The US Securities and Exchange Commission has induced Jefferies, the broker-dealership, to pay nearly $4 million to settle charges that it handled 'pre-released' American Depositary Receipts improperly.

ADRs are US 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 issuers to issue ADRs without the deposit of foreign shares as long as the brokers who receive 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 that the ADRs represent.

The SEC says that Jefferies improperly borrowed pre-released ADRs from other brokers when it should have known that those brokers did not own the foreign shares it needed to support those ADRs.  The regulator accuses it of not supervising its securities lending desk people properly when it came to borrowing pre-released ADRs from these brokers.

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

Jefferies has admitted nothing but has agreed to disgorge more than $2.2 million in ill-gotten gains and pay more than $468,000 in prejudgment interest and a $1.25 million penalty. Jefferies is a diversified financial service company engaged in investment banking and capital markets, asset management and direct investing. Its wealth management experience is extensive.