Former Morgan Stanley, Banc of America trader Salvatore Zangari charged in stock loan kickback case

Former Morgan Stanley and Banc of America stock loan trader Salvatore Zangari has been charged by the US Securities and Exchange Commission (SEC) over alleged kickbacks from Clinton Management, a Brooklyn-based loan finder.

According to the SEC filing, from March 2004 to December 2005 Zangari received “well-over” USD100,000 in kickbacks from Clinton boss Anthony Lupo, in return for sending orders to brokers which in turn paid the finder for supposedly finding the stocks.

The regulator alleges that in 2004 Zangari was introduced to Lupo through Peter Sherlock, who had worked with Zangari at Morgan Stanley. Sherlock had already been involved in a similar kickback scheme with Lupo “for the past several years”, but had been moved from the “hard-to-borrow” desk at Morgan Stanley, with Zangari his replacement.

The SEC filing stated: “Zangari's involvement would ensure that Lupo continued to receive a steady flow of Morgan Stanley stock loan orders from which he could generate finder fee payments, which, in turn, would ensure that Sherlock continued to receive payments from Lupo.”

Because Morgan Stanley had a policy of not making payments to finders, the filing said, the men had to come up with an alternative route, which involved Paloma and SASI.

The SEC outlined the scheme as follows: “If Morgan Stanley needed to lend a particular stock, Zangari would arrange for SASI to borrow the shares from Morgan Stanley and then re-lend the shares to Paloma. Paloma would then lend the shares to another brokerage firm that needed the stock for some legitimate business purpose, such as effecting a customer shortsale, and Paloma would pay Lupo a finder fee out of its proceeds from that loan.

“This last leg of the transaction (between Paloma and the end-user firm) was done at a prevailing market rebate or negative rebate rate and negotiated at arm’s-length. If Morgan Stanley needed to borrow a particular stock, then the arrangement worked in reverse.”

The scheme was damaging to Morgan Stanley because of the “unnecessary multi-step stock loan transactions” involved, the SEC claimed. The group had to ensure that Paloma made a large enough profit on the final step of the transaction for Lupo to receive a fee. To do this, the intermediate loans (those from Morgan Stanley to SASI and from SASI to Paloma) were conducted at artificially low interest rates, the SEC said.

The SEC said that Zangari continued the scheme when he joined Banc of America in May 2005. However, his most recent role was as a stock loan trader at UBS Securities, from October 2006 to July 2009.