Down the rabbit hole

Yesterday I got into a little ‘zombie’ talk action.?Something that would explain the zombie theory is it has something to do with hiding profits and reducing tax liabilities through a reverse “shorting against the box”.?RenTech settled their tax liability with the IRS and the below may shed some light on why they settled it (Jim Simons, RenTech Insiders to Pay IRS Billions in Back Taxes ).?Ever hear about “Equilend”??Well, it’s the reason why we still have the OCT market which are worth $2T USD.?

All Darkpool transactions, stock lending/borrowing, total return swaps and forwards take place here and with NO REGULATION from the SEC.?It could be said that the SEC is giving us a head fake with the “pay-for-orderflow” narrative, which is what we’ve all been against from the beginning.?This hole keeps getting deeper and deeper.?To be blunt: they’re screwed. The following case came to light which may explain a little with where the rabbit hole really goes…and I started diving into the 141 pages: Case 1:17-cv-06221-KPF Document 73 Filed 11/17/17.?All of the below is a “Coles Notes” of the 141 page document (https://www.mintz.com/sites/default/files/viewpoints/orig/19/2018/02/Stock-Lending-Antitrust-Amended-Complaint.pdf) which provides a lot of insights and opinions from a case.?What was taken out from this document and shared here is what one may feel is relative to the above.?It pastes a vivid picture of what we may be dealing with.?My last article was my last one with GameStop specifically, but this one is moreso of diving into the whole 'zombie' stock aspect. At the very end, you will also have the Consolidated Reports of Condition and Income for A Bank With Domestic and Foreign Offices - FFIEC 031?- Schedule RC-L for additional information.

To read the full document, go here?Stock-Lending-Antitrust-Amended-Complaint.pdf?

This case concerns the “stock loan” or “stock lending” market, which is an inefficient, antiquated, and opaque over-the-counter (“OTC”) trading market artificially dominated by a handful of large prime broker banks. Short selling is a trading strategy that involves the sale of a stock that the seller does not own. For most short sales, the seller must “borrow” the stock from an entity that owns the stock (the “beneficial owner”) in order to cover the short sale. Selling short without borrowing stock is like kiting checks—it trades on assets that the trader does not possess at the time of the trade. Stock lending goes hand in hand with most short selling that occurs in the United States equities markets today.

Despite the size and importance of the stock loan market, however, relatively little is known about this market because transactions are usually only visible to the two parties directly involved.”1 The stock loan market remains one of the most closed, inefficient, and opaque major financial markets in the world. Market observers describe stock lending as a trillion-dollar “mother of all dark pools.” (Despite the size and importance of the stock loan market, however, relatively little is known about this market because transactions are usually only visible to the two parties directly involved.”1 The stock loan market remains one of the most closed, inefficient, and opaque major financial markets in the world. Market observers describe stock lending as a trillion-dollar “mother of all dark pools.”).

Essentially, the Prime Broker Defendants act as “exclusive matchmakers” for stock lenders and stock borrowers on every trade. If an investor, for example, wants to borrow a stock to facilitate a short sale, it must contact its broker-dealer. The broker will locate or acquire the stock from an entity that owns the stock, and the broker will then quote the investor a price for the trade. For their matchmaking services, which involve very little risk, the Prime Broker Defendants take approximately 65% of the gross revenues generated each year in the stock loan market, amounting to more than $9 billion annually—far more than the returns paid to any other market participant, including the beneficial owners of the stock being lent.?Through their coordinated actions, the Prime Broker Defendants decimated the platforms, leaving them struggling to stay afloat. At that point, the Prime Broker Defendants swooped in, using their ownership and influence over Defendant EquiLend, a vehicle for their conspiracy, to acquire the crippled platforms. Having bought the platforms, the Prime Broker Defendants then shut them down and shelved their innovative technology so no one would ever be able to use it to threaten their stranglehold on the market

The Prime Broker Defendants’ conduct was primarily driven by Defendants Goldman Sachs and Morgan Stanley. These are the two largest prime brokers in the market, with the most to lose if the market becomes more open and transparent. As detailed below, from time to time, senior personnel from these two banks met in person, one-on-one, to reach agreement on how to protect their dominant market position as the “gatekeepers” of all stock loan trading.?The complaint details the dates and attendees of some of these meetings, along with the subject matter of the agreements reached at these meetings. To be clear, the fact of these illicit meetings is not a matter of inference. They are known to have actually occurred.?The masterminds and chief coordinators of the Defendants’ conspiracy were high[1]ranking principals at the Prime Broker Defendants. These individuals used a variety of known forums and channels to communicate with one another to plot and carry out the conspiracy, including EquiLend, private dinners, and phone conversations. Remarkably, in numerous private conversations, multiple personnel from the Prime Broker Defendants used the same phrasing to describe the stock loan operations of the Prime Broker Defendants collectively. Specifically, these personnel characterized the Prime Broker Defendants as “the five families” of the stock loan market—a reference to the five major New York City organized crimes families of the Italian American Mafia (See Five Families, WIKIPEDIA, https://en.wikipedia.org/wiki/Five_Families ).?

Emails, records of Bloomberg chats, and other electronic messages exchanged among EquiLend members reflecting the collusive agreement among the Prime Broker Defendants exist today on the servers of EquiLend and the Prime Broker Defendants who were its owners. These communications indicate that EquiLend representatives, including CEO Brian Lamb, had been instructed not to “break rank” and not to take independent actions in the marketplace until the “EquiLend banks” determined as a group whether they would support any of the new platforms.?In one instance, BNY Mellon (then Bank of New York) agreed to extend a $50 million line of credit and to participate actively on AQS, but abruptly withdrew its support after it was threatened by Goldman Sachs with a complete loss of further stock loan business from Goldman Sachs.?Hedge funds including Renaissance Technologies, D.E. Shaw, Millennium Management, and SAC Capital were all threatened by Prime Broker Defendants with retaliation if they moved their stock lending business to AQS.

