Act.
127. The tying arrangement is anticompetitive because it diverts to the Defendants the buyers’ demand for shares to cover open fail to deliver positions by requiring buy-ins for open fail to deliver positions to be filled with shares borrowed through the Stock Borrow Program instead of allowing the demand to be filled by all market participants through buying in from the stock market.
128. The value of Nanopierce shares on the open market has been reduced by the Defendants’ anticompetitive behavior because the supply of shares from buy-ins executed through the Stock Borrow Program is limited to lending Members rather than the open market of securities sellers as a whole. A buy-in executed by entering the stock market includes all market participants and is based on the natural supply and demand for the borrowed security.
129. If the clearance and settlement functions of the Defendants were not tied to the Stock Borrow Program, buyers would be able to buy-in open fail to deliver positions by going into the stock market instead of having to execute their buy-in request through the Stock Borrow Program.
130. In addition, the transaction which underlies the Stock Borrow Program is actually a “sale” of securities by a member to the NSCC. This transaction is 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.[8] The Defendants have intentionally mischaracterized this transaction as a “loan” in order to disguise the anticompetitive nature of the transaction.
131. As a result of the Defendants’ anticompetitive conduct in tying the Stock Borrow Program to the separate and distinct functions of clearing and settling stock trades, upon information and belief, buyers of Nanopierce shares in trades which resulted in open fail to deliver positions were prevented from entering the stock market to buy-in shares to cover these positions. Instead, these fail to deliver positions were required to be covered by shares borrowed through the Stock Borrow Program.
132. By requiring that buyers buy-in open fail to deliver positions with shares borrowed through the Stock Borrow Program and accepting delivery of the borrowed shares, the Defendants have artificially created unregistered, free trading Nanopierce shares and have increased the supply of Nanopierce shares in the marketplace without authority.
133. The artificially increased supply of Nanopierce shares in the marketplace created by the Defendants’ anticompetitive conduct in tying the Stock Borrow Program to the separate and distinct functions of clearing and settling stock trades has significantly decreased the value of Nanopierce stock and Plaintiffs’ holdings in Nanopierce stock.
134. The foregoing acts and practices, and the continuing course of the Defendants’ anticompetitive conduct, have harmed the Plaintiffs.
135. The Defendants’ conduct is anticompetitive. There are no procompetitive effects of this tying arrangement that might outweigh the harm to competition in the stock market.
136. As a direct result of the Defendants’ illegal conduct, competition in the stock market has been restrained and suppressed.
137. Defendants’ anticompetitive and exclusionary conduct has directly and proximately caused injury to Plaintiff Nanopierce’s businesses and property and Plaintiffs Seitz’s property as set forth above. Plaintiffs’ injuries are the type the Nevada Unfair Trade Practices Act is intended to prevent and thus constitute unfair trade practice injuries.
138. As a result of the Defendants’ violation of the Nevada Unfair Trade Practices Act and the wrongs herein alleged, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
As and For a Seventh Claim for Relief for Negligent Misrepresentations as to the Nature of the Stock Borrow Program
139. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 138 of the Complaint as if fully set forth herein.
140. Defendants have misrepresented to Plaintiffs that the Stock Borrow Program is a “loan” of shares from participating members of the Stock Borrow Program to cover fail to deliver positions in the clearing and settlement process.
141. Defendants have failed to exercise reasonable care or competence in communicating to Plaintiffs that the NSCC is borrowing shares from lending Members through 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 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.[9]
142. The representations and omissions by the Defendants alleged above were false and misleading when made.
143. The misrepresentations and omissions by Defendants to Plaintiffs were made in their Annual Statements, on their websites and in various press releases.
144. The Defendants have a major financial motivation to make the misrepresentations and omissions. The Defendants have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public because 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.
145. The misrepresentations and omissions by Defendants detailed above have damaged and injured Plaintiffs, which justifiably relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
146. Plaintiffs have suffered substantial damages as a result of the wrongs herein alleged in an amount to be proven at trial.
As and For an Eighth Claim for Relief for
Negligent Misrepresentations regarding the clearing and settlement of trades
147. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 146 of the Complaint as if fully set forth herein.
