follow on re: GBOE
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tom favata
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Wednesday, January 26, 2011 1:14:51 PM
Re: tom favata post# 15502 Post # of 15507
7. Holders of GeoBio shares correctly inferred from this information that a mistake had been made and that someone had mistakenly sold vastly more GeoBio shares than they could possibly have been held, and as a result was in a large, naked short position. In response to that information, the market price of GeoBio shares skyrocketed. In the 10 trading days subsequent to Scottrade’s mistaken offer, GeoBio shares have traded at prices more than 150 times greater than the prices at which the sales resulting from Scottrade’s mistaken offers were effected. Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 2 of 11
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8. When Knight accepted Scottrade’s mistaken offers, either (a) both Scottrade and Knight were mistaken about material facts concerning their transactions or (b) Scottrade was unilaterally mistaken concerning such matters and Knight knew or reasonably should have known of Scottrade’s mistaken belief.
9. In all events, as a matter of equity the transactions in question should be rescinded.
II. Jurisdiction and Venue
10. This Court has subject matter jurisdiction over the matter pursuant to 28 U.S.C. §1332 in that the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between citizens of different states.
11. Venue is proper in this District pursuant to 28 U.S.C. §1391(a)(2), in that a substantial part of the events giving rise to the claim occurred in this District.
12. This Court has personal jurisdiction over Knight because Knight is registered in Missouri as a broker-dealer of securities, and this action arises out of Knight’s business as a securities broker-dealer.
III. The Parties
13. Scottrade is an online broker-dealer of securities. It is a corporation organized under the laws of the State of Arizona and has its corporate headquarters and principal place of business in St. Louis, Missouri.
14. Knight is also a securities broker-dealer. It is a limited partnership organized under the laws of the State of Delaware, and has its headquarters and principal place of business in Jersey City, New Jersey. Knight’s general partner, Knight Securities General, Inc., is a corporation organized under Delaware law having its principal offices and place of business in
Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 3 of 11
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New Jersey. Knight’s limited partner, Knight Securities Operations, Inc., is likewise a corporation organized under Delaware law having its headquarters and principal place of business in New Jersey. Neither Knight nor its partners are citizens of Missouri or Arizona. Knight is a market maker for the common shares of GeoBio, and one of the leading market makers, if not the leading market maker, for ?Pink Sheets? stocks generally.
IV. Facts
15. GeoBio is a corporation organized under the laws of Colorado having its principal offices and place of business in Seattle, Washington. It is reportedly a ?development stage company? which ?operates as a biodiesel supply and distribution company in the United States.?
16. In fact, GeoBio has no meaningful business operations at the present time. It has not reported even $1 in sales during any of the last three years, and has reportedly accumulated losses in excess of $20 million. Its reported shareholders’ equity (as of June 30, 2010) was negative $2.18 million.
17. Prior to December 1, 2010, GeoBio reportedly had issued and outstanding at least 11,573,807,619 common shares. These shares were publicly traded in the over-the-counter securities market commonly known as the ?Pink Sheets.?
18. In September, 2010, GeoBio announced that it was effecting a ?reverse recapitalization?—i.e., a reverse stock split . GeoBio subsequently reported in a Definitive Schedule 14-C filed with the U.S. Securities and Exchange Commission on October 20, 2010, that one effect of the reverse recapitalization would be to reduce the total number of issued and outstanding common shares by a factor of 5,500 – i.e., from 11,573,807,619 shares to 2,104,329 shares. Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 4 of 11
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19. According to a press release issued by GeoBio (Ex. 1, annexed hereto), the reverse recapitalization was completed on December 1, 2010, and upon completion, GeoBio had 2,486,314 common shares issued and outstanding.
20. GeoBio’s press release describes the transaction as a ?5,500:1 reverse recapitalization.?
21. Most commonly, when stock splits are described by use of a numeric ratio, the first number stated in the ratio represents the number of ?new? shares to be exchanged for the quantity of ?old? shares, and the second number stated represents the number of ?old? shares to be exchanged for ?new? shares. Thus, when a company engages in a forward split in which shareholders will end up with two shares for each currently held share, the split is usually described as a ?2:1? or a ?2 for 1? split. When a company engages in a reverse split in which shares holders will receive one new share for each five thousand five hundred old shares, the split would usually be described as a ?1:5,500? or a ?1 for 5,500? split.
