Merrill Lynch to pay over $8M for improper handling of ADRs
The Securities and Exchange Commission announced that Merrill Lynch, Pierce, Fenner & Smith Incorporated will pay over $8M to settle charges of improper handling of "pre-released" American Depositary Receipts. The SEC's order found that Merrill Lynch improperly borrowed pre-released ADRs from other brokers when Merrill Lynch should have known that those brokers - middlemen who obtained pre-released ADRs from depositaries - did not own the foreign shares needed to support those 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. The order against Merrill Lynch found that its policies, procedures, and supervision failed to prevent and detect securities laws violations concerning borrowing pre-released ADRs from these middlemen. This is the SEC's ninth enforcement action against a bank or broker resulting from its ongoing investigation into abusive ADR pre-release practices, which has thus far resulted in monetary settlements exceeding $370M.