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Citibank to pay more than $38 million for handling ADRs improperly

Chris Hamblin, Editor, London, 15 November 2018

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The US Securities and Exchange Commission has induced Citibank to pay $38.7 million to settle charges of improper handling of 'pre-released' American Depositary Receipts. The bank neither confirms nor denies the charges.

ADRs – American securities that represent the foreign shares of foreign companies – require their holders to keep a corresponding number of foreign shares in custody at a depositary bank. The practice of 'pre-release' allows ADRs to be issued without the deposit of foreign shares, as long as the broker that receives them has an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that correspond to the number of shares that the ADRs represent.

The SEC found that Citibank improperly provided ADRs to brokers in thousands of pre-release transactions in circumstances where neither the broker nor its customers had the foreign shares they needed to support those new ADRs. Such practices resulted in an inflation of the total number of foreign issuers’ tradeable securities, which resulted in abusive practices such as inappropriate short selling and dividend arbitrage.

This is the second action against a depositary bank and sixth action against a bank or broker resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices. In September the SEC induced SG Americas Securities LLC to pay more than $800,000 to settle similar charges and before that it docked Deutsche Bank nearly $75 million for the same reason.

The regulator's charges against Citibank are the latest in its continuing investigative effort to hold Wall Street institutions that participated in an industry-wide fraud accountable. Its investigation of these practices has, it says, revealed that banks and brokerage firms profited while ADR holders were unaware of how the market was being abused.

Without admitting or denying the SEC’s findings, Citibank agreed to 'disgorge' more than $20.9 million of its ill-gotten gains and pay $4.2 million in prejudgment interest and a $13.5 million penalty, coming to a total of more than $38.7 million. The SEC's New York regional office handled the charges.

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