On Wednesday, according to this Reuters article, Electronic Trading Group LLC filed an antitrust lawsuit against “11 major U.S. broker-dealers” (the broker-dealer units of Bank of America Corp., Bank of New York Co., Bear Stearns Cos., Citigroup Inc., Credit Suisse Group Inc., Deutsche Bank AG, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Merrill Lynch & Co., Morgan Stanley and UBS AG) “accusing them of colluding over six years to collect unearned fees as a result of a ‘naked short selling’ practice.”  The Defendants that responded to Reuters declined comment or stated that the complaint is without merit.

According to the article, the lawsuit was filed as a class action and accuses:

the defendants of improperly charging fees by failing to borrow or deliver stock needed to back short sales, essentially resulting in ‘phantom’ transactions. Short-selling involves a bet that a company’s stock will fall. Typically, an investor sells borrowed stock, and hopes to buy it back at a lower price to replenish the lender. In a naked short sale, the investor sells stock that has not yet been borrowed. Naked short selling is usually illegal, in part because the stock supposedly underlying the transaction may never be borrowed or may not exist. It can be permitted to promote market stability. The 32-page complaint claims the broker-dealers charged the plaintiff and others for the cost of securities lending, when in fact the broker-dealers did not ‘cover’ short sales, failed to disclose this, and nevertheless charged inflated fees.

I would be interesting in seeing the complaint, if only to see what evidence, if any, the plaintiff has alleged to support its claim that the 11 defendants colluded with each other.

Technorati Tags: antitrust, Bank of America, Electronic Trading Group,  Bank of New York, Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS

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