22. Between August 20, 2010 (i.e., shortly before the announcement of GeoBio’s reverse recapitalization) and November 30, 2010 (the day preceding the effective date of the reverse recapitalization) the highest volume of trading in GeoBio common shares on any given day was less than 110,000 (split adjusted) shares.
23. No transactions in GeoBio shares were reported on Wednesday, December 1, 2010 or Friday, December 3, 2010. On Thursday, December 2, 2010, transactions involving 3,534 (post-split) GeoBio shares were reported. The closing price of GeoBio shares on December 2, 2010 was $0.065/share.
24. Immediately prior to the effective date of the recapitalization, Scottrade held 1,937,654,280 common shares of GeoBio for the accounts of Scottrade customers. The actual
Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 5 of 11
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effect of the reverse recapitalization was to reduce the number of GeoBio common shares held by Scottrade for its customer’s accounts to approximately 352,300 shares.
25. At approximately 11 a.m. Central Standard Time on Monday, December 6, 2010, a Scottrade employee responsible for making entries in Scottrade’s data processing system to reflect the changes in Scottrade’s customers’ holdings of GeoBio shares due to the reverse recapitalization mistakenly entered data in a way that caused Scottrade’s records to indicate that such holdings had increased by a factor of 5,500, rather than decreased by a factor of 5,500.
26. Due to this mistake, at approximately 11:01 a.m. (CST) on December 6, 2010, Scottrade’s records reflected that it held over ten trillion GeoBio shares (specifically, 10,657,098,540,000), Scottrade’s customers whose accounts held GeoBio common shares who viewed their accounts on line at that time would have seen data indicating that their account now held 5,500 times more GeoBio common shares than were reflected pre-reverse split. The displayed quantity of shares was over thirty million times greater than the actual quantity of GeoBio shares held for the customer’s accounts (post-split).
27. There were no reported trades in GeoBio common shares on December 6, 2010 until after 11:05 a.m. (CST).
28. Between 11:02 a.m. and 11:18 a.m. on December 6, a number of Scottrade customers entered limit orders to sell some or all of their holdings of GeoBio shares. In the aggregate, Scottrade received customer orders to sell nearly three billion GeoBio common shares during this period.
29. Based on these orders, between 11:05 a.m. (CST) and 11:18 a.m. on December 6, 2010, Scottrade delivered to Knight offers to sell approximately 2.85 billion GeoBio common shares in six lots. Each lot was offered to Knight on terms such that a person knowledgeable
Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 6 of 11
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about GeoBio and the market for its shares should have known that either or both the quantity or the price at which the offer was made was wildly inconsistent with the market for GeoBio shares.
30. When Scottrade tendered and Knight received those offers, there were less than 2.5 million shares of GeoBio common stock issued and outstanding.
31. Between 11:05 a.m. and 11:18 a.m. (CST) on December 6, 2010, Knight accepted Scottrade’s offers to sell approximately 3.38 million GeoBio common shares.
32. Knight agreed to ?bust? (i.e., to rescind) one trade involving 726,110 GeoBio common shares.
33. At present, the contracts apparently formed when Knight accepted Scottrade’s mistaken offers on December 6, 2010 (and not otherwise resolved since then) oblige Scottrade to deliver to Knight approximately 2.6 million GeoBio common shares at an average price of $0.0068/share.
34. Scottrade’s transactions with Knight and another GeoBio market maker resulted in sales of approximately 19 million GeoBio common shares, or roughly eight times the quantity of GeoBio common shares actually issued and outstanding, being reported as occurring during a time span of roughly 13 minutes on December 6, 2010.
35. Since learning of its mistake and initiating corrective action, Scottrade has been able to resolve the apparent obligations arising from the acceptances of its offers to sell many of the GeoBio common shares involved in the reported transactions.
36. Knight has, however, issued ?buy-in? notices to Scottrade respecting the unresolved transactions. Knight’s most recent buy-in notices indicate that Scottrade is obliged to deliver 2,599,427 GeoBio common shares to Knight, and, failing such delivery, that Knight intends to ?buy-in? the shares. Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 7 of 11
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37. The market has learned of the apparent short position in GeoBio shares resulting from the acceptances of Scottrade’s offers to sell. Some market participants have attempted to capitalize upon the obviously mistaken trades that occurred between 11:05 a.m. and 11:18 am (CST) on December 6, 2010. Since 11:18 a.m. (CST), the market price for GeoBio shares has been extremely volatile, with prices ranging from $0.0051 per share to $1.15 per share.
