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Prosecutors Probe Stock-Loan Scheme: Report

Prosecutors are investigating employees of Wall Street banks, including Bear Stearns Cos. and Morgan Stanley, over alleged kickbacks involving short sellers, and may soon bring criminal charges, a published report said.

Three people have taken pleas in exchange for cooperation with prosecutors in Brooklyn, New York, who have conducted the nearly 18-month-long probe, Business Week magazine said on its Web site, citing unnamed sources. The scheme may have cost financial firms and short sellers millions of dollars in unnecessary fees, the magazine said.

Current and former employees at the stock loan desks of Bear and Morgan Stanley are drawing the most scrutiny, the magazine said, citing unnamed sources. Also under investigation are current and former employees of Goldman Sachs Group Inc., Janney Montgomery Scott, Merrill Lynch & Co. and Nomura Securities, it said.

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Robert Nardoza, a spokesman for U.S. Attorney Roslynn Mauskopf in the Eastern District of New York, declined to confirm or deny the existence of a probe. Representatives of Bear, Goldman, Merrill, Morgan Stanley and Nomura declined to comment. Janney did not immediately return a request for a comment.

A short sale is a bet that a stock price will fall. In a typical short sale, a trader borrows shares and sells them, hoping to buy them back later at a lower price.

According to BusinessWeek, prosecutors are examining whether employees on Wall Street stock loan desks received kickbacks from "finders" who track down shares for them to lend to short sellers.

The article said investigators were examining whether the finders did not do enough work to justify their fees, or whether they even provided a legitimate service.

In April 2005, the New York Stock Exchange issued guidance on the use of stock finders.

"Recent examination findings (in many instances) call into question the business justification for interposing a finder," it said. "We have seen only limited instances where a finder is actually providing services that an effective internal stock loan department could not provide."

NYSE spokesman Brendan Intindola on Thursday said the Big Board was still examining the issue and has "several" cases pending.

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