Thus, by late 2015, the Prime Broker Defendants had neutralized the threat from SL-x. But they began to fear that their collective boycott of Quadriserv/AQS had not been sufficient to eliminate the threat that platform posed to their control of the market. Goldman Sachs’ William Conley and Morgan Stanley’s Global Head of Bank Resource Management, Thomas Wipf, met in person to discuss options. Over a series of private meetings and dinners (paid for by Mr. Wipf) held in New York City, these two executives reached an explicit agreement (which, predictably, was later joined by the other Prime Broker Defendants) that the Prime Broker Defendants would use EquiLend to purchase AQS and bury it, just as they had done with SL-x. By killing AQS (and the ability of any other market participants to access the Case 1:17-cv-06221-KPF Document 73 Filed 11/17/17 Page 11 of 144 9 platform), the Prime Broker Defendants would remain the exclusive “gateway” through which all stock loan transactions must pass, subject as always to their extortionate fees. Mr. Conley and Mr. Wipf gave their plan the apt name of “Project Gateway.” 22. With the agreement reached by January 2016, Mr. Wipf reported the details of this agreement to his Morgan Stanley colleagues internally on a “pipeline call.” On this call, Mr. Wipf stated that he and Mr. Conley had met and agreed that it was time for both institutions to “get a hold of this thing”—referring specifically to AQS. Mr. Wipf informed the group that Goldman Sachs and Morgan Stanley had agreed to launch Project Gateway, whose main purpose was to use EquiLend to acquire the assets of AQS, to take control of its operations, and to shut it down. 23. The plan succeeded. On July 31, 2016, the Prime Broker Defendants, through EquiLend, acquired the assets of AQS. As the Prime Broker Defendants planned and intended, by their joint action, they control all “gateways” to central clearing for stock lending. The market remains frozen in time, and the Prime Broker Defendants continue to dominate an inefficient and opaque, OTC market. 24. The Prime Broker Defendants similarly used EquiLend to force Data Explorers out of the market. Data Explorers posed a competitive threat to the Prime Broker Defendants because it threatened to give borrowers and lenders the pricing transparency they lacked in the OTC market. Data Explorers had signed up borrowers, lenders, and brokers to its data products, and the Prime Broker Defendants were terrified that Data Explorers was on the verge of allowing borrowers to access “wholesale” stock lending data—that is, data showing what beneficial owners were paid by prime brokers for lending their stock—and vice versa. The Prime Broker Defendants feared that, if borrowers and lenders saw what their counterparties were paying, they would use competition to reduce the Prime Broker Defendants’ outsized intermediary profits. In the words of Goldman Sachs’ Conley, if wholesale data were revealed to retail customers, “it will kill our business.”.?Thus, by late 2015, the Prime Broker Defendants had neutralized the threat from SL-x. But they began to fear that their collective boycott of Quadriserv/AQS had not been sufficient to eliminate the threat that platform posed to their control of the market. Goldman Sachs’ William Conley and Morgan Stanley’s Global Head of Bank Resource Management, Thomas Wipf, met in person to discuss options. Over a series of private meetings and dinners (paid for by Mr. Wipf) held in New York City, these two executives reached an explicit agreement (which, predictably, was later joined by the other Prime Broker Defendants) that the Prime Broker Defendants would use EquiLend to purchase AQS and bury it, just as they had done with SL-x. By killing AQS (and the ability of any other market participants to access the Case 1:17-cv-06221-KPF Document 73 Filed 11/17/17 Page 11 of 144 9 platform), the Prime Broker Defendants would remain the exclusive “gateway” through which all stock loan transactions must pass, subject as always to their extortionate fees. Mr. Conley and Mr. Wipf gave their plan the apt name of “Project Gateway.” 22. With the agreement reached by January 2016, Mr. Wipf reported the details of this agreement to his Morgan Stanley colleagues internally on a “pipeline call.” On this call, Mr. Wipf stated that he and Mr. Conley had met and agreed that it was time for both institutions to “get a hold of this thing”—referring specifically to AQS. Mr. Wipf informed the group that Goldman Sachs and Morgan Stanley had agreed to launch Project Gateway, whose main purpose was to use EquiLend to acquire the assets of AQS, to take control of its operations, and to shut it down. 23. The plan succeeded. On July 31, 2016, the Prime Broker Defendants, through EquiLend, acquired the assets of AQS. As the Prime Broker Defendants planned and intended, by their joint action, they control all “gateways” to central clearing for stock lending. The market remains frozen in time, and the Prime Broker Defendants continue to dominate an inefficient and opaque, OTC market. 24. The Prime Broker Defendants similarly used EquiLend to force Data Explorers out of the market. Data Explorers posed a competitive threat to the Prime Broker Defendants because it threatened to give borrowers and lenders the pricing transparency they lacked in the OTC market. Data Explorers had signed up borrowers, lenders, and brokers to its data products, and the Prime Broker Defendants were terrified that Data Explorers was on the verge of allowing borrowers to access “wholesale” stock lending data—that is, data showing what beneficial owners were paid by prime brokers for lending their stock—and vice versa. The Prime Broker Defendants feared that, if borrowers and lenders saw what their counterparties were paying, they would use competition to reduce the Prime Broker Defendants’ outsized intermediary profits. In the words of Goldman Sachs’ Conley, if wholesale data were revealed to retail customers, “it will kill our business.”

