The Securities and Exchange Commission (SEC) has fined two US-based subsidiaries of Deutsche Bank $75 million over its American Depositary Receipts (ADRs) business.
The German bank will pay the settlement after being charged with improper handling of “pre-released” ADRs. The case stems from a continuing SEC investigation into abuses involving pre-released ADRs.
In proceedings against Deutsche Bank Trust Americas (DBTA), its depositary bank, and Deutsche Bank Securities (DBSI), the registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and profiting around dividend pay-outs.
“The SEC’s actions involving pre-released ADRs have revealed industry-wide abuses. Failures at each institutional link in the chain of these transactions, from depositary to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders,” said Stephanie Avakian, co-director of the SEC Enforcement Division.
ADRs, which allow US investors to trade in foreign stocks, require a matching number of foreign shares to be held at a custody or depositary bank, but can be “pre-released” if a broker or customer owns the underlying stock.
Deutsche Bank’s US depositary bank allegedly issued pre-released ADRs over a five-year period in cases where neither its broker not its customer actually owned the corresponding foreign shares.
DBTA agreed to settle the charges, without admitting or denying the SEC’s findings, and agreed to return more than $44.4 million of alleged ill-gotten gains, plus $6.6 million in prejudgement interest, along with a $22.2 million penalty.
DBSI, also without admitting or denying, agreed to pay around $1.6 million.
The SEC’s actions against Deutsche Bank comes one year after it settled charges against brokers ITG and Banca IMI Securities, which at times obtained pre-released ADRs from Deutsche Bank and other depositaries, and lent them to other brokers, including DBSI.