Jefferies to Pay Nearly $4 Million for Improper Handling of ADRs

The Securities and Exchange Commission today announced that broker-dealer Jefferies LLC will pay nearly $4 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).  

ADRs are U.S. securities that represent foreign shares of a foreign company, and they 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 ADRs represent. 

The SEC’s order finds that Jefferies improperly borrowed pre-released ADRs from other brokers when Jefferies should have known that those brokers did not own the foreign shares needed to support those ADRs.  The order against Jefferies also finds that it failed reasonably to supervise its securities lending desk personnel concerning borrowing pre-released ADRs from these brokers.

This is the SEC’s 14th enforcement action against a bank or broker resulting from its widespread investigation into abusive ADR pre-release practices, which has thus far resulted in monetary settlements exceeding $431 million.

“This line of cases demonstrates the SEC’s commitment to holding financial institutions accountable for engaging in abusive ADR pre-release practices,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “Today’s action makes clear that market participants like Jefferies may not use other market participants to facilitate inappropriate securities transactions.”

Without admitting or denying the SEC’s findings, Jefferies agreed to disgorge more than $2.2 million in ill-gotten gains and pay over $468,000 in prejudgment interest and a $1.25 million penalty for total monetary relief of nearly $4 million. 

The SEC’s continuing investigation is being conducted by Andrew Dean, Elzbieta Wraga, Philip Fortino, Joseph Ceglio, Richard Hong, and Adam Grace of the New York Regional Office.  The case is being supervised by Mr. Wadhwa.