DataLend offered the agent lenders essentially the same information they were getting from Data Explorers, but for low or no cost.5 DataLend offered to provide the information agent lenders had previously been paying Data Explorers upwards of a million dollars a year, for almost nothing. The only catch was that DataLend would never provide agent lenders—or anyone else—with the cross-market wholesale-to-retail transparency that would allow borrowers and lenders to negotiate dramatically lower spreads with the Prime Broker Defendants. DataLend quickly signed up all the major agent lenders, undermining Data Explorers’ agent lender revenues and thus sabotaging its ability to transform the stock loan market. 28. If EquiLend were an independent, profit-seeking firm rather than a screen for the Prime Broker Defendants’ conspiracy, it would not have offered its data to agent lenders for free or almost-free. Indeed, the agent lenders should have been some of DataLend’s best customers, as they were for Data Explorers. But EquiLend did not care about maximizing the value of its customers; it only cared about protecting the Prime Broker Defendants’ business. 29. As a result of their collusion to boycott and squash market entrants, the Prime Broker Defendants secured their role as permanent toll collectors on every stock loan transaction—to the detriment of all other market participants and the United States economy as a whole. The principal victims are the class members in this case, who receive less favorable financial terms on every transaction and whose trading volume and ability to negotiate prices is artificially restricted by the bottleneck and information opacity imposed by the Prime Broker Defendants. Put simply, the Prime Broker Defendants both raised prices on market participants and reduced output in the stock loan market—the hallmarks of anticompetitive activity.

Plaintiff Iowa Public Employees’ Retirement System (“IPERS”) was founded by the Iowa Legislature in 1953. Its primary purposes are “to provide a secure core retirement benefit to Iowa’s current and former public employees, as well as attracting and retaining quality public service employees.” (IPERS’ History, IPERS, https://www.ipers.org/about-us/ipers-history) IPERS has over $31 billion in assets, collects over $1 billion in contributions every year, and pays nearly $2 billion in retirement, death, and disability benefits every year. It has 350,000 members and beneficiaries. Between 2009 and the present, IPERS has lent significant volumes of stock to the Prime Broker Defendants and their stock borrower clients.?During the Class Period, Morgan Stanley, itself and through its affiliate agents, directly engaged in securities lending with class members. Morgan Stanley agreed with the other Defendants to boycott AQS and SL-x (and then acquire them) and to thwart Data Explorers. During the Class Period, Morgan Stanley was a co-owner of EquiLend and Morgan Stanley employees served on EquiLend’s Board of Directors in, at least, 2012, 2013, 2014, 2015, 2016, and 2017 (Information about EquiLend’s Board of Directors prior to 2012 is not currently publicly accessible).?Morgan Stanley employees served on the OCC’s Board of Directors in 2010, 2011, 2012, 2013, and 2014 and on DTCC’s Board of Directors in 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, and 2017.?Defendant UBS Securities LLC (“UBSS”) is a limited liability company organized and existing under the laws of Delaware, with its principal place of business in New York, New York. It is a subsidiary of UBSA, and thus ultimately of UBSG. UBSS is a registered broker-dealer with the SEC and a clearing Member of the OCC.?Defendant UBS Financial Services Inc. (“UBSFS”) is a corporation organized and existing under the laws of Delaware, with its principal place of business in Weehawken, New Jersey. UBSFS is a registered broker-dealer with the SEC and a clearing Member of the OCC.?UBS agreed with the other Defendants to boycott AQS and SL-x (and then acquire them) and thwart Data Explorers. During the Class Period, UBS was a co-owner of EquiLend and UBS employees served on EquiLend’s Board of Directors in, at least, 2012, 2013, 2014, 2015, 2016, and 2017 (Information about EquiLend’s Board of Directors prior to 2012 is not currently publicly accessible).?UBS employees served on DTCC’s Board of Directors in 2009.

Stock lending plays a vital role in capital markets and has been called the “oil in the efficient market machine.” (Quadriserv Comment Letter on SEC Extension of Temporary Interim Final Rule 204T, File No. S7-30-08, (June 19, 2009), https://www.sec.gov/comments/s7-30-08/s73008- 126.pdf).?By July 2015, the market value of securities on loan globally was approximately $1.75 trillion. A primary use of stock lending is to facilitate short selling. Short selling is used for many purposes, including to profit from an expected downward price movement, to provide liquidity in response to unanticipated buyer demand, or to hedge the risk of a long position in the same security or a related security. For example, a seller may short sell a stock at a price certain with the belief that the stock price will decrease, at which point the seller can then buy the stock at the lower price and makes a profit on the difference. Or a seller may short sell a stock to hedge against potential price volatility in related securities that it already owns.?In most instances, short sellers do not own the stock being sold. In these cases, to ensure that it can deliver the stock on the settlement date, the seller must confirm it will be able to arrange to “borrow” the stock from an existing “beneficial owner” via a process known as a “locate.”?Stock lending is also commonly used to finance transactions, through the lending of stock against cash. Recent data indicates that U.S. equities comprise nearly half of all securities available for lending (the pie chart on the left), and account for over 30% of the securities on loan (the pie chart on the right). The below graphics are drawn from the first quarter of 2015.

The stock loan market is an “over-the-counter” (“OTC”) market, meaning that there is no central marketplace or exchange through which market participants can send their bids and offers to the entire market or obtain real-time trading data such as price and volume information. Instead, stock loan transactions go through a broker-dealer intermediary that provides the prospective borrower with a single price for the transaction in an opaque market with very limited information. For example, when a fund wants to borrow stock, it must contact its prime broker directly, via the telephone or an electronic message. The prime broker will give the borrower a yes or no to the trade and, if yes, a price. The borrower must either agree or decline to trade, with very limited opportunities to “price shop” by calling competing broker-dealers and comparing their offers (as that is costly and causes delay). Trades are executed without other market participants being aware of the pricing terms on which the transaction was effected.?As a result, there is little to no price transparency for end users. The stock borrower thus has very little visibility into the price at which other parties might be willing to transact. This process is inefficient and opaque and severely limits price competition, which helps keep the fees collected by prime brokers very high.

