Washington D.C., Jan. 12, 2017 —The Securities and Exchange Commission today announced that broker ITG agreed to pay more than $24.4 million to settle charges that it violated federal securities laws when it prompted the issuance of American Depository Receipts (ADRs) without possessing the underlying foreign shares.
ADRs are U.S. securities that represent shares of a foreign company, and for all issued ADRs there must be a corresponding number of foreign shares in custody. On behalf of counterparties, ITG obtained ADRs from depositary banks that administer ADR programs.
The SEC’s order finds that ITG facilitated transactions known as “pre-releases” of ADRs to its counterparties without owning the foreign shares or taking the necessary steps to ensure they were custodied by the counterparty on whose behalf they were being obtained. Many of the ADRs obtained by ITG through pre-release transactions were ultimately used to engage in short selling and dividend arbitrage even though they may not have been backed by foreign shares. ITG’s improper handling of ADRs lasted from 2011 to 2014.
“ITG’s failure to properly supervise its securities lending desk caused ADRs to be issued that were not backed by actual shares, leaving them ripe for potential market abuse,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
The SEC’s order finds that ITG violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its employees on its securities lending desk. Without admitting or denying the findings, ITG agreed to be censured and pay more than $15 million in disgorgement plus more than $1.8 million in interest and a penalty of more than $7.5 million. The SEC’s order acknowledges ITG’s cooperation in the investigation and its remedial acts.
The SEC’s continuing investigation is being conducted by Andrew Dean, William Martin, Elzbieta Wraga, and Adam Grace of the New York office, and the case is being supervised by Sanjay Wadhwa.