SEC Fines ABN AMRO for Improper Handling of ADRs

The case is the result of a continuing industry-wide investigation by the SEC into abuses involving pre-released ADRs

The US-based broker-dealer arm of Netherlands banking giant ABN AMRO on Thursday agreed to pay $586,000 to settle claims that they issued American Depository Receipts (ADRs) without possessing the underlying foreign shares.

The agency accuses ABN AMRO Clearing Chicago LLC 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.

ABN AMRO Clearing is a provider of clearing and financing services, handling over 16 million trades per day and covering the world’s leading exchanges across Europe, the Americas, and the Asia Pacific

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 ABN AMRO 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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A continuing industry-wide SEC investigation

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

Wall Street’s top regulator said ABN AMRO 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 “its investigations revealed that misconduct by numerous industry participants had the effect of introducing “phantom” ADRs into the marketplace. At times of high demand for ADRs, or when supply from traditional lending sources was limited, a number of brokers sought pre-released ADRs from intermediary brokers, who obtained them from depositary banks.”

The SEC’s probe 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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