Discussion in 'Wall St. News' started by ratboy88, Apr 13, 2006.
Here's the piece covering a similar action by Milberg Weiss representing some hedge funds:
Hedge Funds: Got Kleenex?
Liz Moyer, 04.12.06, 6:00 AM ET
New York -
Get your hankies ready: Hedge funds feel they're the newest victims.
A long-simmering issue may soon come to a boil, potentially putting Wall Street's largest firms on the hook for billions more in liabilities years after the research scandal that extracted $1.4 billion in legal fines from ten of the most influential investment banks.
This time, prime brokers face scrutiny for the fees they charge hedge fund clients, with securities lending being a particular focus.
Attorneys at plaintiffs' firm Milberg, Weiss, Bershad & Schulmanare investigating securities lending fees and other practices by the biggest prime brokers and are considering bringing a class-action lawsuit on behalf of hedge funds.
Steven Schulman, a partner at the firm, said Tuesday that it's still investigating the issues and declined to discuss details of any lawsuit. But he did say, "We're thinking about what we need to do."
Prime brokerage is the business of catering to hedge funds, everything from loaning securities so funds can sell them short to providing office space for startup funds. The business has consolidated among the biggest three: Goldman Sachs Group, Morgan Stanley and Bear Stearns Cos. in recent years, though several other banks have tried to get bigger in it, including Bank of America, Credit Suisse and Merrill Lynch.
Securities lending is among the most lucrative of prime brokerage services to the banks, reaping some $10 billion in annual fees, and the business just keeps growing as more hedge funds pop up. But it is also among the most opaque of businesses, with plenty of opportunity for abuse, lawyers unconnected with the Milberg firm say.
Hedge funds have alleged privately for years that they are being overcharged for prime brokerage services or charged wrongly for services that haven't been performed. Most of the griping has to do with securities loaned but never delivered, the allegation being that the prime brokers are lending securities at high fees without actually having possession of the securities to lend in the first place.
Playing by the rules, a trader can't sell short a security without having possession of it by the settlement date, or the trade would be what's called a naked short. A trade is often made while the settlement process continues, and most trades wind up with the security being delivered in ten days. Prime brokers lending securities to clients presumably assure their client that the borrowed securities will be delivered.
The hedge fund pays a fee to borrow the shares, presumably with the knowledge that the delivery will occur. The allegation of fraud comes in when the prime broker takes the fee and never delivers the shares and doesn't intend to.
The New York Stock Exchange and the Nasdaq keep lists of stocks that routinely fail to deliver, and some of the companies that have been on those lists since a new rule was enacted in January 2005 say they are the victims of naked short-selling. The most famous of these is Overstock.com, whose chairman, PatrickByrnePatrick Byrne, has been on a mission to bring the issue to the attention of regulators and lawmakers.
Bringing prime brokers into the loop would put the biggest firms at the center of yet another potentially explosive scandal. Lawyers not connected with the Milberg firm say a lawsuit could attract the attention of state attorneys general, who were instrumental in assessing the fines in the conflicts-of-interest scandal and in the mutual fund trading-abuse cases of recent years. Why? Hedge funds increasingly manage investments from pensions and endowments, meaning regular investors could be bearing the brunt of abusive fee schemes in the form of lower returns on their investments.
A spokesman for New York State Attorney General Eliot Spitzer, who led the conflicts and mutual fund trading-abuse cases, had no immediate comment.
"Some hedge funds feel they have been taken advantage of by their prime broker," says Josh Galper, principal at Vodia Group, a New York consulting firm. "Naked short-selling is an example of how pricing abuses can enter the market."
I read about this on Yahoo. The first thing come into my mind is, do they know how the system work? The lawyers are getting creative by day. Both the legal and patents system of the USA need to reform.
I wear what ever I want even when i short- sometimes only a hat and socks and its perfectly legal where I am from
It is clear from the suit that this is not understood by the lawyers or the plaintiff. Just another over zealous lawsuit that will likely result in greenmail being paid just to get the nuisance off the back.
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