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Broker-Dealer settles with SEC for improper handling of ADRs
On February 6, the SEC announced a settlement with a broker-dealer to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent foreign shares of a foreign company.” The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the broker-dealers receiving the ADRs have an agreement with a depository bank; and (ii) the broker-dealer or the broker-dealer’s customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. According to the SEC’s Order Instituting Administrative Proceedings (order), the broker-dealer improperly borrowed pre-released ADRs from other brokers that it should have known did not own the foreign shares necessary to support the ADRs. The SEC also found that the broker-dealer failed to implement policies and procedures to reasonably detect whether its securities lending desk personnel were engaging in such transactions. The broker-dealer neither admitted nor denied the SEC’s allegations, but agreed to pay more than $326,000 in disgorgement, roughly $80,970 in prejudgment interest, and a $179,353 penalty. The SEC’s order acknowledged the broker-dealer’s cooperation in the investigation and that the broker-dealer had entered into tolling agreements.
Brokers to pay $4.5 million to settle ADR mishandling claims
On August 16, the SEC announced a settlement with two brokers to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares of a foreign companies.” According to the SEC, both brokers improperly “obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares.” The SEC asserted the brokers improperly obtained the pre-released ADRs from other broker-dealers—with one of the brokers also obtaining the pre-released ADRs from depository banks—which “resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage.” The SEC further alleged the brokers violated the Securities Act of 1933 and failed to reasonably supervise their securities lending desk personnel. While neither broker admitted nor denied the SEC’s findings, the orders require them to pay, combined, more than $4.5 million in disgorgement, prejudgment interest, and penalties. The orders acknowledge the brokers’ cooperation in the investigation.
SEC separately settles ADR allegations against international bank subsidiary and securities company
On June 14, the SEC announced a $42 million settlement with a wholly-owned subsidiary of an international bank to resolve allegations that certain associated persons on its securities lending desk allegedly improperly pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares in foreign companies.” The SEC announcement explains that “[t]he practice of ‘pre-release’ allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.” According to the SEC, the subsidiary “improperly obtained pre-released ADRs from depositary banks when [the subsidiary] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC asserts that this resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. The SEC alleged that these practices violated the Securities Act of 1933 and claimed that the subsidiary failed to reasonably supervise its securities personnel. The consent order requires the subsidiary to pay more than $24 million in disgorgement, roughly $4.4 in prejudgment interest, and a civil money penalty of approximately $14.3 million. The order acknowledges the subsidiary’s cooperation in the investigation.
On the same day, the SEC announced an $8.1 million consent order with a securities company to resolve allegations that the company allegedly improperly pre-released American Depositary Receipts (ADRs). According to the SEC, the company, in violation of the Securities Act of 1933, “improperly obtained pre-released ADRs from depositary banks when [the company] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC announcement asserts that the lack of shares to support the ADRs resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. Additionally, the SEC alleges the company failed to establish and implement effective policies and procedures to address whether the company was in compliance with its obligations in connection with pre-release transactions. The consent order requires the company to pay more than $4.8 million in disgorgement, approximately $800,000 in prejudgment interest, and a civil money penalty of more than $2.4 million. The order acknowledges the company’s cooperation in the investigation.SEC settles American Depositary Receipts allegations against international bank subsidiary
On June 14, the SEC announced a $42 million settlement with a wholly-owned subsidiary of an international bank to resolve allegations that certain associated persons on its securities lending desk allegedly improperly pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent shares in foreign companies.” According to the SEC, the subsidiary “improperly obtained pre-released ADRs from depositary banks when [the subsidiary] should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.” The SEC asserts that this resulted in an inflated total number of foreign issuer’s tradeable securities and short selling and dividend arbitrage. The SEC alleged that these practices violated the Securities Act of 1933 and claimed that the subsidiary failed to reasonably supervise its securities personnel. The consent order requires the subsidiary to pay more than $24 million in disgorgement, roughly $4.4 in prejudgment interest, and a civil money penalty of approximately $14.3 million. The order acknowledges the subsidiary’s cooperation in the investigation.
Financial services firm settles SEC’s American Depositary Receipts allegations
On March 22, the SEC announced a settlement with a financial services firm to resolve allegations that certain associated persons on its securities lending desk allegedly “improperly borrowed” pre-released American Depositary Receipts (ADRs)—“U.S. securities that represent shares in foreign companies”—from non-firm brokers who did not own the foreign shares required to support those ADRs. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if (i) the brokers receiving the ADRs have an agreement with a depositary bank; and (ii) “the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.” The SEC alleged that the firm’s practices violated the Securities Act of 1933 and led to “inappropriate short selling and dividend arbitrage that should not have been occurring.” Moreover, the SEC claimed that the firm’s supervisory policies and procedures “failed to prevent and detect” the securities laws violations. The firm neither admitted nor denied the SEC’s allegations, but agreed to pay more than $4.4 million in disgorgement, roughly $725,000 in prejudgment interest, and a civil money penalty of approximately $2.9 million. The SEC’s order acknowledges the bank’s cooperation in the investigation.
Bank settles SEC allegations of mishandled American Depositary Receipts
On December 26, the SEC announced a settlement with a national bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers possessed the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs, that were in many instances not backed by ordinary shares, violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $71 million in disgorgement, roughly $14.4 million in prejudgment interest, and an approximate $49.7 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
Global investment bank settles SEC allegations of mishandled American Depositary Receipts
On December 17, the SEC announced a settlement with a global investment bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers beneficially owned the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs that were in many instances not backed by ordinary shares violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $29.3 million in disgorgement, roughly $4.2 million in prejudgment interest, and a $20.5 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
Financial services firm settles SEC allegations of mishandled American Depositary Receipts
On November 7, the SEC announced a settlement with a financial services firm to resolve allegations that the firm mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the firm improperly provided thousands of ADRs where neither the broker nor its customers possessed the required shares. According to the SEC’s order, the firm’s alleged practice of allowing pre-released ADRs, that were in many instances not backed by ordinary shares, violated the Securities Act of 1933. The firm has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $25.1 million in disgorgement and prejudgment interest, along with a $13.5 million penalty. The SEC’s order further acknowledges the firm’s cooperation in the investigation.
Global investment bank subsidiaries to settle SEC allegations of mishandled American Depositary Receipts
On July 20, the SEC announced it had reached a settlement with two U.S.-based subsidiaries of a global investment bank to settle allegations that the subsidiaries mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. According to the SEC’s separately issued orders, the bank’s depository bank subsidiary and the broker-dealer subsidiary allowed pre-released ADRs to be “used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.” The SEC explained in its press release that ADRs can only be “pre-released” without the deposit of foreign shares, provided the brokers receiving the ADRs have an agreement with a depository bank and the broker or the broker's customer owns an amount of the underlying shares that corresponds to the number of shares the ADR represents. However, the SEC alleged that the depository bank subsidiary improperly provided thousands of ADRs where neither the broker nor its customers possessed the required shares, and that the broker-dealer subsidiary’s policies, procedures and supervision failed to prevent and detect violations tied to the borrowing and lending of pre-released ADRs. While the two subsidiaries neither admitted nor denied the SEC’s allegations, the depository bank has agreed to pay more than $51 million in disgorgement and prejudgment interest, along with a $22.2 million civil money penalty. The broker-dealer subsidiary has agreed to pay approximately $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 civil money penalty.