On August 17, 2017, Cohen Milstein Sellers & Toll PLLC and Quinn Emanuel Urquhart & Sullivan LLP filed suit in the Southern District Court of New York alleging collusion among six of the world’s largest investment banks to prevent modernization of the $1.7 trillion stock loan market. Plaintiffs, including the Iowa Public Employees' Retirement System, the Orange County Employees Retirement System and the Sonoma County Employees' Retirement Association, allege that Bank of America, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley and UBS conspired to overcharge investors and maintain the power they hold over the stock loan market, obstructing multiple efforts to create competitive electronic exchanges that would benefit both stock lenders and borrowers. 

Case Background

The stock loan market is a critical component of a strong economy, enabling trading activities like short selling and hedging while also ensuring that financial systems operate efficiently. The plaintiffs in today’s suit—Iowa Public Employees’ Retirement System (IPERS), Orange County Employees Retirement System (OCERS) and Sonoma County Employees Retirement Association (SERA)—claim that investors who borrowed and lent stock through the stock lending market were and are being harmed because six investment banks took collective, illegal action to boycott, attack and acquire multiple entities who tried to increase competition and lower costs in the stock loan market.

The banks named as defendants in this suit routinely took steps together to block the development of competitive exchange platforms like AQS (in the United States) and SL-x (in Europe) and the impact of government regulatory reforms. For example:

When the investments banks learned that Bank of New York was using AQS for stock loan transactions, Goldman Sachs threatened to return billions in collateral and never do business with BONY again. BONY promptly abandoned its plans. Various defendants took similar steps with well-known hedge funds too, including SAC Capital, Renaissance Capital, and others – telling them they would not connect them to an AQS, and, if they did not like it, they could take their business elsewhere.

As AQS’s executives made the rounds of the stock lending industry and meeting with the organizations that would be part of the re-engineering of critical market infrastructure, one such institution openly stated that the AQS plan, “[sounded] great, but who’s going to start [your] car in the morning?”

When SL-x met with two Goldman Sachs executives to introduce them to an emerging product – one which would have threatened Defendants’ dominance of the stock loan market – the Goldman executives were frank: if they were to allow a central trading platform with counterparty clearing, it would encourage other competitors to enter the stock lending market. “I ain’t supporting this,” said Goldman Sachs Managing Director William Conley. “You ain’t going to get this done,” echoed Brad Levy, then Global Head of Goldman Sachs’ Principal Strategic Investments Group.

Stock lending involves the temporary transfer of a stock from one investor to another, typically from large institutional investors who hold large amounts of publicly-traded securities (pension funds, mutual funds, university endowments, etc.) to entities who want to sell stock short. It is a common practice that helps both the borrowers and lenders of stock generate additional income in their portfolios.

The stock loan market has not kept pace with the technological progress that has improved other financial markets. Stock lending remains an opaque, over-the-counter (OTC) trading market in which there is no central marketplace for stock borrowers and lenders to trade directly with one another or see real-time pricing that could help secure better financial terms. Instead, stock lenders and borrowers must transact through intermediaries, also known as “prime brokers,” who take a massive cut of nearly every stock loan transaction. The six investment banks named in today’s lawsuit are the dominant prime brokers in the U.S., effectively controlling the stock loan market and gobbling up approximately 60 percent of the revenues.

This suit alleges that, in order to protect their profits, these large investment banks have been conspiring since at least 2009 through a company called EquiLend, which they control, to prevent participants from accessing marketplaces where they could benefit from direct, all-to-all trading and thereby secure themselves the best prices. (All-to-all trading means that stock lenders can offer a stock to every other stock borrower in the market and select the best price.) Denying others this level of access forces trades in the market to go through their prime brokers, which is how the banks are able to reap tremendous financial benefit. In 2016, for example, these six institutions skimmed approximately 60 percent of the $9.15 billion in stock lending revenue alone, despite performing a service for which they bear virtually no risk. Any other arrangement would have substantially reduced the need for their services, and the premiums that they charge would have been untenable.

The coordinated effort by the prime brokers to stymie their competition in the stock lending market took numerous forms. After boycotting securities lending participants who participated on other platforms —AQS in the U.S. and SL-x in Europe—the banks either purchased the intellectual property underlying those exchanges (SL-x) or the exchange itself (AQS), effectively shelving the efforts to improve stock lending for investors. The purchase of AQS by bank-controlled EquiLend, which the last piece of the conspiratorial puzzle as it gave Defendants complete control over all gateways to central clearing in the U.S., even had a secret code name at Morgan Stanley – Project Gateway.

The case is Iowa Public Employees Retirement System et al. v. Bank of America Corp., case number 1:17-cv-06221, in the U.S. District Court for the Southern District of New York.