Citibank paid a $38.7 million fine for improper handling of “pre-released” American Depositary Receipts (ADRs), the Securities and Exchange Commission (SEC) announced this week.
ADRs are U.S. securities that represent shares of a foreign company. To be held in custody at a depositary bank, ADRs must have a certain number of foreign shares. However, many banks engage in the practice of pre-releasing ADRs, which enables ADRs to be issued without the deposit of foreign shares as long as there is an agreement that the foreign shares correspond to the number of shares the ADR represents.
Citibank improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor the customers had the foreign shares needed to support those new ADRs, the SEC found. This resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring, the SEC said.
“Our charges against Citibank are the latest in our ongoing investigative effort to hold accountable Wall Street institutions that participated in an industry-wide fraud,” Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office, said. “Our investigation into these practices has revealed that banks and brokerage firms profited while ADR holders were unaware of how the market was being abused.”
This is the sixth action against a bank or broker resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. This industry investigation is being conducted by Andrew Dean, Joseph Ceglio, William Martin, Elzbieta Wraga, Philip Fortino, Richard Hong, and Adam Grace of the New York Regional Office.
Citibank agreed to pay the fine without admitting or denying the SEC’s findings. Citibank paid more than $20.9 million in disgorgement of ill-gotten gains plus $4.2 million in prejudgment interest and a $13.5 million penalty for a total of more than $38.7 million.