Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, September 20, 2007

SEC Charges "Stock Loan" Traders

The SEC charged 38 defendants in a series of fraudulent schemes involving phony finder fees and illegal kickbacks in the "stock loan" industry. The defendants include 17 current and former "stock loan" traders employed at several major Wall Street brokerage firms, including Morgan Stanley, Van der Moolen (VDM), Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. These traders conspired in various schemes with 21 purported stock loan "finders" to skim profits on stock loan transactions. The defendants pocketed more than $12 million from their unlawful schemes over a period of nearly a decade.

In two separate complaints filed in federal court in Brooklyn, N.Y., the SEC alleges that from 1998 until June 2006, the stock loan traders named as defendants routinely defrauded the brokerage firms that employed them and others by engaging in collusive loan transactions and causing the firms to pay sham finder fees to companies controlled by the traders themselves or by their friends and relatives. Acting as fronts for the traders, these companies received hefty finder fees on several thousand stock loan transactions even though they did not provide any legitimate finding services and, in many cases, were simply shell companies that were not even involved in the stock loan business. These phony finders included a mailman, a perfume salesman, a pharmacist and a dental receptionist. The defendants shared in the sham finder fees through secret kickback arrangements. In some cases, defendants met monthly at New York City bars and restaurants to exchange thousands of dollars in cash, often wrapped in newspapers or stuffed into envelopes.

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