The SEC laid down the law, “At the start of the year, the SEC, the New York Stock Exchange and the Federal Reserve Bank of New York met with representatives of the Risk Management Association (RMA) and the Securities Industry Association (SIA). On the agenda was the issue of agent client disclosure. From the start, Les Nelson, managing director at Goldman Sachs and co-chair of the SIA’s securities lending division, knew that the regulators were serious.

“They basically gave the industry an ultimatum,” says Nelson. “Agents could either provide increased disclosure to the borrowers or agents would have to act as principal to every single trade with a borrower in the future. I think it took us about one second to make up our minds which route to follow.”"

Resulting in,

“Under the Procedures, a broker-dealer may continue to negotiate and agree to securities loans with Agent Lenders without identifying at the time of the transaction the specific Principals involved. In addition, a broker-dealer may continue to book such transactions without reference to the underlying Principals (i.e., a broker-dealer may book a single contract for a borrowing of securities from the relevant Agent Lender, without identifying or separately booking transactions with each relevant Principal from whom securities are being borrowed).”

http://archives2.sifma.org/ald/documents  /A_-_Z_Guide_Documents/ALD_No-Action_Re quest.pdf p3

I suppose pension funds are not run by professional investors but they never know who is selling their holdings short. Indeed the beneficial owner is not the client for the lending agent. The custodian is: “To help our custody clients take advantage of these market opportunities and earn incremental revenue, J.P. Morgan will identify securities that are “trading special” and help [custodian] clients lend these specific securities [to short sellers]…”

http://tinyurl.com/y26xako

“The Bank now proposes to act in the capacity of a “conduit lender” to provide additional return enhancements to its securities lending customers. Currently, the Bank’s customer chooses various potential borrowers from a list of usual borrowers. However, the customer may decide not to “approve” all of the borrowers on the list, resulting in some customers that will not permit their securities to be lent directly to certain borrowers. Yet, a certain borrower may desire to borrow securities that only may be found in accounts of customers that have not approved the borrower. To engage in the conduit lending services, the Bank would borrow the desired securities as principal from the customer that had declined to approve the borrower, and then on-lend those same securities as principal to the borrower.”

http://www.occ.treas.gov/law/int1026.pdf

Also GS seems to be claiming that playing off clients against each other in this way, with the non disclosure involved, is standard practice. Is it?

He’s the former CFO of Crazy Eddie who was successfully prosecuted by Richard E Simpson, who’s also the lead counsel in this action. His analysis gives me hope they might actually be serious about bringing Goldman Sachs to account on this.