The stock loan market can be visualized, in simplified form, as follows:

As?the figure illustrates, under the current market structure, the ultimate borrowers of securities have no viable way to transact directly with lenders. Instead, they must negotiate with and borrow securities from the Prime Broker Defendants, who in turn source the requested securities from the lenders (through their agents). Indeed, stock lending transactions are conducted almost exclusively by both lenders and borrowers through intermediary agents—the agent lenders on the lender side and the broker-dealers on the borrower side (Viktoria Baklanova, et al., Reference Guide to U.S. Repo and Securities Lending Markets, Federal Reserve Bank of New York Staff Reports, No. 740, 27 (Sept. 2015, rev. Dec. 2015), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/ sr740.pdf.).?The Prime Broker Defendants dominate the market for stock lending. The market for prime brokerage services—which encompasses stock lending—is highly concentrated. Between 2014 and 2017, the top 10 prime brokers accounted for between 89% and 95% of the market, with the Prime Broker Defendants alone holding between 76% and 80% market share. One analyst estimated in 2013 that the Prime Broker Defendants realized approximately 80% of the total securities lending-related revenue generated by the top 10 prime brokers.?In the OTC stock loan market, the Prime Broker Defendants’ advantage is enhanced by their complete control over real-time price data, which is unavailable to both borrowers and lenders. (As in many OTC markets, real-time trading volumes and prices can only be guessed at through discretionary self-reports and incomplete or delayed data from service providers.) Because customers have little visibility into this market, they have little practical ability to compare or negotiate with the Prime Broker Defendants. Consequently, there is no market mechanism that imposes consistency in pricing or any restraint on the Prime Broker Defendants from charging different customers whatever they like. In a typical stock loan transaction, a lender that is sitting on a portfolio of securities acts through its custodial bank or other third-party lending agent. The custodial bank often has access to the stock portfolios of any number of institutional clients and can draw from the aggregate basket of securities in its custodial accounts to lend out (While most agent lenders tend to be the custodial banks (such as BNY Mellon) who generally administer and maintain a pension fund or endowment’s securities portfolio in their custodial accounts, there are also a select few institutions that have established a specialist practice as agent lenders as an alternative to custodial banks. These specialist agent lenders are often large asset management or investment management firms who will also act as securities lending agents on behalf of their clients).?

The following figure illustrates the make-up of stock lenders in the market over the Class Period (Viktoria Baklanova, et al., Reference Guide to U.S. Repo and Securities Lending Markets, Federal Reserve Bank of New York Staff Reports, No. 740, 55 (Sept. 2015, rev. Dec. 2015), https://www.newyorkfed.org/medialibrary/media/research/staff_reports/ sr740.pdf.)

While stock lending was historically an ancillary business for large lenders, they increasingly use stock lending as an important income-enhancing strategy. Essentially, through stock lending, lenders can collect “rental” fees on otherwise idle assets. In return for lending the stock, the lender receives collateral from the borrower (consisting of cash or “safe” securities) that the lender holds (and can invest) for the duration of the loan. Upon the termination of the loan, the stock-for-collateral transaction is unwound, and the lender receives any outstanding fees from the borrower in compensation for the loan.?While stock lending was historically an ancillary business for large lenders, they increasingly use stock lending as an important income-enhancing strategy. Essentially, through stock lending, lenders can collect “rental” fees on otherwise idle assets. In return for lending the stock, the lender receives collateral from the borrower (consisting of cash or “safe” securities) that the lender holds (and can invest) for the duration of the loan. Upon the termination of the loan, the stock-for-collateral transaction is unwound, and the lender receives any outstanding fees from the borrower in compensation for the loan collateral” stocks are highly liquid securities that a broker-dealer has “reasonable assurance” to believe will be readily available in the market upon a borrower’s request. These designations change frequently, and are often updated every 24 hours. In the current OTC market structure, borrowers and lenders are required to use the services of and transact through the Prime Broker Defendants. The Prime Broker Defendants set the price and terms of the trade, and in return take a hefty fee. Indeed, their complete domination and intermediation of this market means that they take a large share of the economics of nearly every stock loan trade. In 2016, for example, the Prime Broker Defendants skimmed more than 65% off a pot of some $9.15 billion in total industry revenue (See Sec Lending Experts Discuss Last Year’s Top Trades, Global Investor/ISF (Jan. 31, 2017), https://www.globalinvestormagazine.com/Article/3657556/Sec-lending-experts[1]discuss-last-years-top-trades.html > Sec lending experts discuss last year's top trades | News | Global Investor Group ).?These profits far exceed the benefit of the service provided by the Prime Broker Defendants, who take virtually no risk in brokering these transactions and whose “matching” function could be done far more efficiently.?

