Citi has agreed to pay $38.7 million to the US Securities and Exchange Commission (SEC) to settle charges of improper handling of ‘pre-released’ American Depositary Receipts (ADR).
Citi is the second bank the SEC has taken action against for ADR pre-release abuses within its depositary banking business, after Deutsche Bank agreed to pay $75 million to settle similar chargers earlier this year.
The SEC found that Citibank improperly provided ADRs to brokers in thousands of pre-released transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.
According to the regulator, the practice resulted in Citi inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices such as inappropriate short selling and dividend arbitrage.
“Our charges against Citibank are the latest in our ongoing investigative effort to hold accountable Wall Street institutions that participated in an industry-wide fraud,” said Sanjay Wadhwa, senior associate director of the SEC’s New York regional office.
“Our investigation into these practices has revealed that banks and brokerage firms profited while ADR holders were unaware of how the market was being abused.”
ADRs, which allow US investors to trade in foreign stocks, require a matching number of foreign shares to be held at a custody or depositary bank, but can be “pre-released” if a broker or customer owns the underlying stock.
Without admitting or denying the SEC’s findings, Citi agreed to pay nearly $20.9 million
in disgorgement of ill-gotten gains, plus $4.2 million in prejudgement interest and a $13.5 million penalty.