Deutsche Bank to pay nearly $75 million

Two US-based subsidiaries of Deutsche Bank AG will pay the Securities and Exchange Commission (SEC) nearly $75 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

The case stems from a continuing SEC investigation into abuses involving pre-released ADRs.  In proceedings against Deutsche Bank Trust Co. Americas (DBTCA), a depositary bank, and Deutsche Bank Securities Inc. (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.

What didn’t Deutsche Bank do?

It did not follow appropriate protocols. The ADRs are US securities representing foreign shares of a foreign company. When “pre-released,’ a corresponding number of foreign shares normally are 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 ADR represents.

That did not happen. In filing its order against DBTCA, the SEC found that for more than five years, the depository bank improperly provided thousands of pre-released ADRs when neither the broker nor its customers had the requisite shares.  The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs. In total, the exposure involved approximately 850 transactions over more than three years.

Deutsche Bank is not the only target

Last year, the SEC announced settled charges against brokers ITG Inc. and Banca IMI Securities Corp. The latter was found, at times to have obtained pre-released ADRs from DBTCA and other depositaries and lent them to other brokers, including DBSI.

The SEC also charged a former managing director and head of operations at broker-dealer ITG for failing to supervise personnel on ITG’s securities lending desk who improperly handled pre-released ADRs.

“The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division. “Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders.”

Why oversight matters

It isn’t sufficient to take the word of others, said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “Our charges against DBTCA and DBSI show that entities can’t just rely on representations from other professionals when they have doubts about their validity.  The charges also highlight the importance of supervising employees who use counterparties to engage in suspect transactions.”

Without admitting any wrongdoing, DBTCA agreed to return more than $44.4 million of allegedly ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total.

DBSI also agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty.  The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.

Was lack of oversight worth it?

Let’s see…hundreds or even a few thousand dollars to keep your firm on the straight and narrow? Or, more than $73 million in givebacks, interest, and penalties. Hmmmm. Is it worth it the exposure, fines, and worse? That’s a question only you can answer. But that’s also where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.