Calling the $1.72 trillion international stock loan market good for the banks that do the lending but "bad for virtually everyone else," a trio of pension funds filed a class action suit against six of the world's largest financial firms Thursday.
The Iowa Public Employees' Retirement System, Orange County Employees Retirement System and Sonoma County Employees' Retirement Association accused the banks of conspiring to violate federal antitrust laws "to keep stock loan trading frozen in an inefficient and opaque [over-the-counter] market in order to preserve their privileged position as intermediaries on every trade," according to the suit brought in the U.S. District Court for the Southern District of New York.
According to the suit, Bank of America, Credit Suisse, Goldman Sachs, JPMorgan Chase & Co., Morgan Stanley and UBS worked together since at least 2009 to obstruct efforts to create a competitive electronic exchange, while using their stranglehold over the stock loan market to overcharge investors.
Stock lending allows investors to temporarily transfer stock from one investor to another, and plays a vital role underlying most short-selling activity, according to the plaintiffs. Short selling without stock borrowing is illegal under U.S. Securities and Exchange Commission rules, they noted. The market for securities on loan today is nearly $2 trillion.
"Through various improper means, the likes of Goldman Sachs and Morgan Stanley have for years colluded to maintain their power over this little-known-but-lucrative corner of Wall Street," Cohen Milstein Sellers & Toll partner Michael Eisenkraft, attorney for the plaintiffs, said in a statement. "In doing so, they deprive investors of money that should flow to retirees, families and other hard-working Americans."
Unlike other financial products that are trade on exchanges, plaintiffs argue that the banks involved have "yet to embrace modern electronic trading protocols, and little has changed in the way trades are executed."
The alleged collusion has worked to block the development of competitive platforms such as AQS in the United States and SL-x in Europe. When firms attempted to use the exchanges, the defendants allegedly took steps to stop them. Well-known hedge funds like SAC Capital and Renaissance Capital were allegedly threatened if they opted to use AQS. Bank of America's use of the AQS exchange resulted in a threat from Goldman Sachs to sever business ties if it continued, according to the plaintiffs.
Instead, borrowers are forced to use a service called EquiLend, which is owned by the banks.
The suit is the latest to go after large financial institutions for allegedly working to deny investors access to open exchanges not controlled by the banks. A number of suits have been filed over swap exchanges, specifically in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandated an opening up of a number of market exchanges.
Spokespersons for Bank of America, Goldman Sachs, JPMorgan, Morgan Stanley and Credit Suisse declined to comment. A representative for UBS could not be reached.