Wedbush to pay more than $8.1M for improper handling of ADRs

This marks the SEC’s 11th action against a bank or broker resulting from the its ongoing investigation into abusive ADR pre-release practices, which, thus far, has resulted in monetary settlements exceeding $422 million. On Monday, the SEC announced that Industrial and Commercial Bank of China Financial Services will pay more than $42 million to settle charges for the improper handling of pre-released ADRs.

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.

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.