SEC Penalizes JP Morgan Chase Bank More Than $135 Million for Improper Handling of Pre-Release ADRs

On December 26, 2018, the U.S. Securities and Exchange Commission (SEC) announced that JPMorgan Chase Bank N.A. had agreed to pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).  As the SEC explained,

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank.  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 depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

As part of the SEC’s ongoing investigation into what it termed “abusive ADR pre-release practices,” the SEC order in the case found that JP Morgan Chase Bank

improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.  Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.

JPMorgan Chase Bank, without admitting or denying liability, agreed to pay disgorgement of more than $71 million in ill-gotten gains, $14.4 million in prejudgment interest, and a $49.7 million penalty, which totaled more than $135 million in monetary relief.  In addition, the SEC order stated that the bank acknowledged “that the Commission is not imposing a civil penalty in excess of $49,728,857.83 based upon its cooperation and agreement to cooperate in a Commission investigation and related enforcement action.”

Note: Although the lede of the SEC’s press release referred to “improper” actions by JPMorgan Chase Bank, a senior SEC official stated that “[w]ith these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market” (emphasis supplied).

This resolution constitutes the eighth action against a bank or broker, and the fourth action against depositary bank, resulting from the SEC’s ongoing investigation into ADR pre-release practices.  It also involves the highest penalty of the four depositary banks that have now settled with the SEC: Citibank ($38.7 million), BNY Mellon (more than $54 million), and Deutsche Bank Trust Co. Americas (DBTCA) (nearly $73.3 million).

The order against JPMorgan Chase does not directly explain the reasons for its markedly greater total penalties.  Not surprisingly, a comparison of the four banks’ SEC orders indicates that the penalty differences are driven by differences in the banks’ net revenues from the improper transactions:

  • JPMorgan Chase: That order stated that “[f]rom at least November 2011 through early 2015,” JPMorgan improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-releases resulted in revenues of approximately $71 million.
  • Citibank: That order stated that “[f]rom at least August 2011 through November 2016,” Citibank improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-releases resulted in net revenues of approximately $20.9 million.
  • BNY Mellon: That order stated that “[f]rom at least June 2011 through June 2016,” BNY Mellon improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-release transactions resulted in net revenues of approximately $29 million.
  • DBTCA:  That order stated that “[f]rom at least June 2011 through September 2016,” DBTCA improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-releases resulted in net revenues of approximately $44.5 million.

The SEC release in this case contains no indication that the SEC’s investigation into ADR pre-release practices is anywhere near its end.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s