SEC Investigating Big Banks Mishandling Securities in ADR Market

The Securities and Exchange Commission (SEC) is investigating whether big banks have been mishandling securities in the American Depositary Receipt (ADR) market. The banks that have been subpoenaed include: Bank of New York Mellon Corp, Citigroup, Deutsche Bank AG and JP Morgan Chase. The probe is looking into whether the banks have broken controls designed to prevent market abuse and tax fraud and may or may not result in enforcement action. An ADR is a stock that trades in the U.S. but represents a specified number of shares in a foreign corporation. They are bought and sold on American markets just like regular stocks, and are sponsored/issued in the U.S. by a bank or brokerage firm. The SEC is looking into the “pre-release” of ADRs, where banks issue depositary receipts to investors without first having the underlying shares in their custody. This is referred to as “naked short selling,” and means the shares could be sold short without actually having them, and is illegal.

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