Beyond serving as a vehicle for the Prime Broker Defendants to meet and coordinate their conduct, EquiLend does little if anything of real value in the stock loan market. EquiLend ostensibly offers a bilateral (i.e., one-to-one) trading platform for stock loan transactions along with post-trading, administrative, and other services. But its trading platform is widely considered to be “archaic” and “entrenched” with very poor functionality, and EquiLend has done very little to develop it in a meaningful way. Rather than pursue EquiLend’s business interests, the Prime Broker Defendants systematically used EquiLend for illicit purposes: (i) as a forum to discuss and agree on their anticompetitive plans, (ii) to coordinate their boycott of AQS, SL-x, Data Explorers, and other market innovations, and (iii) to pressure other EquiLend member banks to make sure they “understood” what their direction was to be and not to “break ranks” with the Prime Broker Defendants.?They did this in connection with EquiLend meetings and while attending numerous dinners and industry conferences and events ostensibly on behalf of EquiLend.?The former Vice President of Morgan Stanley’s securities lending desk has previously testified that there was a high level of interaction and cooperation among supposedly horizontal competitors in the market: “The securities lending industry is very close-knit industry. . . . Persons employed in the securities lending industry frequently interact, both professionally and socially. For example, I would regularly have lunches, dinners and casual drinks with securities lending employees working at various prime brokers. . . . [including] the very firms with which [I was] competing fiercely for business.” Decl. of Michael A. Manzino in Supp. of Pls’ Opp. to Summ. J. dated Nov. 7, 2011 at ?4, Overstock .com Inc. v. Morgan Stanley & Co., CGC-07- 460147 (Cal. Super. Ct. San Francisco Cnty. Nov. 10, 2011).?One industry publication was prescient in this regard: Global Custodian once described EquiLend as a “cartel-cum-service provider” formed to protect the “economics” of an industry that “double[s] or triple[s] the price” of lent securities “before passing them on to hedge fund managers.” (Hybrid or horror: Can custody and prime brokerage be mixed?, GLOBAL CUSTODIAN (Dec. 1, 2009), https://www.globalcustodian.com/Magazine/2009/Winter-/Hybrid-or-horror-- Can-custody-and-prime-brokerage-be-mixed-/?p=3).?As noted, a Credit Suisse director characterized EquiLend as “the mafia run by five crime families.”

In or around 2005 and 2006, AQS began quietly negotiating with the Options Clearing Corporation, a U.S.-based central counterparty clearinghouse and the world’s largest derivatives clearing organization, to provide AQS with central clearinghouse services. The OCC Board of Directors is comprised of the five exchanges that own 100% of its equity,( These exchanges are the Chicago Board Options Exchange, Incorporated; International Securities Exchange, LLC; NASDAQ OMX PHLX, LLC; NYSE MKT LLC; and NYSE Arca, Inc. See 2016 Annual Report, OCC, https://www.theocc.com/components/docs/ about/annual-reports/occ-2016-annual-report. Each of these five board members has an absolute veto right concerning OCC decisions) along with eight broker-dealers and three “independents.”.?Further demonstrating its feasibility and value, AQS won the support of entities such as one of the largest lenders of stock (asset manager Barclays Global Investors), one of the largest borrowers of stock (the quantitative hedge fund Renaissance Technologies), the oldest venture capital fund in the country (Bessemer Ventures), and one of the largest exchanges in the world (Deutsche Bourse, through its Eurex AG and International Securities Exchange subsidiaries).?AQS also obtained both a financial investment and a commitment from SunGard to connect AQS to its industry-standard back-end system Loanet. SunGard’s Loanet is the universal accounting and settlement processing system for securities lending, which settles through the Depository Trust Company (“DTC,” a subsidiary of the DTCC).

As noted, Quadriserv was able to explain that AQS had the “ability to enhance the profitability and performance of lenders and borrowers alike by reducing spreads, and increasing the overall efficiency of the securities lending marketplace.” (Quadriserv, Inc. Highlights Securities Lending Innovations At TradeTech 2007, NASDAQ - GLOBENEWSWIRE (March 9, 2007), https://globenewswire.com/news[1]release/2007/03/09/356337/115225/en/Quadriserv-Inc-Highlights-Securities-Lending[1]Innovations-At-TradeTech-2007.htm). ?It did this by taking direct aim at the “existing inefficiencies and large spreads in the securities lending industry” by providing “confidential, un-conflicted daily price discovery and transparency by anonymously and directly connecting borrowers and lenders of securities.” “As a result, pension funds better realize the full intrinsic value of the securities they are lending, while hedge funds and other asset managers reduce short-selling costs by borrowing securities directly from beneficial owners of assets.” The Prime Broker Defendants’ fears were crystallized by Data Explorers’ building success among major hedge funds. Through 2009, Data Explorers had largely been focused on agent lenders, who were anxious to benchmark their stock loans. Though Data Explorers had hedge fund clients, the Prime Broker Defendants did not view these clients as posing a real threat of market-wide price transparency. In 2010, however, Data Explorers signed Och-Ziff, a major hedge fund whose Head of Portfolio Management, James O’Connor, was vocal about Data Explorers’ usefulness.

The Prime Broker Defendants gradually decided they could not entrust market data to a firm they did not control. They began to push back against the emerging threat they saw from Data Explorers, which was gaining momentum and attracting a larger and larger client base by allowing clients to begin to see through the stock loan market’s unnecessary fog of opacity. Eventually, this distrust would coalesce into a coordinated plan to destroy Data Explorers using EquiLend.?In one early example of this resistance, State Street faced powerful opposition when its support for Data Explorers became known to the Prime Broker Defendants. In approximately the second or third quarter of 2010, a representative from Goldman Sachs contacted Peter Economou at State Street (a large, influential agent lender) and demanded that State Street not report any of the trading data concerning State Street’s trades with Goldman Sachs to Data Explorers, threatening State Street’s business if it did not comply. State Street, regarding the data as their own, refused to comply, further heightening the Prime Broker-dealers’ anxiety about and desire to act against Data Explorers. Goldman Sachs also contacted numerous hedge funds, including SAC Capital Advisors, in a campaign to try to keep them from sharing any trading data with Data Explorers, with inconsistent success.?In September 2009, Quadriserv/AQS executives learned that, during a conversation with the Head of the Stock Loan Desk at Defendant Bank of America/Merrill Lynch) that took place weeks earlier, Goldman Sachs’ Conley “got so angry at the mention of [Quadriserv/AQS’s] name that spit was coming out of his mouth.” Conley told the Bank of America executive that he was “opposed to transparency in any form,” and that his opposition was driven by the above-market spread Goldman Sachs secretly made on stock loan transactions. Conley pressured Bank of America to reverse course and to join the opposition to Quadriserv/AQS or risk being ostracized by the other Prime Broker Defendants. On September 29 and 30, 2009, the SEC held a roundtable discussion on securities lending that included panels on “Improving Securities Lending for the Benefit of Investors: Transparency; Electronic Platforms; Central Counterparties; Accountability” and “Controls on ‘Naked’ Short Selling: Examination of Pre-Borrow and Hard Locate Requirements.”

