September 21, 2007
The Latest Wall Street Crackdown
Federal prosecutors and the SEC filed criminal and civil charges against a number of Wall Street defendants for abuses in the "stock loan" business that resulted in estimated gains of over $12 million. The transactions involving loaning shares to brokers who need them so that clients can "short" the stock, i.e. sell shares they do not own, a bet the price will go down so they can be repurchased at a lower price and then returned to the lender. With the rise in shorting, propelled by hedge funds and other investment vehicles that try to maintain positions on both sides of the market, demand for shares has increased, and so has the temptation to scoop a little extra money off the top by creating cut-outs to charge an extra commission. According to the SEC press release (here):
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.
The SEC named 38 defendants in two separate civil enforcement actions, a number of whom settled the case, while the U.S. Attorney's Office for the Eastern District of New York announced the indictment of five defendants on securities fraud and conspiracy charges. Ten defendants already have entered guilty pleas in the case (see press release here). (ph)
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