SEC: Wedbush to pay $8.1M for alleged improper handling of ADRs

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Wedbush will pay $8.1 million to settle SEC charges that it improperly handled American depositary receipts — actions that left ADR markets open for abuse, according to the regulator.

It’s the SEC’s 11th such enforcement action against a bank or broker-dealer and part of the commission’s continuing investigative efforts into abusive practices involving the pre-release of ADRs. Pre-release allows ADRs to be issued without the required deposit of foreign shares under specified conditions. In March, Merrill Lynch agreed to pay $8 million to settle SEC charges of improper handling of pre-released ADRs. And JPMorgan Chase paid $135 million last year to settle similar charges.

The SEC alleges that the firm improperly obtained pre-released ADRs from depository banks that did not own the foreign shares required to support those ADRs — a fact that Wedbush should have known.

This type of practice ends up inflating the total number of a foreign issuer's tradable securities and subsequently results in abusess, including inappropriate short selling and dividend arbitrage.

Los Angeles-based Wedbush failed to put in place policies and procedures to ensure its employees complied with its obligations, according to the SEC.

"In today's action, we charge that Wedbush facilitated the issuance of ADRs that were not backed by ordinary shares," Sanjay Wadhwa, senior associate director of the SEC's New York regional office, said 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 alleged misconduct took place from November 2011 until September 2013 and generated revenue of $4.8 million, according to the SEC. Wedbush voluntarily ended its pre-release ADR business in late 2013.

Wedbush takes its obligations under securities laws seriously and is pleased to have resolved this matter, 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,” the executives said.

The firm neither admitted nor denied the SEC's findings, according to the regulator’s order. Wedbush agreed to be censured. It further agreed to pay disgorgement of more than $4.8 million, more than $800,000 in prejudgment interest and more than $2.4 million in penalties.

The SEC’s ongoing investigation into abusive pre-release ADR practices has resulted in $422 million in settlements so far.

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