As a result of the pressure from Goldman Sachs, Morgan Stanley, and others, however, this support began to wane. By late 2011, Bank of America’s attitude had markedly changed. Bank of America/Merrill Lynch personnel who had formerly supported AQS were purged. For example, Mike Stewart, Global Co-Head of Equities, had supported and actively promoted the AQS investment, and encouraged sales and operations personnel to try to help AQS succeed. Stewart was abruptly replaced with someone who would bring Bank of America into line with Goldman Sachs, Morgan Stanley, and the other Prime Broker Defendants: Stuart Hendel, the former head of prime brokerage at Morgan Stanley and UBS, was named the new head of Global Prime Brokerage at Bank of America. The Prime Broker Defendants decided that AQS was a “gateway drug” that could lead to a marginalization of the Prime Broker Defendants’ dominant market position, and that the only effective response was to starve AQS of its necessary lifeblood: liquidity. They agreed to do this by collectively refusing to participate on the platform, and thereby to keep their trade flow and trade data outside of the platform’s electronic market. The collective decision by the Prime Broker Defendants not to use AQS meant that the efforts of other market participants—for example, hedge funds and other broker-dealers (e.g., Charles Schwab)—to use the AQS platform, which they liked and wanted to succeed, was seriously compromised. Not only did the Prime Broker Defendants themselves boycott the AQS trading platform, they also took concerted steps to prevent other market participants from transacting on AQS. The prime brokers knew that for AQS to survive it needed hedge fund borrowers at a minimum to participate on its platform. So the Prime Broker Defendants began to exercise leverage over their hedge funds clients.

The Prime Broker Defendants also refused to give their hedge fund customers access to AQS. Stock loan market standards require that a broker-dealer (acting as a “qualified borrower”) be the legal borrowing entity in every stock loan transaction, and the OCC’s amended by-laws (which set forth the standards and rules applicable to clearing transactions on the AQS platform) explicitly provided that only broker-dealer members of OCC, such as the Prime Broker Defendants, could transact on AQS, either as the lender or borrower. Accordingly, for borrowers and agent lenders to have access to trade on the AQS platform, they needed to be “sponsored” by, and granted access through, a broker-dealer, who would stand in to facilitate and clear their trades. The Prime Broker Defendants’ point blank denial of access for their clients to AQS meant that those clients simply could not trade on the platform.?The Prime Broker Defendants also refused to give their hedge fund customers access to AQS. Stock loan market standards require that a broker-dealer (acting as a “qualified borrower”) be the legal borrowing entity in every stock loan transaction, and the OCC’s amended by-laws (which set forth the standards and rules applicable to clearing transactions on the AQS platform) explicitly provided that only broker-dealer members of OCC, such as the Prime Broker Defendants, could transact on AQS, either as the lender or borrower. Accordingly, for borrowers and agent lenders to have access to trade on the AQS platform, they needed to be “sponsored” by, and granted access through, a broker-dealer, who would stand in to facilitate and clear their trades. The Prime Broker Defendants’ point blank denial of access for their clients to AQS meant that those clients simply could not trade on the platform.??The same thing happened to dozens of large hedge funds, including flagship funds like D.E. Shaw, Millennium Management, and SAC Capital. After inquiring about AQS, each was stonewalled by the Prime Broker Defendants. Each was told that, if it was not happy with the Primer Broker Defendants’ decision, it could take its business elsewhere.?This strategy to deny clients access to AQS would not have worked if each Prime Broker Defendant had acted unilaterally. Without assurances that other Prime Broker Defendants would also refuse, no Prime Broker Defendant would risk losing its best customers by inviting them to take their business to another Prime Broker Defendant. This only made sense because there was no viable “elsewhere” for the hedge funds to go.?In an December 4, 2012 meeting, executives in Prime Broker Defendant UBS’s Zurich office (Casey Whymark, Managing Director and Co-Head of Securities Lending and Financing, and Philipp Haller, Executive Director, Trading Strategy and Development) acknowledged to SL-x executives that transitioning the OTC stock lending business to a centrally cleared market would in principle be a good development for market participants, and noted the “unmistakable momentum arising from regulatory considerations and other pressures” toward this transition.?Although the SL-x trading data to be made available through Markit was limited at that point to European cleared trades (through SL-x’s then-existing partnership with Eurex), the existence of a SL-x/Markit partnership, together with what appeared to be an imminent deal to clear U.S. stock loan trades through OCC, seemed primed to open the floodgates on transparent access to real-time trading data from SL-x trades to the market at large.?Deutsche Bank executives in particular noted that the “fill-rate” of prospective trades on EquiLend—i.e., the ability of brokers to locate and fill stock borrowing orders from their clients—was below 8%. Or, in other words, that Deutsche Bank was “lucky if 4 out of 50 stocks are located on EquiLend.” The partnership between SL-x and OCC that appeared to be imminent in 2013 subsequently, and without explanation, never materialized. Similarly, Murray Pozmanter—the DTCC Managing Director who served as the gatekeeper for DTCC’s clearing business—admitted to SL-x that the DTCC could not offer SL-x central stock loan clearing without the approval of Goldman Sachs and other Prime Broker Defendants.