148. The Defendants have failed to exercise reasonable care or competence in communicating to Plaintiffs that they efficiently clear and settle trades. In fact, the Defendants are not clearing and settling those trades which result in open fail to deliver positions, because these trades are processed through the Stock Borrow Program and remain unsettled for extended periods of time.
149. In connection with it services to the marketplace, the DTCC, itself and by and through the NSCC and the Depository Trust, have further communicated to Plaintiffs the following representations 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.
150. Notwithstanding these representations, upon information and belief, the Defendants are aware that sellers routinely fail to deliver securities on Settlement Day 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.
151. Further, the Defendants are 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 the issuer.
152. 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 negligently 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 justifiably relied upon by Plaintiffs when deciding to purchase and/or sell Nanopierce shares.
153. The representations and omissions by the Defendants alleged above were false and misleading when made.
154. Defendants have a major financial motivation to make the misrepresentations and omissions alleged above. Defendants have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public because 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.
155. 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 involving millions of shares for extended periods of time. As a result, the Defendants have created additional unregistered and unauthorized Nanopierce shares and have artificially increased the supply of Nanopierce shares in the marketplace and decreased the value of said stock.
156. The negligent misrepresentations and omissions by Defendants detailed above have damaged and injured Plaintiffs, which justifiably relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
157. Plaintiffs have suffered substantial damages as a result of the wrongs herein alleged in an amount to be proven at trial.
As and For a Ninth Claim for Relief for Negligent Misrepresentations as to the number of shares held in lending Members’ NSCC and Depository Trust accounts
158. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 157 of the Complaint as if fully set forth herein.
159. Defendants have failed to exercise reasonable care or competence in communicating 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.
160. 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.
161. Further, the NSCC records the borrowing of the shares by balancing the lending Member’s CNS sub-accounts,[10] 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.
162. 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.
163. The representations and omissions by the Defendants alleged above were false and misleading when made.
164. Defendants have a major financial motivation to make the misrepresentations and omissions alleged above.
165. Defendants have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public because 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.
166. The negligent misrepresentations and omissions by Defendants detailed above have damaged and injured Plaintiffs, which justifiably relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
167. Plaintiffs have suffered substantial damages as a result of the wrongs herein alleged in an amount to be proven at trial.
As and For a Tenth Claim For Relief for Negligent Misrepresentations
as to the operation of the Stock Borrow Program
168. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 167 of the Complaint as if fully set forth herein.
169. Defendants have failed to exercise reasonable care or competence in communicating 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.
170. 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.
171. The representations and omissions by the Defendants alleged above were false and misleading when made.
172. Defendants have a major financial motive to allow the misrepresentations and omissions to be made.
173. Defendants have a major economic incentive to keep knowledge of the fail to deliver problem out of the awareness of the investing public because 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.
174. The negligent misrepresentations and omissions by Defendants detailed above have damaged and injured Plaintiffs, which justifiably relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
175. Plaintiffs have suffered substantial damages as a result of the wrongs herein alleged in an amount to be proven at trial.
As and For a Eleventh Claim for Relief for Intentional Misrepresentations as to the Nature of the Stock Borrow Program
176. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 175 of the Complaint as if fully set forth herein.
177. Defendants have willfully and/or recklessly represented to 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 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.[11]
178. The representations and omissions by Defendants alleged above were false and misleading when made.
179. The misrepresentations and omissions by Defendants were willfully and/or recklessly made in their Annual Statements, on their websites and in various press releases issued to the investing public, which include the Plaintiffs.
180. Defendants have a major financial motivation to make the misrepresentations and omissions. Defendants have a significant economic incentive to keep knowledge of the fail to deliver problem away from the investing public because 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.
181. The intentional misrepresentations and omissions by Defendants detailed above have damaged and injured Plaintiffs, which justifiably relied on those misrepresentations and omissions in connection with the purchase and/or sale of Nanopierce shares.
182. Plaintiffs have suffered substantial damages as a result of the wrongs herein alleged in an amount to be proven at trial.
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