Nevada Court Dismisses Nanopierce Lawsuit Against DTCC On Naked Short Selling

Follows series of nine other failed suits

by Steve Letzler

A Nevada court has dismissed a lawsuit brought by Nanopierce Technologies, Inc. against DTCC and its subsidiaries that sought to hold DTCC responsible for the drop in Nanopierce’s stock price.

Nevada’s Second Judicial District Court in Reno, Nevada, adopted the argument that DTCC’s clearing and settlement functions are subject to the oversight and approval of the U.S. Securities and Exchange Commission (SEC) and therefore, under the U.S. Constitution, cannot be challenged under state law, as Nanopierce sought to do. DTCC demonstrated that Nanopierce’s attempt to use state law to forbid DTCC from utilizing this program is barred by an established legal doctrine known as federal preemption.

In dismissing the case, Judge Brent Adams stated that “(S)tate law may not be applied as to impose damages on (DTCC). To do this would be to forbid Defendants from doing what the SEC authorized them to do.”

The court’s decision came after hearing extensive argument and reviewing voluminous documents regarding the Stock Borrow Program and DTCC’s clearing and settlement activities. The judge’s decision to dismiss the case against DTCC follows a series of nine other cases that have been dismissed or withdrawn against DTCC.

Nanopierce had filed the case in May 2004 seeking to hold DTCC responsible for the drop in its stock price and claimed that DTCC’s Stock Borrow Program had somehow enabled brokerage firms to engage in “naked short selling” of Nanopierce shares. DTCC responded by demonstrating that its clearing and settling activities are extensively regulated by the federal government and that the specific program challenged by Nanopierce, the Stock Borrow Program, had been approved by the SEC.

“We are extremely gratified that the court agreed with us that neither DTCC nor its subsidiaries are proper defendants here,” said Larry Thompson, DTCC’s first deputy general counsel. “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 50 states to challenge DTCC’s SEC-approved operations designed to ensure stability and uniformity in clearing and settling the nation’s securities transactions.

“Plaintiffs’ claims that the Stock Borrow Program results in the manufacture of artificial shares is pure invention,” Thompson stated. “Only shares that are actually on deposit in a broker’s account can be borrowed. We hope that Judge Adams’ decision will be taken to heart and the ill-considered litigation and media campaign against DTCC will come to an end.”

Editor’s Note: For more information on this issue, please see “DTCC Responds on Naked Short Selling” at: http://www.dtcc.com/ ThoughtLeadership/keyissues/naked_short_selling.htm; and an SEC update on short selling and Reg SHO at: http://www.sec.gov/ divisions/marketreg/mrfaqregsho1204.htm.