Stock-Lending, Family Style

For the Lando clan, the business of lending stock to short-sellers is a family affair. But now some investigators are wondering if something more may have bound the Landos together.

The lucrative niche this New York-area family has carved out is now being threatened by a wide-ranging investigation into alleged securities lending improprieties. Several members of the Lando family are drawing scrutiny from regulators and prosecutors, who are examining stock-loan transactions in which multiple family members allegedly had a hand in either negotiating or arranging.

In July, TheStreet.com was first to report that federal prosecutors had launched a broad probe into price gouging in the market for borrowed stock. The government is probing allegations that employees of some Wall Street trading desks were either receiving kickbacks from, or splitting fees with, so-called stock-loan finders.

A stock-loan finder is an intermediary who helps to locate shares and arrange a stock loan of so-called hard-to-borrow stocks. These are illiquid stocks with a limited number of shares outstanding. 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.

A number of Lando family members were identified by name in a subpoena issued several months ago by the Securities and Exchange Commission as part of the investigation, which is being conducted in cooperation with federal prosecutors from the Eastern District of New York and regulators at the New York Stock Exchange. People familiar with the inquiry, as well as attorneys for several Lando family members, confirmed that investigators are interested in the family's deep roots in the stock-lending business.

The family's defenders argue that the Landos are being unfairly singled out by investigators for simply doing their job, and there is no indication that any charges are pending.

But the investigation is opening a door into an obscure area of Wall Street, where stock-lending is often called the last vestige of the Wild, Wild West. That's because so much mystery surrounds the process by which firms price loans on hard-to-borrow small-cap stocks.

In many ways, the probe recalls other regulatory attacks on middlemen, such as New York Attorney General Eliot Spitzer's recent crusade against excessive commissions charged by insurance brokers like Marsh & McClennan(MMC Quote). The inquiry has the potential to reshape the stock-lending business by driving stock-loan finders into oblivion, potentially driving down the cost of borrowing shares.