Re: 4/29/04 - [NPCT] Nanopierce Technologies, Inc. et al vs. The Depository Trust and Clearing Corporation et al (part 5 of 5)
As and For a Nineteenth Claim for Relief for Conversion
244. Plaintiffs Seitz repeat and reallege each and every allegation contained in paragraphs 1 through 243 of the Complaint as if fully set forth herein.
245. Upon information and belief, the Defendants, through the Stock Borrow Program, borrowed shares of Nanopierce stock from lending Members in order to cover open fail to deliver positions. The NSCC then delivered these Nanopierce shares to buyers. Upon delivery, the buyer acquired all right, title and interest in the Nanopierce shares, including the right to vote, receive dividends and resell the shares, without encumbrance or any reservation of rights.[15] This transaction was actually a sale of Nanopierce shares and not a loan. As a result, the Defendants exercised a wrongful and unauthorized dominion and control over the aforesaid borrowed Nanopierce shares, since the Defendants do not own the shares and have no right to transfer them.
246. Further, the Defendants have not obtained consent of the beneficial owners of the shares borrowed and transferred through the Stock Borrow Program.
247. Upon information and belief, Plaintiffs Seitz’s shares were borrowed and transferred by the DTCC, the NSCC and the Depository Trust through the Stock Borrow Program without their consent. By borrowing shares without Plaintiffs Seitz’s consent, the Defendants have exerted a wrongful dominion and control over the borrowed shares which is inconsistent with the rights of Plaintiffs Seitz and therefore constitutes a conversion of the borrowed shares.
248. The Defendants, through the implementation of the Stock Borrow Program, allowed an unlimited number of shares to be borrowed for an unlimited period of time. Because of this, the Stock Borrow Program actually increased the supply of shares of Nanopierce stock in the marketplace by the number of shares borrowed.
249. 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 value of the stock.
250. The Defendants’ conversion of Plaintiffs Seitz’s shares through borrowing in the Stock Borrow Program decreased the value of Nanopierce stock and thus damaged the value of Nanopierce shares held by Plaintiffs Seitz.
251. As a result of the wrong alleged herein, Plaintiffs Seitz have suffered damages in an amount representing the value of the stock prior to the conversion minus the value of the stock after the conversion.
As and For a Twentieth Claim for Relief for Intentional Interference with
Contractual Relations Between Nanopierce and its Shareholders
252. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 251 of the Complaint as if fully set forth herein.
253. The operation of the Stock Borrow Program by the Defendants is an intentional interference with Nanopierce’s contractual relationships with its shareholders, including but not limited to Plaintiffs Seitz.
254. The Articles of Incorporation of Nanopierce constitute a contract between Nanopierce and its shareholders which sets forth the number of shares Nanopierce is authorized to issue.
255. The Defendants are aware of the existence and terms of this contract, since the Articles of Incorporation of Nanopierce are public records on file with the Nevada Secretary of State. Further, Nanopierce is a public company that is required to make public filings to the Securities and Exchange Commission and consequently information regarding Nanopierce is widely available.
256. The operation of the Stock Borrow Program by Defendants is an intentional interference with the contractual relationship between Nanopierce and its shareholders.
257. The operation of the Stock Borrow Program by the Defendants has interfered with and contravened the terms of Nanopierce’s Articles of Incorporation because by covering open fail to deliver positions with shares borrowed through the Stock Borrow Program and delivering the borrowed shares to the Buy Side Members, the NSCC has artificially created unauthorized, unregistered, free trading Nanopierce shares. This constitutes a clear contravention of Nanopierce’s Articles of Incorporation and contractual relationship with its shareholders, including but not limited to Plaintiffs Seitz.
258. By covering open fail to deliver positions with shares borrowed through the Stock Borrow Program, the NSCC, as borrower, has subjected itself to the possibility of significant financial losses if the sellers are ultimately unable to honor their delivery obligations. Therefore, the Defendants have motive to continue to operate the Stock Borrow Program in order to manipulate downward the price of Nanopiere’s stock and reduce the market value of the open fail to deliver positions created by sellers.