The Prime Broker Defendants formed DataLend as a data division within EquiLend in 2011. They then agreed, in lockstep, to distribution agreements with DataLend that placed substantially identical restrictions on how each Prime Broker Defendant’s trading data could be used. These agreements included a prohibition on disclosing any prime broker data to lender or borrower customers.?, Data Explorers was acquired by Markit, a large market data and post-trade processing firm. Although Markit is an independent company, the Prime Broker Defendants have considerable influence over it. Markit operates in a number of different financial markets and is closely interconnected with the major banks, including all of the Prime Broker Defendants. As such, Markit has shown no interest in carrying out Data Explorers’ original vision of bridging the data divide between wholesale and retail customers.

On January 1, 2014, the Basel Committee on Banking Supervision issued a set of measures called “Basel III.” Basel III, which was adopted in large part by the United States Federal Reserve, imposed new capital requirements on the Prime Broker Defendants for bilateral stock loan transactions. Basel III revised the “risk weighting” applicable to stock loan transactions in which the Prime Broker Defendants acted as a direct counterparty. The revised risk weighting required the Prime Broker Defendants to carry more capital on their balance sheet to cover the same risk, which in turn reduced the bank’s reported rate of return on capital.?The rate of return on capital is a critical financial metric to determine the profitability of a bank, or a particular business line within a bank, and bankers are compensated (or de-compensated) accordingly as this metric increases or decreases. For investment banks, return on capital is a critical metric of success, and the cost of capital is at least 10% (Laura Noonan, Investment Banks’ Return on Equity Declines, FINANCIAL TIMES (Feb. 21, 2016), https://www.ft.com/content/0c65e85a-d719-11e5-8887-98e7feb46f27?mhq5j=e3 ) Therefore, for a business within an investment bank to be considered profitable, its return on capital must exceed 10%. A business unit within a bank with a high rate of return on capital is considered profitable and worth a great deal—and the employees who run and work in that business are compensated accordingly. A business within a bank with a low rate of return on capital is considered unprofitable and subject to shrinkage or potential closure. Basel III essentially reduced the bank’s reported rate of return on capital for stock loan transactions, unless the bank began centrally clearing its stock loan transactions (and thereby offloading the risk to a central clearing counterparty). For one Prime Broker Defendant, it was estimated that Basel III’s capital requirements could potentially reduce its return on capital for stock loans to an “unprofitable” rate of less than 10% if it did not centrally clear its stock loans.?Faced with Basel III, individual business units within certain banks began taking steps toward central clearing of stock loan transactions. Under Basel III, banks could dramatically reduce the “risk weight,” and hence balance sheet costs, of stock loans by sending them to central clearing. Centrally clearing their stock loans would therefore dramatically improve the reported return on capital for their stock loan businesses.?Within these large prime broker banks, business units and reporting lines are often siloed and lack effective coordination and communication. As a result, staff responsible for balance sheet management within the banks tasked with improving the bank’s balance sheet position were often kept separate from staff responsible for trading stock loan. The loan trading staff did not know, and were not told by senior management until later, that a move toward central clearing of stock loan transactions—while superficially beneficial under Basel III— would be disastrous to the bank’s profitability on a much larger scale. Upon discovering the steps being taken by their various middle management in these working groups towards central clearing, senior management and stock loan executives at many of the Prime Broker Defendants became alarmed. They recognized that central clearing could significantly impair the outsized profits that they still managed to squeeze from every stock loan trade. In their view, the loss of profits from potential market disruption would far outweigh any potential balance sheet cost savings resulting from central clearing. The tension between senior management and stock loan executives at the Prime Broker Defendants and their midlevel business heads in charge of the bank’s balance sheet optimization in the wake of Basel III is illustrated by events that took place at Defendant Morgan Stanley in 2014.

Internally, the projected savings had been widely socialized as a justification for the new Bank Resource Management Division, as well as Ms. O’Flynn’s role. Externally, Ms. O’Flynn had publicly advocated central clearing to Morgan Stanley’s customers, had encouraged the OCC to modify its central clearing rules to permit this evolution, and had started working groups with other major industry participants to move towards central clearing. It would have been impossible, not to mention highly suspicious, for Morgan Stanley to explain to customers a valid basis for suddenly reversing course on a cost-savings strategy it had publicly and widely espoused, particularly since it could never reveal its true reasons: that its internal cost-benefit analysis had revealed any cost savings resulting from central clearing paled in comparison to the extortionate profits the bank was able to wrest from those very customers in the current market structure. , Mr. Wipf devised a strategy that had two main components. The first required Morgan Stanley and the other Prime Broker Defendants to structure their own clearing mechanisms or “pipelines” to OCC in such a way as to ensure their position as an intermediary. Specifically, when the Prime Broker Defendants cleared their trades, they needed to make sure that: (1) the clearing would maintain the opacity of the traditional stock loan market—with neither the lender nor the borrower knowing the price the counterparty paid or received, (2) there would be no independent trading platform linked to the clearing house (like an exchange or central order book), and (3) the clearinghouse would not publish market data.?The second part of the plan was to ensure that the only way for market participants to clear trades was to use pipelines controlled by the Prime Broker Defendants. To do that, the Prime Broker Defendants needed to completely control access to the clearinghouses.?There were only two major clearinghouses with an SEC license to clear securities lending transactions in the U.S. in 2016: DTCC and OCC. DTCC did not offer clearing for stock lending. OCC, on the other hand, did offer clearing of stock loan trades.?

