Six Wall Street investment banks are conspiring to control the little-known — but lucrative — market for lending stocks, according to a federal lawsuit being led by Iowa’s largest public employees’ pension fund.
The complaint by the Iowa Public Employees’ Retirement System and two other government pension plans asserts the giant banks are blocking a shift to an all-electronic system for matching lenders and borrowers of shares so they can instead continue to profit from each transaction.
“Major investment banks are conspiring to preserve their profits at the expense of everyday investors,” plaintiffs’ attorney Michael Eisencraft of Washington-based Cohen Milstein Sellers & Toll said in a statement Thursday.
The investors are seeking unspecified damages in the class-action antitrust case, which could be tripled under federal law.
The IPERS fund members include city, county, state and public school employees, as well as Iowa’s former and retired public employees. The fund says 1 of every 10 Iowans is a member.
The lawsuit names JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Credit Suisse AG, and UBS AG. Each declined to comment Thursday to Boomberg.
IPERS issued a statement, reported the Des Moines Register.
“IPERS 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,” spokeswoman Judy Akre said in a statement to the Register. “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.”
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The banks are accused of stifling a shift to an electronic market that would enhance price transparency and competition, while eliminating them as the transactional middle men.
The pension funds said collusion by the banks harms investors and retirees by forcing them to pay high fees to engage in stock lending.
Stock lending is related to short selling and involves lending a stock to an investor or firm through a broker or dealer. Pension funds and other institutional investors frequently lend stock to hedge funds.
In short selling, a security that is not owned or has been borrowed is sold with the idea that it can be bought at a future date at a lower price.
While firms don’t disclose the fees they earned from stock lending, the prime services units at 12 of the largest global investment banks generated $17.4 billion in revenue last year, according to industry analytics firm Coalition Development Ltd.
JPMorgan loaned or swapped $21.9 billion of equity securities as of June 30, according to a regulatory filing. Goldman Sachs loaned $13.2 billion as of the same date, a filing shows.
The lawsuit seeks to represent everyone who entered into a securities lending transaction with those firms since 2009.
“To paraphrase Tolstoy, all efficient markets resemble one another, but each inefficient market is inefficient in its own way,” according to the suit.
Reuters contributed to this report.