An SEC-registered broker-dealer subsidiary of an Italian bank agreed to pay over $35 million to settle SEC charges of violating securities laws through illegal borrowing of certain American Depositary Receipts ("ADRs").
The SEC found that Banca IMI Securities Corp. ("BISC") improperly handled ADRs, in violation of Securities Act Section 17(a)(3), by obtaining and loaning "pre-released" ADRs. Pre-released ADRs are ADRs obtained from a bank depository before the underlying foreign shares are deposited. "Pre-release" is permitted only if the broker obtaining the pre-release either (i) itself owns, or (ii) takes reasonable steps to determine if the customer owns, the corresponding foreign shares.
The SEC alleged that BISC did not take reasonable steps to ensure compliance with pre-release requirements. Instead, the SEC contended that BISC facilitated inappropriate short selling and allowed for trades to be settled with ADRs that lacked the backing of corresponding shares. The SEC also charged that BISC made it possible for improper payment of dividends, allowing for certain borrowers to benefit from dividends that were not subjected to tax withholding.
As a result of the misconduct, BISC will pay over $35 million in penalties ($15,000,000), interest ($2,362,538.26), and disgorgement ($18,048,483.38). The SEC pointed to BISC's full cooperation with the investigation as the reason that the civil penalty did not exceed $15 million.
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