INDUSTRY WIDE INVESTIGATION: THE STOCK LOAN BUSINESS

The U.S. Attorney’s Office for the Eastern District of New York unsealed its latest indictment in an on-going investigation of fraudulent fees, sham transactions and kickbacks in the stock loan business. The case unsealed this week names as a defendant Ronald Garcia, who did business as Independent Investor Services, Inc., a stock loan finder. U.S. v. Garcia, No. 1:09 No. 1:09-cr-00675 (E.D.N.Y. Sept. 30, 2009).

Mr. Garcia is named in a six-count indictment that grows out of the stock loan business. The securities and wire fraud charges in the indictment center on what are alleged to be fraudulent loan fees and kickbacks. Specifically, Mr. Garcia is alleged to have received finders’ fees in connection with stock loan transactions involving Schonfeld Securities and Van Der Moolen Specialists despite the fact that no services were performed. To obtain the fees Mr. Garcia is alleged to have paid kickbacks to a trader at Van Der Moolen, who in turn paid a trader at Schonfeld.

Garcia is one of a series of cases stemming from an on-going industry wide investigation focused on allegations of bribery and kickbacks in the securities lending or stock loan industry. In that business, financial institutions and their customers frequently engage in transactions that require them to borrow securities from other institutions. The terms of the deal typically include an amount of collateral posted by the borrower, loaned securities and fees and other payments that the parties make to each other as part of the transaction. Typically, the borrower pays the cash or other collateral to the lender and receives the borrowed securities. The lender earns interest on the cash collateral by using it in low risk short term loans to other financial institutions. Finders such as Mr. Garcia claimed to be, facilitated the transactions and are paid a finders’ fee or other compensation for their services.

To date cases have brought have involved former securities lending traders from A.G. Edwards, Janney Montgomery Scott, JP Morgan Chase, Kellner Dileo, Oppenheimer, Morgan Stanley, National Investors Services, Nomura Securities, Pax Clearing, PFPC Worldwide, Schonfeld and Van der Moolen.

Previously, the SEC filed an action against Mr. Garcia and several others. SEC v. Suarez, Civil Action No. 08-3900 (E.D.N.Y. Filed Sept. 24, 2008); See also Litig. Rel. 20736 (Sept. 24, 2008). The Commission’s complaint alleges that over a period of about six years the six defendants defrauded Schonfeld Securities out of at least $1.66 million through the payment of sham finder fees and undisclosed kickbacks that ultimately were paid for by the firm.