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Merrill Lynch Pays $8 Million to Settle SEC Charges of Improper Handling of “Pre-Released” American Depositary Receipts (ADRs)

American Depositary Receipts (ADRs) have been around since J.P. Morgan’s predecessor pioneered the concept in 1927 as an easier way to purchase stock in foreign companies.1 Basically, an ADR is a negotiable certificate issued by a U.S. bank which represents a share or number of shares in a foreign stock that the bank holds in trust for an investor.2 ADRs can be traded on U.S. stock exchanges or over-the-counter.

Merrill Lynch has recently agreed to pay more than $8 million dollars to settle U.S. Securities and Exchange Commission (SEC) charges of improper handling of “pre-released” ADRs.

According to the March 22, 2019, press release from the SEC, “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 depository bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.”3 The SEC charges allege that from at least June 2012 until about November 2014, the Merrill Lynch securities lending desk mishandled more than 40,000 pre-released ADRs.4

The SEC alleged that Merrill Lynch personnel borrowed pre-released ADRs from brokers who did not own the foreign shares required by ADR regulations. The SEC further alleged that “such practices resulted in inflating the total number of foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occuring.”5

Further, the SEC found that Merrill Lynch’s “policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlement.”6

In the settlement, Merrill Lynch did not admit or deny responsibility for the improper handling of these “pre-release” ADRs. To settle the SEC charge, they did, however, agree to pay more than $4.4 million in disgorgement of ill-gotten gains, plus over $724,000 in prejudgment interest, and a $2.89 million penalty. Merrill Lynch, now a member of Bank of America, voluntarily stopped trading pre-release ADRs more than four years ago.

They are just one of a number of financial institutions who have settled with the SEC on similar charges, including JPMorgan Chase Bank, Bank of New York Mellon, Deutsche Bank and Citibank. In total, the SEC has accepted more than $302 million in settlements from these financial institutions.7

If you have questions about investment fraud, financial schemes, broker misconduct, or about your broker’s management of your account, please contact our Investment and Securities Fraud Law Firm at: 313-334-7767 for a case evaluation. We have been helping investors recover losses from fraudulent financial advisors for over 20 years!

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1 ADR Basics: What is an ADR? by Jean Folder, www.investopedia.com
Link: https://www.investopedia.com/university/adr/adr1.asp

2 American Depositary Receipt – ADR, reviewed by James Chen, Updated 7/22/2018
Link: https://www.investopedia.com/terms/a/adr.asp
3,5,6 Merrill Lynch to Pay Over $8 Million for Improper Handling of ADRs, 3/22/2019, www.sec.gov.
Link: https://www.sec.gov/news/press-release/2019-40

4, 7 $8M Merrill Lynch Settlement Over American Depositary Receipts Puts Focus on Foreign Investment Complaince, by Phillip Bantz, 3/25/2019, www.law.com
Link: https://www.law.com/corpcounsel/2019/03/25/8m-merrill-lynch-settlement-over-american-depositary-receipts-puts-focus-on-foreign-investment-compliance/?slreturn=20190228135832