Stock Lending Comes Under Scrutiny

A federal investigation into allegations of impropriety in the lucrative business of lending stock to short-sellers is focusing on the actions of individuals at Wall Street firms both big and small.

People familiar with the joint criminal and regulatory inquiry say investigators are seeking information about stock loans handled by both current and former employees of Bear Stearns(BSC), Goldman Sachs(GS) and Janney Montgomery Scott and Nomura Securities, among others.

The sources say a fair number of the individuals drawing scrutiny are related and share a common surname. Many of the individuals identified by name in a federal subpoena are members of a large New York metropolitan-area family with long roots in securities lending, these sources say.

Officials for the Wall Street firms either declined to comment or did not return phone calls seeking comment. There's no indication at this time that any of the firms are under investigation. It also does not appear that regulators or federal prosecutors are close to charging any of the individuals under scrutiny.

Last month, TheStreet.com first reported that federal prosecutors had launched a broad probe into price-gouging in the market for borrowed stock. One thing prosecutors are probing is an allegation that employees of some Wall Street trading desks are either receiving kickbacks from, or splitting fees with, so-called stock-loan finders.

A stock-loan finder is an intermediary who helps arrange a stock loan and locate shares of so-called hard-to-borrow stocks. These are illiquid stocks with a limited number of shares outstanding. But investigators contend that in many instances, the finders are receiving fees for doing little work and in effect simply increasing the cost of borrowing a stock.