Executive Director of Morgan Stanley’s Domestic Stock Lending Desk Convicted of Conspiracy to Commit Securities Fraud and Wire Fraud and Making a False Statement to the FBI
Earlier today, following a week-long trial, a jury in federal court in Brooklyn convicted Darin Demizio of conspiring to commit securities fraud and wire fraud and making a false statement to agents of the Federal Bureau of Investigation. The case was tried before the Honorable John Gleeson, United States District Judge.
The conviction was announced by Benton J. Campbell, United States Attorney for the Eastern District of New York.
As established at trial, throughout the 1990s and until 2003, Demizio, a former Executive Director at Morgan Stanley and the head of its domestic securities lending desk, routinely directed Morgan Stanley securities lending business to smaller brokerage firms and finder firms in exchange for kickbacks paid to Demizio’s father and brother, Craig Demizio. Between January 2000 and January 2004 alone, the kickbacks totaled over $1.6 million. The payments were disguised to appear as finder fees when, in reality, Demizio’s father and brother had done little if any work as finders in connection with the securities lending transactions for which they were paid. Demizio’s brother, Craig Demizio previously pleaded guilty to conspiracy to commit securities fraud and wire fraud and was sentenced on July 25, 2008 to 21 months’ imprisonment.
The Demizio conviction marks the twenty-ninth conviction stemming from the ongoing industry-wide investigation into allegations of bribery and kickbacks in the securities lending industry, also called the “stock-loan” industry. Previously, twenty-eight defendants pleaded guilty in this district to federal kickback and bribery schemes in the stock-loan industry, including former securities lending traders at A.G. Edwards and Sons, Inc.; Janney Montgomery Scott LLC; JP Morgan Chase; Kellner Dileo & Company, Inc.; Oppenheimer & Co., Inc.; Morgan Stanley; National Investors Services, also known as TD Waterhouse; Nomura Securities International Inc.; Pax Clearing Corporation; PFPC Worldwide; Schonfeld Securities; and Van der Moolen Specialists.
Securities firms often borrow and loan securities among themselves for a number of reasons, including facilitating short-sale transactions. Stock-loan “finders” can assist these firms by locating inventories of a given security and matching borrowers and lenders in stock-loan transactions. The investigation disclosed that stock-loan traders at several large brokerage firms funneled millions of dollars in fraudulent “finder fees” to their co-conspirators, often where no finders’ services had been rendered, in exchange for cash bribes and, in some instances, payments to the traders, or the traders’ relatives.
“Today’s conviction sends a clear message that the culture of corruption and kickbacks in the securities lending industry that victimized shareholders and the investing public will not be tolerated,” said United States Attorney Campbell. Mr. Campbell expressed his appreciation to the Federal Bureau of Investigation, the agency responsible for leading the government’s investigation.
When sentenced on June 19, 2009, Demizio faces a maximum sentence of twenty-five years’ imprisonment on the conviction for securities and wire fraud conspiracy, and five years’ imprisonment on the conviction for the false statement to the FBI.
The government’s case was prosecuted by Assistant United States Attorneys Kelly T. Currie, Winston Y. Chan, and Winston M. Paes.
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