259. The interference with Nanopierce’s Articles of Incorporation by Defendants’ creation of artificial additional Nanopierce shares through the Stock Borrow Program has damaged Nanopierce and its shareholders. The creation of unauthorized Nanopierce shares has caused an increase in the supply of such Nanopierce shares in the marketplace, which has significantly decreased the value of Nanopierce shares held by its shareholders, including but not limited to Plaintiffs Seitz.
260. As a result, Nanopierce and its shareholders, including but not limited to Plaintiffs Seitz have suffered substantial damages in an amount to be proven at trial.
As and For a Twenty-First Claim for Relief for
Breach of Implied Covenant of Good Faith and Fair Dealing
261. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 260 of the Complaint as if fully set forth herein.
262. Nanopierce stock certificates constitute a contract between Nanopierce and the shareholder named on the stock certificate.
263. The Depository Trust is a shareholder of Nanopierce.
264. Upon information and belief, as of April 5, 2004, Depository Trust held, in trust, in its nominee name, Cede & Co., 53,503,305 shares of Nanopierce stock.
265. As a trustee and shareholder of Nanopierce shares, the Depository Trust is required to lawfully hold Nanopierce’s shares.
266. Nanopierce relied on the Depository Trust, as shareholder and trustee of its shares, to act in good faith when holding its shares.
267. By permitting shares of Nanopierce to be diluted through the operation of the Stock Borrow Program, the Depository Trust has breached the implied covenant of good faith and fair dealing.
268. As a result, Nanopierce has suffered substantial damages in an amount to be proven at trial.
As and For a Twenty-Second Claim for Relief for Conspiracy
269. Plaintiffs repeat and reallege each and every allegation contained in paragraphs 1 through 268 of the Complaint as if fully set forth herein.
270. The DTCC, the NSCC and the Depository Trust acted in concert to operate the Stock Borrow Program for the purpose of manipulating the price of Nanopierce stock.
271. By permitting shares of Nanopierce to be borrowed through the Stock Borrow Program, the DTCC, the NSCC and the Depository Trust have conspired to drive down the price of Nanopierce stock.
272. Upon information and belief, the price of Nanopierce stock fell because the operation of the Stock Borrow Program by the Defendants allowed the manipulation of Nanopierce stock by various sellers who failed to deliver Nanopierce shares.
273. The Defendants conspired to maintain significant open fail to deliver positions of millions of shares of Nanopierce stock for extended periods of time by implementing the Stock Borrow Program to cover these open and unsettled positions.
274. By covering open fail to deliver positions with shares borrowed through the Stock Borrow Program and delivering the borrowed shares to the buyers, the Defendants artificially created unregistered, free trading Nanopierce shares and increased the supply of Nanopierce shares in the marketplace without authority.
275. The artificially increased supply of Nanopierce shares in the marketplace created by the NSCC’s and Depository Trust’s borrowing of Nanopierce shares through the Stock Borrow Program to cover open fail to deliver positions caused a dramatic devaluation of Nanopierce stock that would not have occurred absent the actions of Defendants as described herein.
276. As a result, Plaintiffs have suffered substantial damages in an amount to be proven at trial.
Prayer for Relief
WHEREFORE, Plaintiffs demand judgment in its favor and against the Defendants as follows:
a. Damages in an amount in excess of $10,000 in favor of each Plaintiff and against each Defendant;
b. Treble damages under the Nevada Unfair Trade Practices Act;
c. An accounting of all profits which inured to Defendants as a result of their scheme and disgorgement of those profits to Plaintiffs;
d. Attorneys’ fees, expert witness fees, and costs, as allowed by law;
e. Pre-judgment and post-judgment interest at the maximum rate allowed by law;
f. Exemplary, special and punitive damages from all Defendants;
g. Costs incurred; and
h. Such other and further relief the Court deems just and proper.
