Olde Monmouth Stock v. Depository Trust & Clearing
| Decision Date | 23 April 2007 |
| Docket Number | No. 07 Civ. 990(CSH).,07 Civ. 990(CSH). |
| Citation | 485 F.Supp.2d 387 |
| Parties | OLDE MONMOUTH STOCK TRANSFER CO., INC., Plaintiff, v. DEPOSITORY TRUST & CLEARING CORPORATION and Depository Trust Company, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Edward Roland Gallion, Gallion & Spielvogel, New York City, Steven Spielvogel, Gallon & Spielvogel, Garden City, NY, for Plaintiff.
Gregg M. Mashberg, Karen Deborah Coombs, Proskauer Rose LLP, New York City, for Defendants.
In this action, plaintiff Olde Monmouth Stock Transfer Co., Inc. ("Olde Monmouth") alleges that defendants Depository Trust & Clearing Corporation ("DTCC") and Depository Trust Company ("DTC") violated federal and state antitrust laws by unreasonably excluding Olde Monmouth from DTC's Fast Automated Securities Transfer ("FAST") Program. Plaintiff also alleges that DTC tortiously interfered with Olde Monmouth's economic relationships with existing and potential future customers by contacting some of plaintiffs clients and undermining Olde Monmouth's business relationships. Furthermore, plaintiff suggests that DTC may have publicized Olde Monmouth's exclusion from the FAST Program to the stock issuing community.
Plaintiff moved for a preliminary injunction, requesting that this Court affirmatively order DTC immediately to approve Olde Monmouth's application for participation in the FAST Program.1 Defendants filed a cross-motion to dismiss the complaint pursuant to Rule 12(b)(6), Fed. R.Civ.P., for failure to state an actionable claim for relief.
Defendant DTC is a clearing agency, registered with the United States Securities and Exchange Commission ("SEC") under Section 17A of the Securities Exchange Act of 1934, which provides central securities depository services for the nation's securities industry.2 DTC acts as a depository for trillions of dollars worth of physical securities certificates, which are maintained in a central location; and it operates an automated, centralized system for book-entry transfers of securities among its participants, the beneficial owners of securities deposited at DTC. It describes itself as a "utility" for the securities industry that facilitates prompt and accurate settlement of securities transactions, and aims to increase the efficiency of such transactions by reducing the need for actual physical transfer of individual stock certificates. DTC charges its participants fees for services, but operates on a cost basis; revenues in excess of operating costs and reserves are refunded to participants. Olde Monmouth asserts that DTC enjoys a monopoly over the entire securities depository industry, as demonstrated by the fact that DTC is the stock custodian for some 2.5 million issuers, valued at more than $28 trillion.
Plaintiff Olde Monmouth is a stock transfer agent duly and properly registered with the SEC, pursuant to Section 17A(c) of the Securities Exchange Act of 1934.3 As a transfer agent, Olde Monmouth performs various services for its clients, which are companies that issue publicly-traded shares of stock. For example, transfer agents issue new stock certificates in withdrawal by transfer transactions when an owner seeks to obtain a physical certificate for his or her shares. In addition, transfer agents process deposits of physical securities and maintain books and records on the securities issued by their clients. Olde Monmouth keeps track of the constantly shifting ownership rolls of its clients' stocks and acts as an intermediary between its clients and DTC. As a stock transfer agent, Olde Monmouth is paid transaction fees by its clients, as well as by DTC.
Under DTC's FAST Program, some transfer agents can be appointed to act as DTC's agents. The purpose of the program is to eliminate the movement of physical securities by allowing transfer agents to hold one balance certificate for each issuing company — and to adjust the balance on that certificate — rather than issuing multiple stock certificates. The program is intended to reduce the cost of creating, transporting, and storing stock certificates. Transfer agents appointed as FAST agents enter into a contractual relationship with DTC governing the treatment of stock ownership records for their FAST stock issues. A transfer agent may become a FAST agent by submitting an application and obtaining approval from DTC.
The present dispute arises out of Olde Monmouth's efforts' to become a FAST agent in order to participate in DTC's Direct Registration System ("DRS"). Under DRS, individual investors have the ability to establish a direct book entry position with the issuer, either through the issuer's transfer agent or the investor's broker, without having to hold a physical certificate. The major stock exchanges in the United States — including the New York Stock Exchange, the American Stock Exchange, and the NASDAQ — have made or will soon make DRS participation a listing requirement for their exchanges. To be eligible for DRS, the issuing company must have a transfer agent that has been approved for the FAST Program.
