(RTTNews.com) - The Securities and Exchange Commission announced that JPMorgan Chase Bank N.A. will pay more than $135 million to settle charges of improper handling of "pre-released" American Depositary Receipts or ADRs.
New York City -based J.P. Morgan Chase Bank, doing business as Chase Bank, constitutes the consumer and commercial banking unit of JPMorgan Chase & Co.
In a statement, the SEC noted that 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.
The SEC's order found that JPMorgan 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 that resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.
The SEC noted that without admitting or denying the findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million.
The SEC's order acknowledges JPMorgan's cooperation in the investigation and remedial acts.
Sanjay Wadhwa, Senior Associate Director of the SEC'sNew York Regional Office, said, "With these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market. Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs."
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