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SMITH BARNEY, HARRIS UPHAM & CO. v. LIECHTENSTEINI

September 14, 1994

SMITH BARNEY, HARRIS UPHAM & CO. INCORPORATED, Plaintiff,
v.
LIECHTENSTEINISCHE LANDESBANK, THE DOW CHEMICAL COMPANY, CITIBANK, N.A., and THE DEPOSITORY TRUST COMPANY, Defendants.



The opinion of the court was delivered by: ROBERT P. PATTERSON, JR.

 ROBERT P. PATTERSON, JR., U.S.D.J.

 BACKGROUND

 I. The Agreement Between Smith Barney and DTC

 DTC, a limited purpose trust company organized under the Banking Law of the State of New York, is a securities depository and clearing agency established to facilitate the settlement of securities transactions among the financial institutions (i.e., brokerage firms) that constitute its "Participants." DTC's Rule 3(g), P 5. DTC is owned by its Participants as well as other financial institutions and controls over 90% of the clearinghouse business in the United States.

 On February 2, 1976, Smith Barney, a corporation which is engaged in the securities underwriting, brokerage and investment banking businesses and which is a member of all principal securities and futures exchanges in the United States, became a DTC Participant pursuant to a Participant's Agreement ("Agreement") executed by DTC and Smith Barney. The Agreement was a form agreement drafted by DTC which Smith Barney did not negotiate. Grant Decl. Ex. 65 P 38. The Agreement provides that DTC and Smith Barney agree to be bound by the rules promulgated by DTC, which in turn bind the parties to follow DTC's Participant Operating Procedures. Grant Decl. Ex. 60, 62 at 61.

 Under DTC's Participant Operating Procedures, if a deposit of securities is rejected by DTC, "the Participant will receive a DTC Deposit Rejection Notice together with the securities via DTC's Central Delivery Department." Id. at Ex. 55. In the event of confiscation of deposited securities "by a law enforcement agency, the issuer or an agent of the issuer, the Participant will receive a copy of the receipt for such securities provided by DTC." Id.

 II. The Dow Debentures

 The present action arises out of the issuance in 1978 by Defendant Dow of 8.625% debentures (i.e., bonds) in the principal amount of $ 300,000,000. DTC's Rule 3(g) St. P 7. Upon their issuance, Dow caused certificates evidencing the debentures to be delivered to various underwriters, including Smith Barney; these debentures were subsequently resold by the underwriters to third parties. Id.

 Upon the resale of the debentures to third parties, the original certificates were delivered to Citibank, the transfer agent for the issue, for re-registration in the name of a new registered owner. Id. P 8. Citibank cancelled the original certificates on its books and issued new certificates in place of the originals. Id. Then, Citibank released the original certificates to an outside contractor for disposal. However, the certificates were not disposed of and re-entered the stream of commerce. Id.

 On November 6, 1991, Defendant Landesbank, a banking entity organized under the laws of Liechtenstein, presented for sale to Smith Barney's Zurich office 85 certificates purporting to represent $ 6,175,000 of the principal amount of the Dow 8.625% debentures (the "Certificates"). Id. P 2 & 9. Thereafter, Smith Barney's Zurich office sent the Certificates to Smith Barney's New York office where they arrived on November 8, 1991. Id. P 10.

 On November 11, 1991, Smith Barney's Zurich office called Smith Barney's New York office and issued a sell order for the Certificates. *fn2" Id. P 11. On the same day, Smith Barney presented the Certificates to DTC in New York for credit to Smith Barney's DTC account and transfer into street name. Id. P 12. On November 12, 1991, DTC credited ...


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