Olde Monmouth believes that participation in the FAST Program is of critical importance for retaining its existing clients and attracting new ones. Accordingly, Olde Monmouth has made vigorous efforts to join the FAST program. In March 2006, Olde Monmouth began inquiring with DTC about participating in the FAST program. After obtaining the necessary application materials, Olde Monmouth submitted an application to become a FAST agent on May 19, 2006. On June 22, 2006, DTC advised Olde Monmouth that it had determined not to use Olde Monmouth's services as a FAST agent, noting that Olde Monmouth had been cited for certain operational deficiencies in SEC reviews. After this rejection notice, Olde Monmouth made numerous written and telephone inquiries to DTC about its application, and attempted to show that it had cured the deficiencies cited by the SEC and that it was otherwise in complete compliance with all of the FAST Program's requirements, as well as DTC's proposed — and not yet enacted — criteria for eligibility. However, despite these efforts, DTC did not approve Olde Monmouth's application for the FAST Program.
Beginning in July 2006, Olde Monmouth also decided to raise the fees that it charged DTC in an effort to pressure DTC to process and approve Olde Monmouth's FAST application. Olde Monmouth instituted a series of steep fee increases, such that by October 8, 2006, the charge for a single withdrawal by transfer — originally 835 — was now $700. Olde Monmouth represented that it would revert to the original fee schedule if DTC approved its FAST application. DTC estimates that, as of the time of the present litigation, it had paid Olde Monmouth approximately $1.1 million in excessive fees.
After the fee increases, DTC contacted several of Olde Monmouth's clients, complained about the fees Olde Monmouth was charging DTC, intimated that it might stop processing physical transactions for Olde Monmouth's clients,4 and suggested that the clients should consider using a different stock transfer agent. Olde Monmouth claims that these communications were malicious attempts to injure Olde Monmouth by disrupting its business relationships. DTC contends that, in light of the exorbitant transaction fees charged by Olde Monmouth (which were passed on to participants), it was reasonable for DTC to notify participants of the fee increases and to advise those issuers that DTC was considering "chilling" the issues for companies using Olde Monmouth as their transfer agent.
Finally, Olde Monmouth suggests that DTC has publicized Olde Monmouth's exclusion from the FAST Program to the stock issuing community at large, and thus hindered Olde Monmouth's ability to attract new clients.
Plaintiffs Verified Complaint asserts seven causes of action: claims for actual and attempted monopolization pursuant to Section 2 of the Sherman Act (plaintiffs First and Second Causes of Action), attempted monopolization pursuant to Section 1 of the Sherman Act (Third Cause of Action), companion claims pursuant to New Jersey antitrust statutes (Fourth, Fifth, and Sixth Causes of Action), and a common law claim for tortious interference with prospective economic advantage (Seventh Cause of Action). Plaintiff seeks compensatory, punitive, exemplary, and treble damages, as well as injunctive relief requiring DTC to enroll Olde Monmouth in the FAST Program.
Based on these claims, Olde Monmouth moves for a preliminary injunction which if granted would compel DTC to approve Olde Monmouth's application to the FAST Program.5 DTC opposes that motion and cross-moves to dismiss Olde Monmouth's complaint.
While DTC's cross-motion to dismiss Olde Monmouth's complaint was filed after Olde Monmouth moved for a preliminary injunction, I will consider it first, for the following reasons.
Every federal civil case begins with the filing of a complaint. When a plaintiff moves for preliminary injunctive relief, it does so on the basis and in aid of its previously filed complaint. The objective of a plaintiff moving for a preliminary injunction is to obtain relief pendente lite with respect to the claims plaintiff pleads in its complaint.
Given these procedural realities, the Court properly considers DTC's motion to dismiss Olde Monmouth's complaint before considering plaintiffs motion for a preliminary injunction. DTC moves to dismiss the complaint under Rule 12(b)(6) on the ground that it fails to state a claim upon which relief — any form of relief — can be granted. If DTC's motion is well founded, Olde Mountain's complaint falls and its motion for a preliminary injunction necessarily falls with it.
Moreover, in deciding DTC's motion to dismiss the complaint, the Court looks only to the well-pleaded allegations in the...
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