SEC fines Wedbush $8.1 million over improper handling of ADRs

American Depository Receipts at the center of charges that Wedbush failed to supervise staff

Jun 18, 2019 @ 4:53 pm

By Bruce Kelly

The Securities and Exchange Commission on Tuesday said that Wedbush Securities Inc. will pay more than $8.1 million to settle charges for improper handling of U.S. securities that represent shares of a foreign company. Such shares are known as American Depository Receipts, or ADRs.

The SEC's order found that Wedbush improperly obtained so called "pre-released" ADRs, violating securities industry laws. ADRs require a corresponding number of foreign shares to be held in custody at a depository bank. The practice of pre-release allows ADRs to be issued without the deposit of foreign shares.

The SEC's order found that Wedbush improperly obtained pre-leased ADRs from depository banks when Wedbush should have known that neither the firm nor its customers owned the foreign shares needed to support the ADRs, according to the SEC. This practice resulted in the inflation of the total number of a foreign issuer's tradeable securities, which resulted in abusive practices such as inappropriate short selling and dividend arbitrage.

"In today's action, we charge that Wedbush facilitated the issuance of ADRs that were not backed by ordinary shares," said Sanjay Wadhwa, senior associate director of the SEC's New York regional office in a statement. "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 order charged Wedbush with failing to supervise its securities lending desk personnel. Without admitting or denying the SEC's findings, Wedbush agreed to pay disgorgement of more than $4.8 million, more than $800,000 in interest, and a penalty of more than $2.4 million.

The SEC's ongoing investigation into abusive ADR pre-release practices has resulted in settlements of more than $422 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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