JP Morgan to pay $135 million for improper handling of ADRs

The eighth action against a bank or broker, and fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices.

By Jonathan Watkins

JP Morgan will pay more than $135 million to settle charges of improper handling of pre-released American Depositary Receipts (ADRs).

The announcement comes less than 10 days after BNY Mellon agreed to pay a $54 million settlement over similar claims.

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.

The Securities and Exchange Commission’s (SEC) order found that JP Morgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs. 

Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring. 

This is the eighth action against a bank or broker, and fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. 

“With these charges against JP Morgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million.  The SEC’s order acknowledged JPMorgan’s cooperation in the investigation and remedial acts.

«