Amid claims that they mishandled ARDs (American Depository Receipts) trading, broker-dealers BMO Capital Markets and Cantor Fitzgerald & Co reached an agreement to provide payments of $3.9 million and $647,000, respectively, to settle their respective cases.
According to the United States’ SEC (Securities and Exchange Commission) both platforms received accusations of failing to properly supervise their securities lending desks, a development that resulted in ADRs being issued without the backing of actual, real shares, leaving them exposed to possible market manipulation.
Failing to Ensure the Backing of Actual Shares
The cases had to do with the prerelease of the American depository receipts, in which financial institutions issue depositary receipts without the need of having shared.
According to the watchdog, both Cantor Fitzgerald and BMO got ADRs, known as the certificates that validate the ownership of a foreign stock, from fellow broker exchanges. However, they did not make sure that they were properly backed by the actual shares, which was seen as a violation.
Per the financial regulator, these pre-released ADRs were misused with the objective of engaging in practices deemed as “abusive.” Among them were inappropriate profiting from dividend payouts and questionable short selling.
The SEC further probed and imposed fines to various Wall Street banks while it assesses whether they have dismissed market abuse and tax fraud prevention measures. Some of the institutions that were flagged are the Bank of New York Mellon, Citigroup, Deutsche Bank, and J.P. Morgan.
A Similar Event
The SEC’s New York office did a similar thing with Deutsche Bank in 2018: it fined the institution with $75 million in order to settle claims that were actually related to the same case.
According to the Commission, BMO Capital consented the payment of $1.2 million in penalties and interest. It also forfeited a little over $2.2 million worth of profits, although it didn’t actually admit any wrongdoings.
The practice per se isn’t frowned upon, and its main objective is to smoothen trading. However, it is often abused for betting against a specific firm’s stock because it involves the sale of unowned shares, with the irresponsibility of not locating the shares that are needed to cover the sale. The ARDs are, according to the SEC, being used illegally in the arbitrage of distinct tax regimes.
Those brokers that sell or transfer these assets need to be accountable and take responsibility in making sure, in any way, that the number of foreign shares deposited with custodian matches.
