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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



Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

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,

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.

Hedge funds seeking to short a stock must first be able to borrow those shares from a brokerage. Wall Street firms can charge a hefty fee to hedge funds seeking to short a hard-to-borrow stock because those shares are in short supply.

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If the allegations of excessive finders' fees and kickbacks are true, then some hedge funds looking to bet against the price of a stock are being ripped off.

Michael Bachner, a criminal defense attorney representing one of the individuals under scrutiny, says all of the conduct being investigated was known by his client's employer.

"It's my view that the conduct engaged in by various stock-loan departments was known," says Bachner. "It was authorized by their employers and was engaged in for the purposes of generating huge profits for their employers."

The alleged improprieties that prosecutors are looking into are similar to ones outlined by the NYSE last week in a regulatory action against

Van Der Moolen


, a Big Board specialist trading firm. The NYSE, in fining Van der Moolen $3.5 million, charged it 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 same family drawing scrutiny in the ongoing criminal and regulatory probe.

Assistant U.S. Attorney Michael Asaro, who is heading up the criminal investigation for the Eastern District of New York, declined to comment. An official with the New York office of the

Securities and Exchange Commission

declined to comment. An NYSE spokesman also declined to comment.

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.

Indeed, some say the regulators and prosecutors are guilty of overzealousness in going after stock-loan finders and the employees of Wall Street stock-loan desks. They say the world of stock loans always has been a clubby business, built on relationships -- even family ties.

John Tabacco, CEO of Locatestock, a company that invented a software program that helps small brokerages and hedge funds find hard-to-borrow shares, says the stock-loan business needs more openness. Tabacco, a former stock finder, says he started Locatestock in 2005 because he saw how the business was changing and that regulators were demanding more pricing clarity -- making it difficult for traditional stock finders to continue to operate.

But Tabacco believes the investigation into the practices of his former colleagues is going too far.

"I feel, as citizens, there is a grave danger if the government and regulators can go back and criminalize behavior for violating policies that never existed," says Tabacco.