NYSE Regulation, Inc. announced today that it has censured and fined CIBC World Markets Corp. (“CIBC”) and Nandra Group, Inc. (“Nandra”), each a member firm, $200,000 and $75,000 respectively for supervisory deficiencies in connection with an improper stock loan transaction at below-market rates that deprived a bank and/or its customers of substantial fees and proceeds.
In addition, Jonathan F. Gutman (“Gutman”), the principal of Nandra, was censured, suspended, and (along with Nandra) barred from future securities lending. Also, a disciplinary action has been commenced against a former stock loan trader at CIBC for facilitating this deceit.
“In this case, a below-market transaction that included a sham finder’s fee went undetected because of inadequate supervision, including no review of revealing Bloomberg e-mails,” said Susan L. Merrill, chief of enforcement, NYSE Regulation, Inc. “Firms are again reminded to assess the adequacy of the supervision, control and surveillance of their stock loan departments and their personnel.”
In February 2003, an Italian company announced that it would pay a substantial combined dividend/tax credit to owners of record as of June 20, 2003. This created high demand for its shares and caused the net cost or “all-in-rate” of borrowing those shares to rise in early June, to approximately 120% to 125% of the dividend to be paid on the loaned shares.
On or about June 3, 2003, a stock loan trader at Bank A (“Bank A Trader”) intentionally arranged to lend shares to Non-Member Firm B (a NASD-only firm) at a below-market all-in-rate of 95% rather than the prevailing 120-125%. The Bank A Trader also arranged with Firm B for the payment of a “finder’s fee” of 25% of the dividend to Nandra even though the services of a finder were not required because Firm B was already identified as a borrower.
The CIBC stock loan trader agreed to act as a conduit for this pre-arranged loan: Bank A would lend 14 million shares to CIBC at below-market rates and CIBC would immediately re-lend the shares to Firm B on the same terms. At the same time, the Bank A Trader also arranged to lend 7.2 million shares to Firm B through another NYSE member firm at below-market rates.
Firm B then re-lent the total 21.2 million shares at the current market all-in-rate of approximately 125%, generating revenue of approximately $24.3 million that should have been part of the proceeds to Bank A and/or its customers. Firm B also paid approximately $4.3 million to Nandra as a finder’s fee for purportedly locating the shares.
CIBC’s supervisory policies and procedures with respect to its stock loan business were deficient to prevent and/or detect its trader from engaging in below-market transactions and from knowingly entering incomplete and inaccurate stock loan transaction terms on its books and records. The Bloomberg messaging system was not required to be reviewed even though the firm’s traders and their counterparties used it to discuss stock loan transactions, including the loan that gave rise to these proceedings. The Hearing Board Decision also noted the full cooperation given by CIBC to NYSE Regulation’s Division of Enforcement during its investigation. To access the Hearing Board Decisions, click on the relevant link: CIBC, Nandra, Gutman.
Nandra had no written operations or supervisory procedures concerning stock loan transactions, nor any procedures for the supervision of a finder at the firm. It did not have any written agreements with any counterparties defining the services to be provided as a finder. Gutman conducted inadequate due diligence to ensure that the loan was effected at a fair market price. He also failed to ensure that the payment to Nandra as a finder was reasonable and consistent with market standards.
The Hearing Board Decisions also noted that neither Nandra nor Gutman had any prior experience in stock loan transactions and as result of this settlement will be permanently barred from any future involvement in any transactions relating to securities lending. Nandra and Gutman have also undertaken for a three-year period to employ a qualified compliance official, other than Gutman; and to provide written notice of important organizational or operational changes, including new business activity.
Gutman was also suspended from membership for a three-month period, followed by a one-year suspension from membership in a supervisory capacity. He has also undertaken to re-take and pass the qualifying examination for a compliance official before the end of his supervisory suspension.
In settling these charges brought by NYSE Regulation, CIBC World Markets Corp., Nandra Group, Inc. and Gutman neither admitted nor denied the charges. Disciplinary proceedings are pending against the former CIBC stock loan trader.
The NYSE took no action against the other NYSE member firm that acted as a conduit for the 7.2 million shares concerning its supervision of its stock loan activities based upon a number of factors, including its extraordinary cooperation with this investigation. For background, see NYSE Information Memo 05-65, “Cooperation”, September 14, 2005.
Related disciplinary action was taken against individuals. See also, Patrick Joseph Hayes, Decision 05-138 (NYSE Hearing Panel November 15, 2005) (former stock loan supervisor disciplined for failure to supervise and books and records violations) and Jason Andrew Bander, Decision 05-119 (NYSE Hearing Panel October 20, 2005) (former stock loan trader permanently barred for failure to cooperate).
About NYSE Regulation, Inc.
NYSE Regulation, Inc., is a not-for-profit corporation dedicated to strengthening market integrity and investor protection. A subsidiary of NYSE Group, Inc., NYSE Regulation’s board of directors is comprised of a majority of directors unaffiliated with any other NYSE board. Each director must also be independent from member organizations and listed companies. As a result, NYSE Regulation is independent in its decision-making.
NYSE Regulation protects investors by regulating the activities of member organizations through the enforcement of marketplace rules and federal securities laws. NYSE member organizations hold 98 million customer accounts or 84 percent of the total public customer accounts handled by broker-dealers. Total assets of NYSE member organizations are over $4 trillion. They operate from 20,000 branch offices around the world and employ 195,000 registered personnel.
NYSE Regulation also ensures that companies listed on the NYSE and on NYSE Arca meet their financial and corporate governance listing standards. NYSE Regulation consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration. For more information, visit our website at www.nyseregulation.com .