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What’s The Cost of Mishandling ADRs?

SEC hits JPMorgan with more than $135 for mishandling ADRs

JPMorgan had a tough year end in 2018. Not as tough as Wells Fargo, but pretty rough nonetheless. Esecially when the Securities and Exchange Commission announced the firm would pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).

According to the SEC’s order, JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs. As a result, the total number of a foreign issuer’s tradable securities was inflated, resulting in abusive practices like inappropriate short selling and dividend arbitrage.

Costly errors for banks, brokers, and depository banks

Sanjay Wadhwa, a senior associate director of the SEC’s New York Regional Office says the JPMorgan exposure is the eighth action against a bank or broker, and the fourth action against a depositary bank, resulting from the Commission’s ongoing investigation into abusive ADR pre-release practices. By way of background, ADRs are U.S. securities that represent foreign shares of a foreign company. The regulators require a corresponding number of foreign shares 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. Such was not the case at JPMorgan. “With these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market,” said the SEC’s Wadhwa. “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

A $13 million settlement

Without admitting or denying the SEC’s findings, JPMorgan agreed to disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million. The SEC’s order acknowledged JPMorgan’s cooperation in the investigation and remedial acts but did not hold back the monetary punishment.

Who was watching?

Hard to say. Where was compliance and oversight? Hard to say. But, that’s where Patrina comes in. We’ve built our business based 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, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.