Dated: April 29, 2004
Respectfully submitted,
By: _________________________
Michael J. Morrison, Esq.
1495 Ridgeview Drive, Suite 220
Reno, Nevada 89509
___________________________
Dan C. Bowen, Esq.
Lionel Sawyer & Collins
1100 Bank of America Plaza
50 W. Liberty Street
Reno, NV 89501
Attorneys for Plaintiffs
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[1] Willing lenders are brokers and clearing firms who lend their customers’ shares to the NSCC. These shares are ultimately held at the Depository Trust through a chain of custody that begins with the customers delivering share certificates to brokers who then deliver the certificates to the Depository Trust.
[2] National Securities Clearing Corporation Annual Financial Statements (2003).
[3] NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044) (emphasis added).
[4] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
[5] As set forth in the letter from Ralph A. Lambaise, President, North American Securities Administrators Association, Inc., to Jonathan Katz, Secretary, Securities and Exchange Commission (January 5, 2004), the Securities and Exchange “Commission should explicitly prohibit the [Depository Trust] from lending more shares of a security than it actually holds.”
[6] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
[7] The NSCC records the borrowing of the shares by creating a miscellaneous activity entry in the lending Member’s CNS sub-accounts. The number of shares borrowed is journaled in the lending Member’s CNS sub-account as a short position to show the delivery obligation of the lending Member to the NSCC for the number and value of the borrowed shares. This short position is automatically covered by taking the shares on deposit in the lending Member’s Depository Trust account. A separate journal entry is made in another sub-account of the lending Member as a long position to show the number and value of the shares due to be returned by the NSCC to the lending Member. The long position is adjusted daily to reflect the market value of the borrowed shares.
[8] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
[9] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
[10] The NSCC records the borrowing of the shares by creating a miscellaneous activity entry in the lending Member’s CNS sub-accounts. The number of shares borrowed is journaled in the lending Member’s CNS sub-account as a short position to show the delivery obligation of the lending Member to the NSCC for the number and value of the borrowed shares. This short position is automatically covered by taking the shares on deposit in the lending Member’s Depository Trust account. A separate journal entry is made in another sub-account of the lending Member as a long position to show the number and value of the shares due to be returned by the NSCC to the lending Member. The long position is adjusted daily to reflect the market value of the borrowed shares.
[11] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
[12] The NSCC records the borrowing of the shares by creating a miscellaneous activity entry in the lending Member’s CNS sub-accounts. The number of shares borrowed is journaled in the lending Member’s CNS sub-account as a short position to show the delivery obligation of the lending Member to the NSCC for the number and value of the borrowed shares. This short position is automatically covered by taking the shares on deposit in the lending Member’s Depository Trust account. A separate journal entry is made in another sub-account of the lending Member as a long position to show the number and value of the shares due to be returned by the NSCC to the lending Member. The long position is adjusted daily to reflect the market value of the borrowed shares.
[13] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
[14] The NSCC records the borrowing of the shares by creating a miscellaneous activity entry in the lending Member’s CNS sub-accounts. The number of shares borrowed is journaled in the lending Member’s CNS sub-account as a short position to show the delivery obligation of the lending Member to the NSCC for the number and value of the borrowed shares. This short position is automatically covered by taking the shares on deposit in the lending Member’s Depository Trust account. A separate journal entry is made in another sub-account of the lending Member as a long position to show the number and value of the shares due to be returned by the NSCC to the lending Member. The long position is adjusted daily to reflect the market value of the borrowed shares.
[15] As noted in NASD Proposed Amendments Relating to Short Sale Delivery Requirements (SR-NASD-2004-044), “significant failures to deliver can impact certain rights of buyers, such as the right to vote shares or the treatment of dividends”.
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