Merrill Lynch agreed to pay over $8 million to settle SEC charges of improper handling of pre-released American depository receipts, according to the regulator.
The SEC alleges that Merrill borrowed pre-release ADRs from brokers who did not own the underlying foreign shares that underwrote the securities resulting in the firm inflating the total number of available securities to trade. The SEC says this allowed the firm to engage in “abusive practices like inappropriate short selling and dividend arbitrage.”
This is the SEC’s ninth enforcement action following an investigation into the alleged mishandling of ADRs.
The SEC declined to comment for this article.
Without admitting or denying the regulator’s findings, Merrill Lynch agreed 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.
“Merrill discontinued the trading of pre-released ADRs four years ago,” says company spokesperson Bill Halldin.
Between June 2012 and November 2014, Merrill received pre-released ADRs without taking steps to ensure they met the pre-release broker’s obligations, according to the SEC’s order. The regulator also alleges that Merrill’s supervisory policies and procedures were not reasonably implemented to provide sufficient oversight, or detect the violations.
“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 and supervisor for thinvestigation, said in the news release.
The regulator says it’s investigation into allegedly abusive ADR pre-release practices is ongoing.
