The Securities and Exchange Commission (SEC) on Friday said Cantor Fitzgerald & Co and BMO Capital Markets had agreed to pay $647,000 and $3.9 million respectively to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).
With the latest actions, the SEC has charged 13 financial institutions in its ongoing investigation into abusive ADR practices, which has so far led to more than $427 million in monetary settlements.
Previous settlements with banks and brokers since 2017 include JPMorgan Chase & Co. ($135 million), U.S. subsidiaries of Deutsche Bank AG ($74 million), Banca IMI Securities ($35 million) and Wedbush Securities Inc. ($8 million).
Cantor Fitzgerald and BMO obtained pre-released ADRs indirectly from other broker-dealers when “they should have known that the pre-release transactions were not backed by foreign shares,” according to the SEC.
ADR CRACKDOWN
The multi-year SEC effort has aimed to clean up common abuses related to the use of “pre-release” ADRs.
ADRs are U.S. traded securities that represent shares of foreign-listed companies. To ensure that the price of the U.S. shares match those abroad, banks and brokers who deal in ADRs are required to hold a corresponding amount of foreign stock, or ensure that their counterparties or clients do the same.
Because of slight differences is international trade settlement times, ADRs are allowed to be “pre-released” to close any gap, usually less than a few days. That’s where, according to the SEC, banks and brokers flouted the requirement to hold enough foreign shares, creating an undue surplus.
The offending banks and brokers unjustly profited from trafficking in those phantom shares, according to the SEC. The pre-release shares were sometimes used for abusive practices, according to the SEC, such as “naked” short selling - betting against a company without actually borrowing shares - and an international tax dodge technique known as dividend arbitrage.
“This is a big win for investors,” said Norm Champ, a senior partner at Kirkland & Ellis LLP and former director of the SEC’s Division of Investment Management.
“These cases continue Chairman Clayton’s efforts to maintain U.S. markets as the best in the world by rooting out practices that contribute to mispricing of publicly traded securities.”