Deutsche Bank to settle charges regarding ADRs
23 July 2018 Washington DC
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Two US-based subsidiaries of Deutsche Bank will pay nearly $75 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).
The case, announced by the US Securities and Exchange Commission (SEC), stems from a continuing investigation into abuses involving pre-released ADRs.
In proceedings against Deutsche Bank Trust Co. Americas (DBTCA) and Deutsche Bank Securities Inc. (DBSI), the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.
In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a more than five-year period when neither the broker nor its customers had the requisite shares.
The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.
Without admitting or denying the SEC’s findings, DBTCA agreed to return more than $44.4 million of alleged ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total.
DBSI, also without admitting or denying the SEC’s findings, agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty.
ADRs, which are US securities that represent foreign shares of a foreign company, require a corresponding number of foreign shares to be held in custody at a depositary bank.
The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.
The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.
Stephanie Avakian, co-director of the SEC Enforcement Division, commented: “The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses. Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders.”
Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, said: “Our charges against DBTCA and DBSI show that entities can’t just rely on representations from other professionals when they have doubts about their validity.”
He added: “The charges also highlight the importance of supervising employees who use counterparties to engage in suspect transactions.”
The case, announced by the US Securities and Exchange Commission (SEC), stems from a continuing investigation into abuses involving pre-released ADRs.
In proceedings against Deutsche Bank Trust Co. Americas (DBTCA) and Deutsche Bank Securities Inc. (DBSI), the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting around dividend payouts.
In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a more than five-year period when neither the broker nor its customers had the requisite shares.
The order against DBSI found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.
Without admitting or denying the SEC’s findings, DBTCA agreed to return more than $44.4 million of alleged ill-gotten gains plus $6.6 million in prejudgment interest and a more than $22.2 million penalty, nearly $73.3 million in total.
DBSI, also without admitting or denying the SEC’s findings, agreed to pay nearly $1.6 million, representing $1.1 million in disgorgement and prejudgment interest and a nearly $500,000 penalty.
ADRs, which are US securities that represent foreign shares of a foreign company, require a corresponding number of foreign shares to be held in custody at a depositary bank.
The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.
The SEC’s orders acknowledge each entity’s cooperation in the investigation and remedial acts.
Stephanie Avakian, co-director of the SEC Enforcement Division, commented: “The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses. Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders.”
Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, said: “Our charges against DBTCA and DBSI show that entities can’t just rely on representations from other professionals when they have doubts about their validity.”
He added: “The charges also highlight the importance of supervising employees who use counterparties to engage in suspect transactions.”
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