Merrill Lynch to Pay $8M to the SEC
In an order against Merrill Lynch, the U.S. Securities and Exchange Commission found that the brokerage firm failed to prevent securities violations and protect securities laws regarding the pre-release of American Depository Receipts (ADRs). Resulting in a $8 million dollar Merrill Lynch SEC fine.
In the administrative order, the SEC accused Merrill Lynch of “abusive practices” that should not have occurred.
What are ADRs?
ADRs are issued by U.S. banks. They are securities that represent and correspond to an equal value or amount of foreign shares in a foreign company and remain in custody of the depository U.S. bank. Pre-release means the ADRs are released before the foreign shares are received by way of agreement between the bank and the broker.
Facts of the Case
According to the SEC, ML improperly borrowed pre-released ADRs from other brokers with the knowledge that the brokers did not own the shares required to support the Merrill Lynch ADRs. Due to the mishandling of the ADRs, the SEC accused Merrill Lynch of committing dividend arbitrage and short selling.
When Merrill obtained the pre-released ADRs, the amount of foreign traders’ securities was inflated, thus exploiting the price difference between the different markets, causing Merrill Lynch as the depository bank to receive an undue profit.
Merrill Lynch agreed to the settlement but did not confirm or deny the SECs findings.
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