Re: 4/29/04 - [NPCT] Nanopierce Technologies, Inc. et al vs. The Depository Trust and Clearing Corporation et al (part 4 of 5)
As and For an Twelfth Claim for Relief for Intentional Misrepresentations regarding the clearing and settlement of trades
183. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 182 of the Complaint as if fully set forth herein.
184. Defendants have willfully and/or recklessly misrepresented 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.
185. In connection with its services to the marketplace, the Defendants have further willfully and/or recklessly represented 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.
186. Notwithstanding these representations, upon information and belief, the Defendants are aware that sellers routinely fail to deliver securities on required Settlement Days 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.
187. 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.
188. By utilizing the Stock Borrow Program to cover open fail to deliver positions in Nanopierce stock and consequently create artificial Nanopierce shares, the Defendants have misrepresented to the 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 making decisions to purchase and/or sell Nanopierce shares.
189. The representations and omissions by Defendants alleged above were false and misleading when made.
190. 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.
191. The Plaintiffs have suffered substantial damages from the Defendants’ willful and/or reckless misrepresentation that they use the Stock Borrow Program to efficiently settle and clear 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 artificially increasing the supply of Nanopierce shares in the marketplace and decreasing the value of the stock.
192. 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.
193. 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 Thirteenth Claim for Relief for Intentional Misrepresentations as to the number of shares held in lending Members’ NSCC and Depository Trust accounts
194. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 193 of the Complaint as if fully set forth herein.
195. Defendants have willfully and/or recklessly 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.
196. 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.
197. Further, the NSCC records the borrowing of the shares by balancing the lending Member’s CNS sub-accounts,[12] 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.
198. But for Defendants’ willful and/or reckless 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.
199. The representations and omissions by Defendants alleged above were false and misleading when made.
200. 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.
201. 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.
202. 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 Fourteenth Claim for Relief for Intentional Misrepresentations as to the operation of the Stock Borrow Program
203. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 202 of the Complaint as if fully set forth herein.
204. Defendants have willfully and/or recklessly misrepresented to Plaintiffs that open fail to deliver positions will be cured through buy-ins, when in fact, these fail to deliver positions are actually cured by borrowing shares from lending Members through the Stock Borrow Program.
205. 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 open fail to deliver position.
206. The representations and omissions by Defendants alleged above were false and misleading when made.
207. Defendants have a major financial motive to allow the misrepresentations and omissions to be made. 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, NSCC, Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
208. 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.
209. 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 Fifteenth Claim for Relief for Fraudulent
Misrepresentations as to the Nature of the Stock Borrow Program
210. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 209 of the Complaint as if fully set forth herein.
211. Defendants have fraudulently 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.[13]
212. The representations and omissions by Defendants alleged above were false and misleading when made.
213. The misrepresentations and omissions by Defendants were made in their Annual Statements, on their websites and in various press releases issued to the investing public, which include the Plaintiffs.
214. 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.
215. The fraudulent misrepresentations and omissions by 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.
216. 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 Sixteenth Claim for Relief for
Fraudulent Misrepresentations regarding the clearing and settlement of trades
217. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 216 of the Complaint as if fully set forth herein.
218. Defendants have fraudulently represented to Plaintiffs that they efficiently clear and settle trades. In fact, Defendants are not clearing and settling those trades which result in open “fail to deliver,” positions because those trades are processed through the Stock Borrow Program and therefore remain unsettled for extended periods of time.
219. In connection with its services to the marketplace, the Defendants have further falsely represented 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.
220. Notwithstanding these representations, upon information and belief, the Defendants are aware that sellers routinely fail to deliver securities on required Settlement Days 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.
221. 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.
222. By utilizing the Stock Borrow Program to cover open fail to deliver positions in Nanopierce stock and consequently create artificial Nanopierce shares, the Defendants have misrepresented to the 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 making decisions to purchase and/or sell Nanopierce shares.
223. The representations and omissions by Defendants alleged above were false and misleading when made.
224. 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, NSCC, Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
225. The Plaintiffs have suffered substantial damages as a result of the Defendants’ misrepresentation that they use the Stock Borrow Program to efficiently settle and clear 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 have artificially increased the supply of Nanopierce stock in the marketplace and decreased the value of the stock.
226. The fraudulent misrepresentations and omissions by 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.
227. 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 Seventeenth Claim for Relief for Fraudulent Misrepresentations as to the number of shares held in lending Members’ NSCC and Depository Trust accounts
228. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 227 of the Complaint as if fully set forth herein.
229. Defendants have fraudulently represented 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.
230. 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.
231. Further, the NSCC records the borrowing of the shares by balancing the lending Member’s CNS sub-accounts,[14] 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.
232. But for Defendants’ false 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.
233. The representations and omissions by Defendants alleged above were false and misleading when made.
234. 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, NSCC, Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
235. The fraudulent 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.
236. 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 Eighteenth Claim for Relief for Fraudulent Misrepresentations as to the operation of the Stock Borrow Program
237. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 236 of the Complaint as if fully set forth herein.
238. Defendants have fraudulently 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.
239. 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 open fail to deliver position.
240. The representations and omissions by Defendants alleged above were false and misleading when made.
241. Defendants have a major financial motive to allow the misrepresentations and omissions to be made. 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, NSCC, Depository Trust and their systems would jeopardize the $947 million fee-based revenues generated by the DTCC.
242. The fraudulent misrepresentations and omissions by 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.
243. 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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