FYI-Sorry
By Carol S. Remond
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--A Nevada judge last week dismissed a lawsuit filed by
Nanopierce Technologies Inc. (NPCT) against the Depository Trust and Clearing
Corporation, or DTCC.
Nanopierce claimed in a complaint filed last July in the Second Judicial
District Court of the State of Nevada, Washoe county, that its stock price was
unfairly depressed by DTCC's clearing and settlement services, specifically its
stock borrow program.
DTCC operates the global clearing and settlement system through which most
securities transactions are processed in the U.S. Under its stock borrow
program, DTCC facilitates the lending of shares from one brokerage firm to the
other in the event a firm is unable to deliver stock to settle a transaction on
time.
Nanopierce had argued in court that the program results in the creation of
non-existent stock and contributes to the illegal short selling of the company's
shares.
Arguing that its stock borrow program was approved by the Securities and
Exchange Commission, DTCC said in court that the program could not be challenged
in state court.
Judge Brent Adams sided with DTCC and said in his decision that: "The stock
borrow program is an automated, non discretionary process specifically approved
by the SEC as a component of the nationwide stock transactions' clearing system.
Therefore, the court finds that federal law preempts (Nanopierce)'s claim for
relief."
DTCC said in a press release Tuesday that it felt gratified by Judge Adams's
decision.
"All of our operations are taken in accord with our SEC-approved rules and
subject to strict federal regulatory oversight. The Nevada court agreed with us
that plaintiffs like Nanopierce cannot attempt to use the laws of the 50 states
to challenge DTCC's SEC-approved operations designed to ensure stability and
uniformity in clearing and settling the nation's securities transactions," said
Larry Thompson, DTCC's first deputy general counsel.
Lawyers for Nanopierce weren't immediately available to comment.
Nanopierce's complaint against DTCC's stock loan program was the latest in a
series of maneuvers by some small companies that argue that the global clearing
system is rigged against them.
These companies, many of them shells without real businesses and minimal
revenues, have for months now been complaining that their shares are being
manipulated by illegal short selling.
Short sellers typically borrow shares to sell them, hoping that they will be
able to replace them with shares bought at a lower price later. Trading without
a borrowing agreement is called naked short selling. It's illegal for most
investors, but legal for firms that make markets in stocks by bringing liquidity
to the market.
Some companies, like Nanopierce and most recently Global Links Corp. (GLKC),
have argued that their stock prices have been unfairly depressed by the fact
that the electronic clearing system allows trades to go through without ever
ensuring that these transactions will be closed out or settled with the delivery
of stock by the seller.
A couple of years ago, several companies had attempted to exit the global
stock settlement system operated by DTCC, asking that their shareholders forgo
electronic ownership of their shares and demand physical delivery of their stock
certificates.
Physical ownership of stock certificates guarantees that brokers don't loan
out stock to short sellers looking to borrow shares before placing a short sale.
But it also greatly impairs the ability of shareholders to quickly trade in and
out of its position.
The SEC in 2003 ruled that although shareholders could elect to hold their
shares in physical or electronic format, companies could not exit the global
settlement system and require physical ownership of stock.
(Carol S. Remond is an award-winning columnist and one of four who write the "
n The Money" feature.)
-By Carol S. Remond; Dow Jones Newswires; 201 938 2074;
carol.remond@dowjones.com