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Regulation and Compliance > Federal Regulation > SEC

Wedbush Hit With $8.1M SEC Fine Over Improper Handling of ADRs

By Melanie Waddell

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The Securities and Exchange Commission said Tuesday that Wedbush Securities will pay more than $8.1 million to settle charges for improper handling of “pre-released” American depositary receipts, or ADRs.

The SEC’s order finds that Wedbush improperly obtained pre-released ADRs from depositary banks when Wedbush should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.

“Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which, in turn, resulted in abusive practices such as inappropriate short selling and dividend arbitrage,” the SEC said.

Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, said that the agency charges that Wedbush “facilitated the issuance of ADRs that were not backed by ordinary shares. As this investigation has shown, Wedbush was one of numerous market participants that should have known its actions left the ADR markets ripe for abuse.”

The SEC said that the action against Wedbush is the agency’s 11th action against a bank or broker resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices, which, thus far, has resulted in monetary settlements exceeding $422 million.

ADRs, which are U.S. securities that represent foreign shares of a foreign company, 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 ADRs represent,” the agency explained.

The SEC’s order charges Wedbush with violating Section 17(a)(3) of the Securities Act of 1933 and failing reasonably to supervise its securities lending desk personnel.

Without admitting or denying the SEC’s findings, Wedbush agreed to be censured and to pay disgorgement of over $4.8 million, more than $800,000 in prejudgment interest, and more than $2.4 million in penalty, for total monetary relief of more than $8.1 million.

“Wedbush takes seriously its obligations under the securities laws and we are pleased to resolve this matter relating to conduct that we voluntarily ceased in 2013,” the firm’s co-presidents, Rich Jablonski and Gary Wedbush, said in a statement. This is one of several legacy regulatory matters that our leadership team has sought to resolve so that we can continue to focus on serving our clients to the best of our ability.”

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Melanie Waddell

@Think_MelanieW

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