The Securities and Exchange Commission said Friday Merrill Lynch will pay over $8 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs). This brings the total settlements of abusive ADR pre-release practices to $370 million.
From at least June 2012 to November 2014, the SEC says, Merrill improperly borrowed pre-released ADRs from other parties when it “should have known that those … middlemen who obtained pre-released ADRs from depositaries … did not own the foreign shares needed to support those ADRs.”
These practices led to the inflating of the total number of a foreign issuer’s tradable securities, “which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring,” according to the regulator.
“The order against Merrill Lynch found that its policies, procedures and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen.”