NYSE Regulation, Inc., announced that it has censured and fined Janney Montgomery Scott LLC US$2.5 million for engaging in away-from-market stock loan transactions, making payments to finders who performed no legitimate business function, and related supervisory deficiencies and books and records violations.

It found that from January through December 2004, certain former employees of Janney’s stock loan department caused the firm to engage in certain stock loan transactions at away-from-market rebate rates that were disadvantageous to the counterparties to those transactions and made payments to finders who performed no legitimate business function in connection with the transactions.

In addition, the stock loan traders caused the firm to participate in several transactions referred to as “daisy chain” or “swing” transactions with no legitimate basis. The effect of these transactions was to deprive the original lender of proceeds to which it was entitled and to redistribute those proceeds among all the other broker-dealers in the chain and any purported finder, it said.

Finally, the regulator found that the firm failed to reasonably supervise the activities of its stock loan department in that it did not have adequate supervisory procedures to detect and deter these improper transactions.

In settling this matter, Janney also consented to an undertaking to record the telephone conversations of its stock loan department and retain the recordings for a period of no less than one year.

“When a stock loan finder is inserted into a transaction without any business purpose, it directly harms the counterparties involved and increases the cost of stock lending,” said Richard Ketchum, chief executive officer, NYSE Regulation. “That’s what happened in this case against Janney Montgomery. In some instances, payments were made to relatives or friends who did nothing at all. Firms must have independent controls to verify that services paid for have actually been performed.”