09.20.07 - Feds Crack
Down On Stock Lenders
The Feds are moving on their long-promised crackdown on
abuses in the murky world of stock lending.
The charges read like something only David Chase could
dream up, including kickbacks and phony payments to family
members and others. Five people, including former stock
loan traders at Morgan Stanley (nyse: MS - news - people
) and Janney Montgomery Scott, face criminal charges of
conspiracy to commit wire and mail fraud, money laundering
and making false statements. The arraignments are scheduled
for Thursday afternoon in New York.
Sixteen people have faced criminal complaints by the U.S.
attorney in Brooklyn so far in the investigation, and 10
have already pleaded guilty.
Meanwhile, the Securities and Exchange Commission charged
38 people with a series of fraud schemes, including the
payment of kickbacks and the collection of phony finders'
fees that reaped $12 million in profits over a decade. The
individuals include former traders from Morgan Stanley,
Van der Moolen (nyse: VDM - news - people ), Janney Montgomery,
A.G. Edwards, Oppenheimer and Nomura Securities.
"The defendants in these cases devised a host of brazen
schemes to enrich themselves and others at the expense of
firms engaged in securities lending," said Linda Thomsen,
the SEC's director of enforcement. "The commission
will respond forcefully to misconduct in the securities
industry."
The charges shed light on abuses in the stock lending business,
an industry that is largely unknown outside of Wall Street
but which plays a central role in trading activities. Stock
lending, a clubby world dominated by family and friend connections
that for a long time has operated under the radar screen
of regulators, nets Wall Street an estimated $8 billion
to $10 billion in fees annually.
Stock lenders help firms borrow and loan shares among themselves
to facilitate trading strategies, including short sales.
At times, middlemen known as "finders" are used
to link stock loan traders with one another, but the usefulness
of the "finder" is waning with improvements in
electronic trading.
Still, federal regulators say, finders are being used mostly
to illegally skim profits from the firms lending the stock.
The NYSE Group (nyse: NYX - news - people ) has also sanctioned
several individuals and firms in the last year.
The prosecutor is charging Peter Sherlock, a former Morgan
Stanley stock loan trader; Anthony Lupo, a purported finder
who ran his own firm Clinton Management; Craig Demizio,
a purported finder of the firm CD Management; and Donato
Tramontozzi, Sherlock's brother-in-law, with conspiracy
to commit securities fraud and wire fraud and money laundering
conspiracy.
Prosecutors claim Sherlock, the former Morgan Stanley trader,
steered business to Lupo's company in exchange for $500,000
in kickbacks from 2001 to 2005 and for $200,000 paid to
Sherlock's brother-in-law, Tramontozzi, a pharmacist. Demizio,
the other purported finder, got $350,000 in kickbacks, according
to the complaint.
In a separate case, Andrew Caccioppoli, the former manager
of Janney's securities lending desk, is accused of stealing
$350,000 by having Janney pay phony finders' fees to his
sister and her husband, employed respectively a secretary
and a letter-carrier, who allegedly performed no legitimate
securities-related services.
Lawyers for three of the five defendants could not immediately
be reached. A lawyer for Tramontozzi says he plans to plead
not guilty and that "he looks forward to vindicating
his name in court." An attorney for Sherlock says his
client is not guilty and "we are confident that he
will be exonerated."
- Liz Moyer: Forbes.com
Staff Writer
Return to Recent News
