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JPMorgan to Pay $135M for Mishandling ADRs

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The Securities and Exchange Commission said Wednesday that JPMorgan Chase Bank will pay about $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (or ADRs).

The SEC’s order found that from late 2011 to early 2015, JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its clients had the foreign shares needed to support those new ADRs. This led to inflated numbers of foreign issuers’ tradeable securities and resulted in abusive practices, such as inappropriate short selling and dividend arbitrage.

“Beginning at least as early as November 2011, JPMorgan became aware that each of its largest pre-release brokers sometimes were not in compliance with the pre-release obligations,” the SEC explained in the order. 

These practices produced revenues of roughly $71 million for JPMorgan during this time period. In early 2015, after the SEC investigation had begun but before any subpoenas, the bank voluntarily stopped some pre-release activities and by the end of the year ceased all pre-releases.

“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,” according to Sanjay Wadhwa, senior associate director of the SEC’s New York office.  “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

When pre-releasing ADRs — which are U.S. securities that represent foreign shares of a foreign company — brokers must have an agreement with a depositary bank and the broker or client must own the number of shares that matches the number of shares represented by the ADR.

This is the eighth action against a bank or broker, and fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. For more details about ADRs, see this SEC Investor Bulletin.

Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million, as well as $14.4 million for prejudgment interest and a $49.7 million penalty.  The SEC says the bank cooperated with the investigation and remedial acts.

“We’re pleased to have resolved this matter, which is related to an industry practice we voluntarily ended a few years ago,” JPMorgan said in a statement shared with ThinkAdvisor.

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