Harnessing Antitrust Laws, Investors Deal Blow to Bank Collusion in Market for Stock Lending

Shareholder Advocate Fall 2023

October 25, 2023

By Kate Fitzgerald

Plaintiffs in an antitrust lawsuit accusing a handful of prime broker banks of colluding to keep prices in the stock loan market artificially high have received initial approval for a settlement requiring the banks to pay nearly $500 million in cash and make reforms that should reduce the chances of collusion in the future.

On September 1, 2023, the Hon. Katherine Polk Failla of the United States District Court for the Southern District of New York granted preliminary approval of plaintiffs’ class action settlement with four Defendant banks—Morgan Stanley, Goldman Sachs, UBS, and JP Morgan—and with EquiLend, the securities lending trading platform Defendants control. According to Plaintiffs, the Defendant banks conspired through EquiLend since at least 2009 to keep markets opaque and thwart modernization, thereby keeping prices artificially high.

Counting the $499 million cash component of the latest settlement, Plaintiffs have now recovered $580 million from Defendants, pending final approval. An $81 million settlement with Credit Suisse received preliminary approval last year.

Filed in 2017, Iowa Public Employees’ Retirement System, et al. v. Bank of America Corp. et al. is led by five institutional investors, including four public pension funds, represented by Cohen Milstein and its co-counsel. The Plaintiffs—Iowa Public Employees’ Retirement System, Los Angeles County Employees Retirement Association, Orange County Employees Retirement System, Sonoma County Employees’ Retirement Association, and Torus Capital LLC—asserted that the banks’ actions to preserve their market dominance violated federal antitrust laws, causing market participants financial harm. The Plaintiffs sought financial damages and improvements to the system.

The $1.7 trillion stock loan market is a critical component of global securities markets, facilitating activities like short selling and hedging while providing a stream of income to beneficial owners who lend out their securities. By temporarily lending stocks to another entity, typically for a fee, long-term investors who hold large amounts of publicly traded securities can generate additional income for their portfolios. The borrowing entities, in turn, are able to borrow stocks they need to enable short sales and hedging strategies.

But, as alleged in the complaint, the institutional investors who lend and borrow stocks believe that, for years, they were forced to use an inefficient, antiquated, and opaque over-the-counter trading platform which forced market participants to use defendant Prime Brokers as middlemen to match buyers and sellers for a fee, which Defendants allegedly conspired to keep the market frozen in its inefficient state to preserve their collective market control and dominance and charge higher transactional fees.

In their complaint, Plaintiffs allege that since at least 2009, the six Defendant banks routinely took steps together to block the development of competitive exchange platforms in the stock loan market, like AQS (in the United States) and SL-x (in Europe)—exchanges that would have reduced trading costs for both stock lenders and borrowers. For example, the Complaint alleged that when the banks learned that Bank of New York (BONY) 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—SAC Capital, Renaissance Capital, and others—telling them they would not connect them to AQS, and, if they did not like it, they could take their business elsewhere.

In 2001, the six prime broker banks, together with four others, created EquiLend, a securities lending platform and dealer consortium purportedly created to enhance market efficiencies in the stock loan market. The board of directors of EquiLend consisted of a representative from each Defendant bank, something that plaintiffs allege helped them control and protect their profits in the stock loan market.

The Complaint alleged that through EquiLend, the banks could collectively agreed not support any exchange that would permit borrowers and lenders to trade directly with each other in a modern all-to-all market.

In the Complaint, Plaintiffs contend that in 2016 alone these six banks skimmed approximately 60% of the $9.15 billion in stock lending revenue, 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 charged would have been untenable.

The Complaint alleges that after boycotting securities lending participants who participated on other platforms—AQS in the US 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—the last piece of the conspiratorial puzzle because it gave the banks complete control over all gateways to central clearing in the US—even had a secret code name at Morgan Stanley: Project Gateway.

After years of painstaking and costly discovery, in February 2022, Credit Suisse became the first of the six banks to settle. Morgan Stanley, Goldman Sachs, UBS, JP Morgan, and EquiLend followed suit in September 2023.

While the settling Defendants have denied any wrongdoing and say reforms are unnecessary, Plaintiffs believe that the equitable relief they designed and negotiated for will help align EquiLend to the best practices and guidelines for anti-cartel and collaborations among competitors.

These reforms include:

  • Mandatory rotation of outside antitrust counsel and EquiLend board members;
  • Limitations on who can access commercially sensitive information; and
  • A robust compliance, training, and monitoring program at EquiLend.

At least one industry observer is cautiously optimistic about the settlement’s injunctive relief. In a recent article, financial investor publication Pensions & Investments said that the terms of the settlement “may bring the first bit of transparency to stock lending.” The article noted, however, that many of the case documents that could shed further light on the inner workings of stock loan market remain under judicial seal.

Cohen Milstein and co-counsel continue to pursue the case against Bank of America, the only remaining Defendant bank.