U.S. – SEC Wedbush Mishandling ADRs

U.S. – SEC Wedbush Mishandling ADRs

On 18 June 2019, SEC fined Wedbush $8.1mn for mishandling ADRs.

  • Wedbush Securities Inc. mishandled pre-released American depositary receipts.
  • Follows 10 prior SEC enforcement actions from investigation into abusive ADR
    pre-release practices, which resulted in monetary settlements of over $422mn.

Pre-Release ADRs

  • ADRs are US securities representing shares in a foreign company, and require a
    corresponding number of foreign shares be held in custody at a depositary bank.
  • Pre-release allows ADR to be issued without a deposit of foreign shares in bank.
  • As long as broker or customer, owns the corresponding number foreign shares,
    and the broker receiving the ADRs has current agreement with depositary bank.

Misconduct

  • Wedbush improperly obtained pre-released ADRs from depositary banks because
    neither the firm nor its customers owned foreign shares needed to support ADRs.
  • This resulted in inflating total number of foreign issuer's tradeable securities, that
    led to abusive practices, such as inappropriate short selling and dividend arbitrage.
  • Wedbush further failed to reasonably supervise securities lending desk personnel.