SEC Investigates JPMorgan Over Mishandling of ADRs

The SEC has probed, fined several Wall Street banks including Bank of New York Mellon, Citigroup, Deutsche Bank.

JPMorgan Chase said it’s among depositary banks being investigated by the US Securities and Exchange Commission for misconduct in the trading of American depositary receipts. The agency accuses these lenders with failure to supervise its securities lending desks which caused ADRs to be issued while not backed by actual shares, leaving them ripe for potential market abuse.

The SEC has probed, fined several Wall Street banks including Bank of New York Mellon, Citigroup, Deutsche Bank and J.P. Morgan as it examines whether they have broken controls designed to prevent market abuse and tax fraud.

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Specifically, the top securities watchdog said J.P. Morgan provided ADRs, which are certificates representing ownership of a foreign stock, to clients without ensuring they would be backed by the actual shares. The pre-released ADRs were used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.

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Last month, the SEC’s New York regional office fined Deutsche Bank $75 million to settle claims that they issued American Depository Receipts (ADRs) without possessing the underlying foreign shares.

The probe of DB’s subsidiaries, which covered activity in late 2016, was related to the prerelease of ADRs, where banks issue depositary receipts without first having the underlying shares in their custody. The practice, while intended to smooth trading, could be abused for betting against a company’s stock by selling shares they don’t own, without borrowing or locating the shares needed to cover the sale. The regulator also says such receipts are being used to illegally arbitrage between different tax regimes.

Brokers who sell or transfer ADRs are typically responsible for ensuring that a matching number of foreign shares has been deposited with a custodian.


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