38. Knight is actively participating in the market for GeoBio common shares.
COUNT I
39. Scottrade incorporates by reference the allegations of paragraphs 1 – 38, above, as though the same were fully set forth herein.
40. At the times Scottrade offered GeoBio shares for sale on behalf of its customers on December 6, 2010, it was operating under a mistaken belief as to the following material facts:
a. That it held for its customers accounts common shares of GeoBio in quantities that were more than sufficient to enable Scottrade to settle any trades resulting from acceptance of its offers by delivering GeoBio shares already held by Scottrade for the accounts of its customers;
b. That its offers to sell GeoBio shares on December 6, 2010, involved fewer shares than the quantity of GeoBio shares issued and outstanding on December 6, 2010; and
c. That the price at which it offered to sell the shares was reasonable in light of the prevailing market prices for such shares.
41. Scottrade is informed and believes that when Knight accepted Scottrade’s offers to sell GeoBio common shares on December 6, 2010, Knight either:
a. Was likewise mistaken concerning: (1) the relationships between and among (i) the numbers of GeoBio common shares offered for sale by Scottrade (2.85 billion), (ii)
the number of shares then held by Scottrade for the accounts of its customers, and (iii) the number of GeoBio common shares then issued and outstanding (2.5 million), and (2) the relationship between the prevailing market prices for GeoBio common shares and the prices at which Scottrade was offering to sell such shares; or
b. Knew or should have known that Scottrade was operating under a mistaken belief concerning: (1) the relationships between (i) the numbers of GeoBio common shares offered for sale by Scottrade, (ii) the number of shares Scottrade could have conceivably then held for the accounts of its customers, and (iii) the number of GeoBio common shares then issued and outstanding, as well as (2) the relationships between the prevailing market prices for GeoBio common shares and the prices at which Scottrade was offering to sell such shares.
42. Missouri courts have long recognized that relief may be granted in a court of equity in rescission cases where a unilateral mistake has been made. In such instances, rescission is appropriate where the opposite party either knew of the mistake by the other party or the mistake was of such a nature that it must have been known to the other party.
43. Scottrade’s mistakes as to the quantity of shares it was offering to sell and the price at which it was offering to sell those shares were so out of proportion to the quantities of GeoBio common stock actually issued and outstanding and the price at which such shares had recently traded that Knight must either have been, like Scottrade, mistaken concerning such matters or knowledgeable of Scottrade’s mistake and intending to take unfair and unreasonable advantage of that mistake, such that equity will intervene and prevent enforcement of the contract seemingly reached by the offers and acceptances exchanged between the parties. Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 9 of 11
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44. Alternatively, because of the obvious disparities between (A) the quantities of GeoBio common shares Scottrade offered to sell to Knight and the quantity of GeoBio common shares issued and outstanding, and (B) the price at which GeoBio shares had last traded and the price at which Scottrade was offering to sell GeoBio shares to Knight, there was no actual meeting of the minds between Scottrade and Knight on the terms of sale. Consequently, no contract of sale was actually formed.
45. Alternatively, if any contracts were formed, enforcement of such contracts would unjustly enrich Knight or others acting through Knight in the market, given the circumstances surrounding their formation.
46. In all events it would be inequitable (and disruptive of the market for GeoBio common shares) to enforce any presently executory contract apparently formed between Scottrade and Knight on December 6, 2010, when Knight accepted Scottrade’s mistaken offers to sell GeoBio shares.
WHEREFORE, Scottrade prays that this Court enter judgment in favor of Scottrade and against Knight either (a) declaring that no contract was made between Scottrade and Knight when Knight purported to accept Scottrade’s offers to sell Knight 2,599,427 shares of GeoBio common stock made December 6, 2010, or (b) rescinding any contract(s) that did result from such acceptance, and for such other and further relief as is appropriate under the circumstances. Case 4:10-cv-02380-HEA Document 1 Filed 12/20/10 Page 10 of 11
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Respectfully submitted,
THOMPSON COBURN LLP
By: /s/ / Kenton E. Knickmeyer
Thomas E. Douglass, #3008
Kenton E. Knickmeyer, #3577
One US Bank Plaza
St. Louis, Missouri 63101
314-552-6000
FAX 314-552-7000
Attorneys for Plaintiff Scottrade, Inc.
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