Wedbush Securities Inc. will pay $8.1 million to settle SEC charges that it mishandled “pre-released” American Depository Receipts (ADRs), according to an SEC press release.
ADRs are U.S. securities that represent shares of a foreign company and require a corresponding number of foreign shares to be held in custody at a depositary bank. Pre-release allows ADRs to be issued without the deposit of foreign shares, if the brokers receiving them have an agreement with a depositary bank and the broker or customer owns the number of foreign shares corresponding to the number of shares the ADRs represent.
In this case, the SEC found that Wedbush improperly obtained pre-released ADRs when it should have known that neither it nor its customers owned the foreign shares corresponding to the ADRs. This practice inflated the number of a foreign issuer’s tradeable securities which resulted in abusive practices such as inappropriate short selling and dividend arbitrage.
The SEC charged Wedbush with violating Section 17(a)(3) of the Securities Act of 1933 and supervisory failures. Wedbush neither admitted nor denied the SEC’s findings but agreed to a censure, disgorgement payments of over $4.8 million, $800,000 in prejudgment interest, and more than $2.4 million in penalty.
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