The US-based broker-dealer arm of French banking giant Société Générale on Tuesday agreed to pay $800,000 to settle claims that they issued American Depository Receipts (ADRs) without possessing the underlying foreign shares.
The agency accuses SG Americas Securities of 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.
Specifically, the top securities watchdog said SG Americas 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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Earlier this year, 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 Wall Street’s top regulator said Société Générale did not admit or deny the SEC’s findings but agreed to return its “ill-gotten gains” and comply with the SEC’s fine. The watchdog added in a statement that it “continues to hold accountable those parties that abused the ADR markets. U.S. investors who invest in foreign companies through ADRs have a right to expect that issuances of those ADRs are properly backed by 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.