The Securities and Exchange Commission today announced that Wedbush Securities Inc. will pay more than $8.1 million to settle charges for improper handling of “pre-released” American Depositary Receipts (ADRs). This is the SEC’s 11th action against a bank or broker resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices, which, thus far, has resulted in monetary settlements exceeding $422 million.
ADRs– U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank. The 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.
The SEC’s order finds that Wedbush improperly obtained pre-released ADRs from depositary banks when Wedbush should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs. Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which, in turn, resulted in abusive practices such as inappropriate short selling and dividend arbitrage.
“In today’s action, we charge that Wedbush facilitated the issuance of ADRs that were not backed by ordinary shares,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “As this investigation has shown, Wedbush was one of numerous market participants that should have known its actions left the ADR markets ripe for abuse.”
The SEC’s order charges Wedbush with violating Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, Wedbush agreed to be censured and to pay disgorgement of over $4.8 million, more than $800,000 in prejudgment interest, and more than $2.4 million in penalty, for total monetary relief of more than $8.1 million.
The SEC’s continuing investigation is being conducted by Andrew Dean, Elzbieta Wraga, Philip Fortino, Joseph P. Ceglio, Richard Hong, and Adam Grace of the New York Regional Office, and is being supervised by Mr. Wadhwa.