Three Pension Funds Sue Major Banks in Stock Loan Case

The funds allege that six major banks conspired to overcharge on the stock loan market.


Three public retirement funds have banded together to file a lawsuit against six major Wall Street investment banks, alleging that they were overcharged by those banks in the stock loan market and that the banks conspired to control the market.

The lawsuit was filed in United States District Court of the Southern District of New York on August 16 by the Iowa Public Employees’ Retirement System, the Orange County Employees’ Retirement System, and the Sonoma County Employees’ Retirement System. The plaintiffs are suing Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, J.P. Morgan, Morgan Stanley, and UBS.

Stock lending is a common practice among institutional investors, particularly public pension funds, which often sit on large piles of cash for a long time. Lending shares, for example to other investors who want to short them, “allows these investors to earn a cash return on their investments while holding a stable interest in publicly-traded companies,” according to the lawsuit.

But the investors allege that the banks worked together to keep the stock-loan market inefficient by conspiring to keep third-party electronic platforms from tapping into this lucrative business.

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“We think it’s a strong case,” Daniel Brockett, senior litigation partner at Quinn Emanuel Urquhart & Sullivan who is representing the pension funds, tells Institutional Investor. “It’s very well documented.”

The stock-loan market does not operate like the equities market does. While almost $1.72 trillion worth of securities are on loan, there isn’t a system in place that shows updated prices on stock loans. As a result, valuations on stock lending are virtually unknown.

Several stock loan trading platforms, like Quadriserv and SL-x have popped up over the years, but, according to the suit, the banks “threatened clients with retaliation if they moved any of their stock lending transactions” to either platform.

The suit alleges that the banks “conspired to keep stock loan trading frozen in an inefficient and opaque [over the counter] market in order to preserve their privileged position as intermediaries on every trade.”

Additionally, these bankers “preserved this antiquated system by taking collective action to boycott trading platforms which sought to enter the market and which threatened to increase transparency and competition,” the lawsuit alleges.

According to Michael Eisenkraft, partner at Cohen Milstein Sellers & Toll who is representing the pension funds along with Brockett, the suit has been in the works for a number of months. Eisenkraft declined to comment further.

Brockett noted that since its filing, the lawsuit has received an “outpouring” of support from other pension funds.

The banks implicated have yet to respond in court. A Nov. 1 pretrial conference date has been set by Judge Analisa Torres.

“We’ll be working together even more facts to strengthen the complaint between now and then,” Brockett said.

Spokespeople from Goldman Sachs, Morgan Stanley, J.P. Morgan and UBS declined to comment on the lawsuit. Bank of America Merrill Lynch and Credit Suisse did not immediately respond to requests for comment.

“Iowa Public Employees’ Retirement System is proud of its role in leading this lawsuit and its efforts to get compensation for investors damaged by the lack of competition and transparency in the stock lending market,” a spokesperson wrote via e-mail. “IPERS has a fiduciary duty to advocate for IPERS’ participants and beneficiaries and protecting them from investment banks’ collusion and anti-competitive behavior is in accordance with that duty.”

Spokespeople from the Orange County Employees’ Retirement System and the Sonoma County Employees’ Retirement System directed requests for comment to the legal team.