Several large banks including Goldman Sachs and JP Morgan Chase were recently hit with a federal class-action lawsuit over alleged stock-lending abuses. The suit was brought by three U.S. pension funds: the Iowa Public Employees’ Retirement System, Orange County Employees’ Retirement System, and Sonoma County Employees’ Retirement Association.
The pension funds claim that the banks colluded to dominate the stock lending market for years, forcing investors and retirees to pay higher fees to engage in stock-lending transactions. The banks also allegedly boycotted start-up lending platforms by threatening and intimidating potential clients, in violation of federal antitrust laws.
A Primer on Stock Lending
Stock lending generally occurs between broker-dealers and institutional investors, including pension funds. This typically involves a short sale, in which an investor sells borrowed securities at a higher price while expecting the stock price to fall. The investor then buys the stock back at a predetermined lower price, hoping to make a profit on the difference. To engage in a short sale, the borrower must pay a fee to the lender and put up collateral – cash, security or a letter of credit.
The Pension Funds’ Class Action
The lawsuit claims that the banks colluded to undermine a startup lending platform designed to allow lenders and brokers to interact directly. The platform, known as AQS, was developed by Quadriserv Inc and Sl-x, and charged discounted fees.
The banks collaborated to create another securities lending platform, Equilend LLC, to prevent borrowers from accessing other markets. Equilend bought intellectual property held by AQS and shelved it, thereby blocking the platform from the stock-lending market. Goldman Sachs allegedly threatened to cut off Bank of New York (BNY) Mellon in 2012 if it continued using the AQS platform, and BNY capitulated. Other defendants include Bank of America Corp., Credit Suisse AG, Morgan Stanley, UBS AG, and Equilend.
It is unclear if the pension funds have a valid antitrust claim under the Sherman Act. They seek injunctive relief to stop the alleged collusion and unspecified treble damages. This case will have a significant impact on the securities lending market and the future of alternative lending platforms. Ultimately, these disputes require the advice and counsel of attorneys with experience in antitrust and competition matters.