The opinion of the court was delivered by: Gerard E. Lynch, District Judge
This case concerns the effect of the assignment of a duplicate CUSIP number to stock in plaintiff's company. A CUSIP number is a unique nine-digit number assigned to publicly-traded securities to identify securities for the clearing and settlement of trades. The defendant, which administers the CUSIP system, mistakenly assigned a pre-existing CUSIP number to plaintiff's securities, and plaintiff alleges that this error, which it discovered two months after public trading in its stock had commenced, caused its stock to lose value irreparably. The defendant moves for summary judgment, proposing that even if its negligence is assumed for purposes of argument, the plaintiff has failed to present any evidence that the decline in plaintiff's stock price is attributable to the misassigned CUSIP number. For the reasons that follow, the defendant's [ Page 2]
motion to dismiss the Complaint will be granted.
Except where otherwise indicated, the following facts are undisputed. The plaintiff, Fragrance Express Dot Com, Inc. ("Fragrance Express"), was organized in the late 1990s to engage in the on-line sale of perfumes. The predecessor of the present Fragrance Express was called Fragrance Express, Inc., a Florida company ("FEF"). On March 24, 1998, FEF consummated a reverse merger with Growth Industries, Inc., a Nevada corporation that had been approved by NASD to publicly trade its shares ("Growth"). As a result of that merger, FEF became a wholly-owned subsidiary of Growth.
About a week before the merger, Growth had changed its name from Frozen Assets, Inc. As a result of the name change, Growth applied to the CUSIP Service Bureau*fn1 for a new CUSIP number to identify the stock of the newly-named company. (Compl. ¶ 9.) On March 18, 1998, the CUSIP Service Bureau told Growth that its new CUSIP number was 399884105.
After consummating the merger with FEF, trading in Growth shares began. On March 30, 1998, the first day a trade occurred, 1,000 shares of Growth stock were sold with a starting price of $3.675 per share. (PL Mem. 7.) By the end of the day, the stock price had dropped to $1. (Def. Mem. 11.) By May 27, 1998, the share price had declined to less than $0.13; it never substantially recovered. (PI. Mem. 21.)
In late May, the plaintiff learned that the CUSIP number assigned to Growth was not a new and unique number, as it was supposed to be. (Compl. ¶ 17.) Rather, the CUSIP Service [ Page 3]
Bureau had mistakenly assigned Growth the number already issued to an unrelated, defunct Nevada company which had also been called Growth Industries, Inc. ("Old Growth"). On June 12, 1998, Growth publicly disclosed that it had been issued a duplicate CUSIP number. (PI. Mem. 21; Declaration of Clare F. Saperstein, dated Feb. 28, 2003 ("Saperstein Decl."), Ex. 29.) On June 22, 1998, the CUSIP Service Bureau assigned a new CUSIP number to Growth, which by then had changed its name to Fragrance Express, Inc., a Nevada corporation ("FEN"). By March 18, 1999, the plaintiff company again changed its name to Fragrance Express Dot Com, Inc. The price of stock in the plaintiff company never rose above $1 per share after the first day of trading.
The significance of the duplicate CUSIP number lies in the mechanics of a stock trade. The Depository Trust Company ("DTC") is a national clearinghouse for securities traded by brokerage firms on the public markets. (Def. 56.1 Stmt. ¶ 83.) Stock certificates in DTC's possession reflect shares held in brokerage firm accounts, identified by CUSIP number. DTC maintains records of each brokerage firm's position in a particular security, and the brokerage firm keeps records of the trading activity of those shares.
The parties agree that by May 29, 1998, DTC had 2,902,200 shares on deposit with CUSIP number 399884105. (PI. Mem. 19; Declaration of Leo W. Desmond, executed March 28, 2003 ("Desmond Decl."), Ex. 6.) Of that number, at least 92,100 shares (about 3%) were shares of defunct Old Growth stock bearing the same CUSIP number as the Growth shares. (PI. 56.1 Stmt. ¶ 3, Def. Rep. 56.1 Stmt. ¶ 3.) The parties agree that during the time Growth shares were on the market, a seller called RAF Financial Corporation ("RAF") sold 5,700 shares of Old Growth stock held at DTC, even though Old Growth was a defunct company. (PI. 56.1 Stmt ¶ 5.) [ Page 4]
The first sale of Old Growth shares occurred on April 13, 1998, and subsequent sales occurred on April 15, 1998, and April 22, 1998. (Def. 56.1 Stmt. ¶ 89.) These sales were apparently facilitated by the posting of Growth shares to the market, since those shares had the same company name and CUSIP number.
While the parties do not dispute these facts, they do dispute the effect of the presence in the DTC inventory of defunct Old Growth shares bearing the same CUSIP number as newly-posted Growth shares. In the Complaint, the plaintiff alleged that Old Growth shareholders believed that their stock had been posted to trade again since stock with the identical CUSIP number had been posted, and proceeded to flood the market with worthless Old Growth stock, thus driving down the price of Growth shares. (Compl. ¶ 17.) After discovery revealed the extremely small number of Old Growth shares actually traded, the plaintiff largely abandoned this theory. In opposition to the summary judgment motion, the plaintiff argues instead that Old Growth shares were "commingled" with Growth shares in DTC's inventory, resulting in rumors within the investment community that Growth shares were diluted. The plaintiff claims that investor confusion resulting from two companies using the same CUSIP number caused the irreparable collapse of the Growth stock price. (PI. Mem. 7.)
The defendant offers evidence, and the plaintiff does not dispute, that a total of 2,368,512 trades of stock with CUSIP number 399884105 were made on the public markets during the time Growth stock was posted to the market. (Def. 56.1 Stmt. ¶ 95.) Of those trades, the parties agree that 5,700 — less than two-tenths of one per cent — involved shares of Old Growth stock. (Def. Mem. ...