Pension Funds Sue Big Banks Over Stock Lending Abuses

• Posted on: Aug 28 2017

The hits keep coming for money center banks, such as Goldman Sachs, JP Morgan Chase and others, as three U.S. pension funds have filed a class action lawsuit over alleged stock lending abuses.

The suit, brought by the Iowa Public Employees’ Retirement System, Orange County Employees’ Retirement System, and Sonoma County Employees’ Retirement Association, claims the banks’ stock lending practices violate federal antitrust laws. The funds allege that the banks colluded to boycott start-up lending platforms by threatening and intimidating potential clients.

An attorney representing the funds said that the banks colluded to corner the lucrative stock lending market for years and harmed investors and retirees by forcing them to pay high fees to conduct transactions that involved stock lending.

What is stock lending?

Securities lending is generally conducted between broker/dealers and institutional investors, although pension funds and other entities may also lend securities to hedge funds. This essentially involves loaning a stock, derivative or other security to an investor, typically in connection with short selling. In a short sale, an investor looks to sell the borrowed securities at a higher price in anticipation of the price falling, and then buying the securities back at a lower price. The borrower is required to put up collateral in the form of cash, security or a letter of credit, and also pay a fee to the lender.

The Pension Funds’ Claims

The lawsuit claims that the banks conspired to undermine AQS, a startup lending platform that was developed by Quadriserv Inc. and SL-x. The AQS platform was designed to allow lenders and borrowers to interact directly, with lower fees being charged by AQS compared to traditional stock lending firms.

The funds contend that the banks jointly created a securities lending platform, Equilend LLC. in 2009, to prevent access to other marketplaces. One tactic Equilend allegedly employed was buying certain AQS intellectual property and shelving it, effectively keeping the platform off the stock lending market. The lawsuit also contends that in 2012, Goldman Sachs threatened to cut off Bank of New York Mellon if it continued to support the AQS platform and that the bank acquiesced.

Takeaway

Other banks named in the suit include Bank of America Corp., Credit Suisse AG, Morgan Stanley, UBS AG, and Equilend. The pension funds are seeking unspecified treble damages and an order forcing the banks to stop the alleged collusion. Whether the funds will successfully demonstrate the necessary elements to prevail on their antitrust claims under the Sherman Act remain to be seen. Nonetheless, the resolution of this case, either way, will have far reaching implications for the securities lending market and the development of alternative lending platforms.