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Another Financial Services Scandal: Broker Fined

A second Broker that has been fined by the Securities and Exchange Commission for years of committing ADR Securities Violations.

This is yet another example of the unacceptable behaviour and bad culture that has pervaded far too many financial services organisations (and arguably still does). In this case Banca IMI Securities Corp issued ADRs even though it did not own the underlying shares. This made it possible for such ADRs to be used for inappropriate short selling or inappropriate profiting around dividend record dates. In certain countries, demand for ADR borrowing increased around dividend record dates so that certain tax-advantaged borrowers could, through a series of transactions, collect dividends without any tax withholding.

The Depositary Receipts Violation Schedule at the Securities and Exchange Commission is extremely long. The schedule includes in excess of 35 Global Brokers and second and third tier Institutional Borrowers of ADRs, the four Depositary Banks, The Bank of New York Mellon, JPMorgan, Citibank and Deutsche Bank and others such as Foreign Private Issuers and Depositary Receipts Service Providers.

The SEC’s Office of Enforcement depositary receipts global crackdown is truly historic!

I wonder if the FCA is pursuing similar cases?

The Press Release from the Securities and Exchange Commission is as follows:

Banca IMI Securities to Pay $35 Million for Improper Handling of ADRs in Continuing SEC Crackdown

08/18/2017 01:05 PM EDT

The Securities and Exchange Commission today announced that broker Banca IMI Securities Corp. (BISC), an indirect, wholly-owned U.S. subsidiary of Italian bank Intesa Sanpaolo SpA, has agreed to pay more than $35 million to settle charges that it violated federal securities laws when it requested the issuance of and received American Depositary Receipts (ADRs) without possessing the underlying foreign shares.

ADRs are U.S. securities that represent shares of a foreign company, and for all issued ADRs there must be a corresponding number of foreign shares held in custody at a depositary bank. Under “pre-release agreements,” brokers such as BISC may obtain ADRs without depositing corresponding foreign shares provided the broker owns or takes reasonable steps to determine that the customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

The SEC’s order finds that BISC obtained pre-released ADRs and lent them to counterparties without satisfying the proper requirements. BISC’s improper handling of ADRs, which lasted from at least January 2011 to August 2015, made it possible for such ADRs to be used for inappropriate short selling or inappropriate profiting around dividend record dates. In certain countries, demand for ADR borrowing increased around dividend record dates so that certain tax-advantaged borrowers could, through a series of transactions, collect dividends without any tax withholding. Pre-released ADRs that were improperly issued were used to satisfy that demand.

Earlier this year, broker ITG settled charges for similar misconduct.

“U.S. investors who invest in foreign companies through ADRs have a right to expect market professionals to create new ADRs only when they are backed by foreign shares so that the new ADRs are not used to game the system,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “As our order finds, BISC’s actions left the ADR markets ripe for potential abuse.”

The SEC’s order finds that BISC violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, BISC agreed to be censured and pay more than $18 million in disgorgement plus more than $2.3 million in interest and a $15 million penalty. The SEC’s order acknowledges BISC’s cooperation in the investigation and its remedial actions.

The SEC’s continuing investigation is being conducted by William Martin, Andrew Dean, Elzbieta Wraga, and Adam Grace of the New York office and supervised by Mr. Wadhwa.

Cliff Weight

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