From: Reuters
Published March 13, 2008 04:31 PM

Two plead guilty in stock loan case

By Paritosh Bansal

NEW YORK (Reuters) - A former Morgan Stanley <MS.N> trader and his brother-in-law pleaded guilty on Thursday to conspiring to defraud the bank in a case involving phony finder fees and kickbacks in the stock loan industry.

Peter Sherlock, 36, who worked in Morgan Stanley's stock lending department, admitted to taking money from a finder, while Donato Tramontozzi, 38, a pharmacist, said he agreed to participate in the scheme during a hearing before U.S. District Judge John Gleeson in Brooklyn federal court.

The two were charged in September 2007 with conspiracy to commit fraud and other counts. Sherlock was accused of executing a scheme along with others in which a stock loan finder, Anthony Lupo, received finder fees in connection with transactions involving securities borrowed from or loaned to Morgan Stanley, according to an indictment in the case.


In return, Lupo paid a portion of the fees as kickbacks and bribes to Sherlock and Tramontozzi, who was charged with conspiracy and structuring cash transactions, according to the indictment.

Lupo pleaded guilty in the case in February, according to court records.

Morgan Stanley's practice during the period between January 2001 and December 2005 was not to pay finder's fees for stock loan transactions. The payments were made without the firm's approval, according to the indictment.

Sherlock and Tramontozzi each pleaded guilty to one count of conspiracy to commit securities and wire fraud. Under sentencing guidelines, Sherlock faces a prison term of 57 to 71 months, while Tramontozzi could get 18 to 24 months. They are scheduled to be sentenced on June 20.

"I did nothing to earn that money," Tramontozzi told the judge. "I knew what I was doing was wrong."

The losses and kickbacks in this scheme were more that $1 million, Assistant U.S. Attorney Sean Haran told reporters after the hearing.

Sherlock's lawyer, John Wallenstein, said the defense disagreed with the government's loss calculation but the dispute would be resolved at sentencing.

The pleas are the latest developments in a larger federal investigation into the stock loan industry that has seen charges filed against more than a dozen people.

Prosecutors contend that in the wider case, traders at several large brokerage firms funneled millions of dollars in fraudulent finder fees to their co-conspirators.

Stock loans are made as part of short sale or other transactions that require the investor to borrow shares. Finders are third parties who locate a counterparty for stock loans in exchange for a fee.

Most of the people charged in the case have pleaded guilty, but the investigation, which is being conducted by federal prosecutors in Brooklyn along with the FBI, is ongoing.

The U.S. Securities and Exchange Commission has also filed civil charges against more than three dozen people.

(Editing by Brian Moss and Dave Zimmerman)

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