The US Securities and Exchange Commission (SEC) has fined ITG $24.4 million, following a settlement that stemmed from a breach in federal securities laws in relation to American Depository Receipts (ADRs), per an SEC filing.
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The fine of ITG, an independent execution broker and financial data firm, constitutes the second edict in under six months for $20 million or more. Back in August, the group was also hit with fine of $20.3 million, together with its affiliate AlterNet Securities for breaches in breach of dark pool trading confidentiality.
However, the recent settlement details a violation of securities law of ADRs, without possessing the underlying foreign shares. ADRs represent US securities that are components of shares of an international firm – for all issued ADRs there must exist a corresponding number of foreign shares in custody.
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According to the SEC order, an investigation determined that ITG had facilitated transactions known as ‘pre-releases’ of ADRs to its counterparties, neither owning foreign shares nor taking the necessary steps to ensure they were custodied by the respective counterparty on whose behalf they were being obtained.
More specifically, several of the ADRs that were obtained by ITG via pre-release transactions were also used to engage in short selling and dividend arbitrage – ITG was guilty of this procedure (Section 17(a)(3) of the Securities Act of 1933) for a three year period lasting between 2011 to 2014.
As such, ITG was hit with a fine totaling $24.4 million, which it agreed to pay. This included more than $15.0 million in disgorgement as well as an additional $1.8 million in interest and a penalty of more than $7.5 million.
According to Andrew M. Calamari, Director of the SEC’s New York Regional Office, in a recent statement on the order and consequent settlement: “ITG’s failure to properly supervise its securities lending desk caused ADRs to be issued that were not backed by actual shares, leaving them ripe for potential market abuse.”