Washington D.C., Aug. 16, 2019 — The Securities and Exchange Commission today announced that broker Cantor Fitzgerald & Co. will pay more than $647,000 and broker BMO Capital Markets Corporation will pay over $3.9 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs). With today’s actions, the SEC has charged 13 financial institutions in its ongoing investigation into abusive ADR pre-release practices, which, thus far, has included monetary settlements exceeding $427 million.
ADRs – U.S. securities that represent foreign shares of a foreign company – 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 the ADRs 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.
According to the SEC’s orders, both Cantor Fitzgerald and BMO Capital obtained pre-released ADRs when they should have known that the pre-release transactions were not backed by foreign shares. The SEC orders find that both brokers improperly obtained pre-released ADRs indirectly from other broker-dealers, and the order as to Cantor Fitzgerald finds that the firm also improperly obtained pre-released ADRs directly from depositary banks.
“The SEC continues to hold accountable parties that abused the ADR markets over an extended period of time,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office. “U.S. investors who invest in foreign companies through ADRs have a right to expect that market professionals aren’t gaming the system.”
The SEC’s order as to Cantor Fitzgerald finds that the firm violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, Cantor Fitzgerald agreed to pay over $359,000 in disgorgement of ill-gotten gains, over $88,000 in prejudgment interest, and a $200,000 penalty, totaling more than $647,000.
With respect to BMO Capital, the SEC’s order finds that it failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, BMO Capital agreed to pay over $2.2 million in disgorgement of ill-gotten gains, over $546,000 in prejudgment interest, and a $1.2 million penalty, totaling more than $3.9 million. The SEC’s orders acknowledge each firm’s cooperation in the investigation.
The SEC’s continuing investigation is being conducted by Andrew Dean, Philip Fortino, Elzbieta Wraga, Joseph P. Ceglio, Richard Hong, and Adam Grace of the New York Regional Office, and is being supervised by Mr. Wadhwa.