US law firm Milberg, Weiss, Bershad & Schulman is pondering whether to file a class-action lawsuit against prime brokers on behalf of hedge funds, according to reports in New York today. The suit will focus, say the reports, on allegations by hedge funds that they were overcharged by their prime brokers over so-called “naked short-selling” – or the shorting of shares that are not necessarily available to borrow.
The reports suggest prime brokers were paid for lending hedge funds stock despite not borrowing it, and that this caused market distortions that cost the hedge funds money. One report quoted a Milberg Weiss partner as saying “this is not about the evils of short-selling, which is part of an efficient market. We think that the short-sellers themselves are suffering injury. The market may not be operating in the way that participants assume and pay for.”
The reports say it is not yet clear which firms are the targets of a potential suit, or which hedge funds will be plaintiffs.