Stock-Lending, Family Style

The investigation into the Lando family stems from alleged improprieties that NYSE says took place at Van der Moolen (VDM Quote), a Big Board specialist trading firm. In July, the NYSE fined Van der Moolen $3.5 million, charging the firm with paying "unjustified finders' fees" to 29 friends and family members of its now-defunct stock-lending department.

Sources say some of the family members identified in the Van der Moolen case are members of the Lando family. Michael Lando, who worked at Van der Moolen from 2000 to 2002, had no comment on the investigation.

Stock lending can be a profitable business for Wall Street firms, given the daily demand from hedge funds and other big traders for shares to sell short. In a short sale, a bearish trader borrows stock, sells it, then hopes to repay the loan later with stock purchased at a lower price. In the vast majority of cases, the transaction is a simple one for the brokerages, which normally keep an inventory of shares on hand to lend to clients.

A difficulty arises when too many people want to borrow the same shares. In those cases, brokerages trying to serve big customers often resort to borrowing shares themselves and re-lending them to the client. In these cases, stock finders can be useful in helping firms track down shares to borrow. But some on Wall Street say there's no need for finders, especially with advances in technology that have made it easier for Wall Street firms to scour the market for shares.

Shawn Sullivan, a Credit Suisse managing director who oversees the Wall Street firm's stock-lending operation, says it is against the bank's policy for anyone on his staff to work with a stock-loan finder. He says finders are "unaffiliated persons" who add little value to completing a transaction.

"I've got 70 people worldwide looking for stock every day," says Sullivan. "A finder is just one or two people with a telephone. They have no standing in the transaction, as they do not act as a principal or as agent with any counterparts involved."

To Marc Powers, a partner with Baker Hosteler, the current investigation into stock-lending is nothing new. Two decades ago, Powers was a top attorney at the SEC prosecuting cases involving improprieties between stock-loan finders and brokerage employees. Given the close-knit nature of the stock-loan community, he says it's a business that's ripe for abuse.

"A generation ago you had the SEC bringing cases against finders for questionable practices," says Powers. "But from time to time, you'll see a new crop of players that somehow find it difficult to stay on the right side of the regulations and the law."