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Ex-Shearson Exec To Plead Guilty in Stock-Loan Investigation

September 7, 1989 GMT

NEW YORK (AP) _ A former top Shearson Lehman Hutton Inc. executive will plead guilty to criminal charges in a broad government investigation of the stock-loan industry that also involves other brokerages, a source familiar with the case said Thursday.

The expected guilty plea by Dennis T. Palmeri, Shearson’s former executive vice president in charge of stock loans, would be the first action following more than a year of examination by federal prosecutors.

The case also is said to be derived from information from jailed speculator Ivan F. Boesky, a major source of evidence for Wall Street securities investigations since he was ensnared in an insider trading probe in 1986.

Stock loaning is the business of lending large blocks of stocks for a fee, usually to big investors who need stock quickly and are unable or unwilling to purchase enough shares.

A person familiar with the stock-loan case said Palmeri reached a plea deal with the Manhattan U.S. attorney’s office recently and would enter a guilty plea to criminal counts by the end of October. Palmeri also is cooperating with prosecutors in the investigation and others could be named.

The source, speaking on condition of anonymity, declined to offer other details about the charges. But the investigation was said to include alleged kickbacks received by Palmeri while head of the stock-loan operation.

It also involves stock-loan corruption at other major brokerages, the source said, but no other brokerage executives or other officials have reached plea deals with the government or have been identified in the investigation.

A federal grand jury last year issued subpoenas to Shearson seeking information about Palmeri’s trading activities. Shearson said at the time that it did not believe the firm or any employees were targets of an investigation.

Asked for comment about the expected Palmeri guilty plea, a Shearson official said the firm still does not believe it is a target.

″The U.S. attorney’s office has requested information from Shearson Lehman Hutton relating to a former employee of our stock-loan department and we have been cooperating fully with the request,″ Shearson said in a statement.

Palmeri’s attorney, Stanley Arkin, declined to comment on the case. A spokeswoman for the U.S. attorney’s office, Deborah Corley, also declined to comment.

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Palmeri began working at Shearson in 1979. He resigned June 28 after taking a leave of absence from the firm in April because of the investigation, a Shearson spokesman said.

He had supervised a department that specializes in lending blocks of stock mostly to large institutional investors and speculators. Boesky had borrowed stock from Shearson.

Large brokerages such as Shearson, 62 percent-owned by American Express Co., maintain large inventories of stocks typically loaned to clients. Stock loans frequently are used in ″short-selling,″ a strategy used to profit from an expected price decline in a stock.

A speculator will sell borrowed stock at a high price, wait for the price to fall, repurchase the shares at the lower price and return them to the lender, pocketing the difference in price as a profit.

The tactic is risky because the price might not fall and the borrower must return the stock within a limited time.

Violations alleged by the government in other stock-loan cases in recent years include improper payments in return for interest-free stock loans, unauthorized stock lending and fake transactions.

Shearson was censured by the Securities and Exchange Commission in 1987 for alleged unlawful use of customers’ stocks for loans during one week in November 1985, including $69 million of securities illegally loaned in one day. Shearson said the violations were technical and agreed to internal procedural changes.