Concurrent with the emergence of the deal between OCC and AQS was AQS’s development of a new service relating to electronic trading and clearing of equity repurchase agreements, which represents one financial reinvestment strategy employed by lenders of securities who receive cash collateral from the borrower. So-called “equity repo” activity accounts for between $400 billion and $700 billion in investment activity in the U.S. alone, and is critical to successful and liquid US financial markets. The prospective acquisition of AQS by OCC—an organization over which the Prime Broker Defendants exerted substantial influence but did not entirely control—presented a significant threat to the Prime Broker Defendants. It created the possibility of a pathway to central clearing for market participants that the Prime Broker Defendants could not control. To keep this from happening, Mr. Wipf and his colleagues at Morgan Stanley developed a plan that they code-named “Project Gateway.” The goal of Project Gateway was to erect an iron-clad “gate” through which all stock loan transactions must pass on their way to central clearing, which was now recognized as the inevitable result of Basel III.?

On August 1, 2016, EquiLend purchased AQS. In the accompanying press release, Brian Lamb, CEO of EquiLend, said: “Momentum has been building in the past two years in support of CCPs [central clearing] in the securities finance marketplace. Balance sheet costs, risk weighting and tougher capital-adequacy requirements have highlighted to the industry the potential benefits of using central clearing services.” (EquiLend Acquires AQS to Facilitate OCC CCP Connectivity for Securities Finance Market, EQUILEND, https://www.EquiLend.com/news/articles/2016/EquiLend_acquires_aqs.php ).?He claimed that by “providing seamless access to OCC’s Market Loan Program, the securities finance market now will have unprecedented access to central clearing services.”. If the Prime Broker Defendants had acted unilaterally, each would have been driven by the pressures of Basel III to pursue the procompetitive path to central clearing that Ms. O’Flynn of Morgan Stanley had first pursued. In that event, the stock loan market, instead of being the largest “dark pool” the world has ever known, would look more like the modern, electronic, U.S. stock market itself. Borrowers would be able to choose any broker they wished to price, trade, clear, and settle stock loans. And they could do so without facing pressure to steer all their stock loan trading through the same broker at inflated rates.

EquiLend Holdings LLC was formed in 2001, for the ostensible purpose of “optimiz[ing] efficiency in the securities finance industry by developing a standardized and centralized global platform for trading and post-trade services.” (See About Us, EQUILEND, at https://www.EquiLend.com/about/ (last visited Nov. 16, 2017)).?EquiLend mainly provides reconciliation of stock loan transactions. Reconciliation is a process that, post-trade, determines whether the shares from each counterparty were actually matched, whether margin due matched margin received, whether collateral given matched collateral received, and so on. Though EquiLend is nominally organized as a joint venture, this fact does not shield it—or the Prime Broker Defendants—from the antitrust laws. This is because EquiLend does not act in its own economic interests as an independent, rational market participant by improving its products and services so as to meet customer demand and generate increased revenue for the company.?EquiLend has been used by the Prime Broker Defendants as a centralized forum for collusion and the advancement of their particular anticompetitive interests in the stock loan market. The cover story that EquiLend is a legitimate, for-profit business enterprise is belied by the actions taken, and not taken, by EquiLend and its member banks during the Class Period. The Prime Broker Defendants used EquiLend to: (i) suppress price transparency by refusing to release pricing data to its customers, despite having access to this data and despite a clear market demand for such data; (ii) force competitors out of the market by coercing their customers to use EquiLend and/or DataLend, even though EquiLend and DataLend offered lower quality or entirely different services than what their customers desired and what prospective competitors offered; and (iii) stymie procompetitive market developments by purchasing valuable patents and trading platform technology from SL-x and AQS for valuable consideration, and then refusing to use or capitalize on those assets in any way, despite the fact that such patents and platform technology were essential for market developments that were in high demand and could have been used to bring extra revenue into the company.

Because the Prime Broker Defendants already control much of the stock lending market and profit greatly from its opaque, OTC structure, they have no incentive to foster innovation in that market, launch new products or services, or improve the quality of existing products or services. Instead, the Prime Broker Defendants have the exact opposite incentive—to preserve the antiquated OTC market at all costs, including by working together to stifle procompetitive developments that risk their disintermediation. When facing a lender or borrower, each dealer holds a degree of monopoly power because the counterparty has no ability to pick the best of many simultaneously executable terms. The Prime Broker Defendants’ exploitation of this monopolistic market power both (i) reduces the volume of trades that would otherwise occur in the stock lending market, and (ii) raises the costs associated with searching for desirable transaction terms (i.e., reduces what is known as “matching efficiency”).?The economic benefits may have been even greater for “hard to borrow” securities, for which additional (often opaque and exceedingly high) fees exist as a result of limited supply. The stock loan market, however, lacks a central marketplace where buyers and sellers can meet directly. Instead, when a hedge fund wants to borrow stock, its trader must call its broker-dealer on the telephone, over Bloomberg chat, or otherwise; the broker-dealer will give the hedge fund a price, and then it must go out and secure the stock. The hedge fund has little or no insight into the price at which other parties might be willing to transact.

Under Jury Demand,

SAFIRSTEIN METCALF LLP By: /s/ Peter Safirstein Peter Safirstein 1250 Broadway, 27th Floor New York, New York 10001 Telephone (only edit of mine is that the telephone and email removed as you can easily find it online). Counsel for Torus Capital, LLC

GOLDMAN

JP MORGAN

CITIBANK

BANK OF NY MELLON

BANK OF AMERICA

WELLS FARGO

STATE STREET