SEC charges 38 in Multi-Million Dollar Stock Loan Kick-Back Schemes
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The Securities Exchange Commission (SEC) charged 38 defendants of stealing more than $12 million in stock loan kickbacks from their Wall Street employers. Basically stock loan traders at Morgan Stanley, A.G. Edwards, Nomura Securities and Oppenheimer, among others, worked with phony stock loan “finders” to skim profits from the traders’ firms in the form of finder fees, and then took cash kick backs from these finders. The SEC alleges the fraudulent transactions took place from 1998 to June 2006.
Under these kickback schemes, stock loan traders executed legitimate stock loans, but then in trading records they logged transactions with stock loan “finders”—mostly an obsolete and unnecessary practice these days—to generate finder’s fees. The finders were often friends and/or family of the traders who controlled illegitimate “shell companies” (which were not even involved in the stock loan business). The “finder” then paid kickbacks, usually cash, to the trader. In more complicated schemes, traders (out of their illegal kickback cash) paid other traders that facilitated the loan transactions.
The various scams exposed in the SEC sweep of the stock loan industry involved 17 current and former stock loan traders and some 21 stock loan finders/shell companies, with a mailman, a perfume salesman, a pharmacist and a dental receptionist among them.
One complaint involved someone from this ensemble and two stock loan traders from Morgan Stanley. The traders allegedly received $1 million in undisclosed kickbacks from a finder and a shell company controlled by the trader’s relatives, one of who was a pharmacist. (Stock loans are essentially borrowed stock, which allow people to sell short, and various b/ds have stock loan desks.)
The SEC says some of these deceptive operations involved clandestine meetings at New York City restaurants and bars where defendants exchanged thousands of dollars in envelopes or wrapped in newspaper. Guess the briefcase at the train station thing isn’t cool anymore.
