Merrill Lynch, Pierce, Fenner & Smith Incorporated will pay over $8 million to address what the Securities and Exchange Commission noted as improper handling of pre-released American Depositary Receipts (ADRs).
“We are continuing to hold accountable financial institutions that engaged in abusive ADR practices,” Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, said. “Our action conveys the message that an entity like Merrill may not avoid liability by using another broker to obtain fraudulently issued ADRs on its behalf.”
Officials said ADRs, which are categorized as 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.
SEC officials said the agency determined Merrill Lynch improperly borrowed pre-released ADRs from other brokers when Merrill Lynch should have known that those brokers did not own the foreign shares needed to support those ADRs. The practices resulted in inflating the total number of a foreign issuer’s tradeable securities.
Merrill Lynch did not admit or deny the SEC’s findings in agreeing to pay more than $4.4 million in disgorgement of ill-gotten gains plus over $724,000 in prejudgment interest and a $2.89 million penalty for total monetary relief of over $8 million.
The action taken represents the SEC’s ninth enforcement action against a bank or broker resulting from its ongoing investigation into abusive ADR pre-release practices, officials said, which has resulted in monetary settlements exceeding $370 million.