DTC Chills and a solution

26 Apr

Depository Trust & Clearing Corporation

Since April 23, 2012, we at Rhodes Holdings LLC have spent time speaking with Randy Goulding, an Illinois securities lawyer, tackling how the DTC has precipitously put “chills” on issuers without an issuers’ ability to appeal such chills.  With two clients with chills and 20+ issuer backlog who have contacted me concerning DTC chills, I was very interested in what he has accomplished and his plans.  Instead of paraphrasing it, I have permission to re-print the letter sent to publicly traded company / issuers.

As of today, we are speaking to a number of litigation specialists for the second step, which is to bring suit by a number of issuers at the same time that will benefit the issuer and their shareholders.  A class action lawsuit would most likely only benefit the class action lawyers and not bring conjunctive relief to the issuers and their shareholders so that the DTC will provide some ability, as the SEC as prescribed recently, for the issuer to request a review of the chill.  Summary – we are still interviewing litigators to determine who would be the best to bring this forward, getting maybe 20+ issuers with this issue to participate.

Dear Professional:

Legal Services to Stop and to Reverse the Illegal DTC “Chill”

The March 15, 2012 SEC ruling in the matter of the Application of International Power Group, Ltd.
(Securities and Exchange Act of 1934 Rel. No. 66611 / March 15, 2012, Admin. Proc. File No. 3-
13687) prompts this letter to address and relieve ongoing and accumulated losses sustained by
aggrieved issuers.

Recently, several small publicly traded companies have retained this law firm to represent it in
connection with an inappropriate imposition of a DTC “chill”, without a hearing and without notice to
the issuer, and thus without constitutional due process. This Depository Trust Company (DTC)
practice appears to be a pattern, to the substantial detriment of such companies. Our fees to each
company are $375 to write up to two letters, including what we refer to as the “soft letter”, which is the
preliminary demand and thus less controversial by nature, and, if necessary, to have one additional,
more pointed and more detailed letter, to DTC, on behalf of the company.

The SEC Ruled That DTC Violated the Public Company’s Rights to a Fair Hearing.

In the matter of International Power Group, Ltd. (IPG), the SEC reviewed DTC’s 2010 suspension of
the electronic trading of IPG. DTC initiated the suspension simply because the SEC started a case
alleging, among other things, sales of unregistered securities by IPG (but neither IPG nor its officers or
directors were named.)
The SEC ruled that IPG, a public company which was subjected to a DTC “chill”, without notice and
without being afforded an opportunity for hearing, is a “legal person”, entitled to a fair and orderly
procedure, including a fair hearing and the opportunity to appeal the matter to the SEC. With respect to
the suspension, the SEC ruled that DTC “did not provide IPG with fair procedure in connection with
the suspension.” DTC argued that since IPG is not a broker-dealer “participant,” it was not a “person.”
In addition to determining that IPG is a “person”, and thus entitled to fairly applied procedures,
another equally important determination by the SEC was that DTC, as a registered clearing agency,
falls within the definition of a self-regulatory organization (“SRO”). 15 U.S.C. § 78c(a)(26). These
determinations open the door to the prospect that DTC is a quasi governmental organization (see note 1) and thus obligated to afford such corporate entities, or “persons”, to “due process” considerations, required by
the United States Constitution. For details see:
66611.pdf . We feel that this notion is exacerbated by DTC’s voluntary assumption of the role of a
self-proclaimed regulator, autocratically dealing deleterious consequences of its own volition.
Moreover, as a regulator, DTC takes punitive action, restricting a person’s right to access to its
critically important monopolistic services, its electronic securities credit system, which is not available
to issuers through any other means. And perhaps somewhat insidious is that DTC actually profits from
such action, through its Obligation Warehouse.

Consistent with this theory of DTC being a quasi government organization, although not specifically
mentioning the Due Process clause of the Fifth and Fourteenth Amendments to the United States
Constitution, the Commission also directed DTC to “adopt procedures that accord with the fairness
requirements of [the Securities Exchange Act], which may be applied uniformly in any future such
issuer cases.”

