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) - Get Report

. 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.

Three generations of Landos, most of whom hail from New York's Staten Island, have worked on the stock-loan desks of Wall Street brokerages. Other Lando members have been self-employed stock-loan finders -- intermediaries who help broker loans to hedge funds and other traders.

A gaggle of Landos work in stock-lending now, including three brothers and a sister: Andrew Jr., Joseph, Michael and Andrea, people familiar with the family say. Andrew Jr. is the former head of stock-lending with

Bank of America

(BAC) - Get Report

. The patriarch of the Lando family is Andrew Sr. He is retired, but once ran the stock-loan desk at Weiss Peck & Greer, now part of Robeco Investment Management.

Some of the transactions under scrutiny involve

stock loans made at

Bear Stearns

(BSC)

,

Goldman Sachs

(GS) - Get Report

, Janney Montgomery Scott and Nomura Securities, among other brokerages. One thing investigators are looking at is dealings between Landos working at different brokerages, and Landos serving as stock-loan finders.

The family's defenders point out that it's not a crime for members of the same family to be active in the same line of business. Nor is there anything improper with siblings working at different firms and doing business with one another.

"It appears that because the Lando family has been in the business for so long, there is an undue emphasis on their relationship. But they've always acted appropriately," says Michael Bachner, who represents Joseph Lando, formerly of Janney Montgomery. "We're confident that they will find nothing."

People familiar with the probe say the investigators believe that in most instances, stock finders are ripping off the hedge fund borrowers, along with the brokers that lend out the shares to traders looking to open a short position in a stock.

Still, there's no indication that regulators or federal prosecutors are close to charging any of the individuals under scrutiny. It also does not appear that the firms where the individuals work are in any trouble.

Federal prosecutors and securities regulators declined to comment on the investigation. The various Wall Street firms where the Lando family members either currently work, or used to work, also have had no comment.

Several Lando family members contacted by

TheStreet.com

, including Andrew Jr. and Joseph, said they had nothing to say on the matter. Andrew Jr.'s attorney, Seth Levine of Foley & Lardner, had no comment. Andrea Lando, who used to work as a stock-loan finder, according to sources, could not be reached for comment. Her attorney, Kenneth Kaplan, declined to comment.

But Bachner, the attorney for Joseph Lando, says the Landos' relationships were well-known to their respective employers and no secret on Wall Street.

"The Landos have always played diligently by the rules that have been in existence," says Bachner. "Now it appears that the New York Stock Exchange is creating new rules."

The investigation into the Lando family stems from alleged improprieties that NYSE says took place at

Van der Moolen

(VDM)

, 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."