September 05, 2023

Some of America's billion-dollar pension funds have agreed to a proposed settlement in a lawsuit against Wall Street banks, in a long-running case that cracked open the hidden world of securities lending.

In securities lending, pension funds and retirement plans lend out their portfolio shares to hedge funds and other investors, using Wall Street brokers that charge a fee. By some estimates, stock lending totals $1.75 trillion in market value.

But the business was so tightly controlled that it effectively functioned as a cartel, according to the pension funds' class-action lawsuit. Their partial settlement was filed in court Aug. 23.

The secrecy behind securities lending may be changing: the group of pension funds led by the $40.1 billion Iowa Public Employees' Retirement System, Des Moines, reached a $499 million partial settlement in the antitrust lawsuit alleging that Morgan Stanley, Goldman Sachs, UBS, J.P. Morgan Chase & Co., Credit Suisse, and Bank of America ran a price-fixing scheme using their own joint venture called EquiLend.

In effect, the banks hurt pension funds by keeping fees paid artificially low. That prevented asset owners from earning more revenues when they lent out stock, according to the complaint filed in the U.S. District Court in Southern District of New York.

Other pension funds that are lead members of the class-action suit include the $73.6 billion Los Angeles County Employees Retirement Association, Pasadena, Calif.; the $21 billion Orange County Employees Retirement System, Santa Ana, Calif.; and the $3.4 billion Sonoma County Employees' Retirement Association, Santa Rosa, Calif.

The proposed agreement could end up benefiting many investors far beyond the pension fund world.

"This is a class settlement, so it should achieve results for everyone. Every single borrower and lender of stock is affected," said Michael Eisenkraft, a New York-based partner with Cohen Milstein Sellers & Toll, which represented the plaintiffs.

As part of the settlement agreement, EquiLend agreed to undertake reforms over the next five years, among them: limiting the number of board seats held by each bank, appointing and rotating outside antitrust counsel, and creating an "Antitrust Code of Conduct" designed to "prevent collusion and inappropriate sharing of information."

Read Inside the $499 Million Lawsuit Settlement Exposing 'Opaque' World of Securities Lending (Subscription required.)