This ruling and its implications are good news for issuers facing a so-called DTC eligibility commonly
referred to as DTC “chill.” It is now clear that such issuers have standing to insist on a proper and fair
hearing, and the chance to appeal to the SEC if they are not satisfied. More importantly, for issuers that
have already been aggrieved by DTC’s non-compliant conduct, this law firm is actively pursuing

Our approach to reversing the DTC “Chill.”

Our approach, for the $375, will specifically include eliciting a communication with DTC in an effort
to remedy the consequences of DTC’s action, or to at least to obtain a hearing. Anything more, if
necessary, would be at the firm’s normal hourly rate of $350 per hour, and only should the aggrieved
company, at that time, agree.

Obviously, there is no guarantee. Nor is there any guarantee that this will be resolved with the two
letters and/or the one additional communication.

However, we are optimistic about success given the potential due process considerations, which we
believe implicate significant constitutional rights, coupled with the SEC oversight and concern over
this issue. Additionally, the magnitude of the losses sustained by what we feel is an illegal act and
actionable conduct by DTC, with a potential constitutional dimension, opens the prospect of a class
action, or perhaps a joint action of many aggrieved parties, if we are not successful in our initial
resolution pursuits on behalf of such companies. Additionally, even if we are successful, the losses
were sustained as a consequence of improper and arguably actionable conduct. Accordingly, we still
make room for the prospect of a class action for such damages, notwithstanding this instant pursuit of
addressing and eliminating the ongoing losses.

Icon of Law Firm--owned by user.

Icon of Law Firm--owned by user. (Photo credit: Wikipedia)

What We Would Need to Pursue the DTC “Chill” Reversal.

What we would need from an aggrieved public company, is complete contact information, and basic information such as: complete corporate name and address, telephone and e-mail contact information), when and how the Corporation first learned of the DTC “chill”, when, to the best of the Corporation’s knowledge the DTC “chill” occurred, its stock transfer agent, contact information for corporate counsel, CUSIP number and any other information one might find pertinent.



The Corporation should mail a check for $375 to the below address, made payable to:

the “Law Offices of Randall S. Goulding and Associates”
1333 Sprucewood Deerfield, IL 60015
Fax: 484-450-5130 Phone: 847.948.5431

Very truly yours,
/s/ Randall S. Goulding

Law Offices of Randall S. Goulding and Associates
1333 Sprucewood, Deerfield, IL 60015
Office telephone number: 847-948-5431
Facsimile: 484-450-5130

Note 1 – Established in 1973, DTC was created to reduce costs and provide efficiencies to the system of handling securities transactions and accounting therefore by creating an electronic “book-entry” system of handling securities. DTC moves securities for National Securities Clearing Corporation (NSCC)’s net settlements, and settlement for institutional trades (which typically involve money and securities transfers between custodian banks and broker-dealers), as well as money market instruments. In addition to settlement services, DTC retains custody of almost 3.7 million securities, worth about $40 trillion, including securities issued in the US and 121 other countries. DTC issues credits for such securities. Its depository provides custody and asset servicing for securities issues from the United States and countries and territories, valued at US$39.5 trillion. In 2011, DTC settled nearly US$1.7 quadrillion in securities transactions. DTC is a member of the U.S. Federal Reserve System, and a registered clearing agency with the Securities and Exchange Commission.

© 2012 contents (letter) by Randy Goulding and (comments) Rhodes Holdings LLC, all rights reserved.  Original letter available here at 2012-04-12 Randy Gould letter.

1 Comment

Posted by on April 26, 2012 in BLOG, Business, Public markets


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One response to “DTC Chills and a solution

  1. sIMON kOGAN, eSQ.

    June 29, 2012 at 9:28 am

    Robert: I have two problems with your approach. First, I think you are too optimistic when you assume that DTCC WILL ever actually hold a hearing or be fair at a hearing if one is held. I think you can expect DTCC to act like the NASD/FINRA and simply rubber stamp the staff determination to impose a chill.Second, your letter does not address the second step which is a petition to review to the SEC. WOULD NOT A BETTER APPROACH BE TO PETITION THE sec directly and ask the Commission to stay imposition of the chill, effectively forcing DTCC to reverse the chill– at least temporarily.


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