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Wedbush Improperly Handles ADR’s and Gets Fined $8.1 Million From SEC

Levin Law | 9.20.2019
wedbush securities

The Securities and Exchange Commission announced Wedbush Securities, a Los Angeles based broker-dealer, is being fined over $8 million to settle the charges against them for improperly handling United States securities representing foreign company shares. These shares are called ADRs, short for American Depository Receipts. Wedbush Securities is the 11th brokerage firm being charged by the SEC for having abusive or shoddy ADR practices.

The SEC Investigation Findings

The findings say Wedbush violated securities industry laws between 2011 and 2013 by obtaining ‘pre-released’ ADRs and loaning them to their broker-dealer customers. In other words, they secured the ADRs without obtaining the respective foreign share deposits.

How An ADR Should Be Secured

To be in accordance with securities rules and regulations, ADRs must have custody of a corresponding number of foreign shares held at a depository bank. The act of issuing an ADR without the foreign shares being deposited in a US bank is a no-no for many reasons. This faulty practice is one the SEC has been investigating for quite some time, and Wedbush is just another violator in a growing list of firms and brokers getting charged and fined.

“Wedbush is just one of the numerous market participants that should have known its actions would leave ADR markets ripe for abuse,” said Sanjay Wadhwa of the SEC’s New York regional office, according to a prepared statement.

FINRA broker-dealers receiving an ADR as a ‘pre-release’ must have an agreement in place with a depository bank, or it must ensure their customer owns the correct number of foreign shares necessary to properly obtain the American Depository Receipts within the United States. Any other practice is a violation of SEC rules and regulations. FINRA broker-dealers taking part in this shoddy practice (or who have in the past) will most likely find themselves the subject of SEC action.

Wedbush’s Hot Water Continues To Boil Over

Wedbush has agreed to pay the fines, without actually affirming or denying the mishandling of securities charges against them by the SEC. While executive management refers to the regulatory matter and their business, they fail to address the actual charges, merely stating they voluntarily stopped their unlawful ADR practices back in 2013 before the SEC began the industry-wide investigation. It is said Wedbush has fully cooperated with the SEC from the beginning of the investigation.

“Wedbush takes its obligations under the securities laws seriously and we are pleased to resolve this matter relating to conduct that we voluntarily ceased in 2013. This is one of several legacy regulatory matters that our leadership team has sought to resolve so that we can continue to focus on serving our clients to the best of our ability,” Co-Presidents Rich Jablonski and Gary Wedbush said in a June 18, 2019 press release.

The fines of more than $8 million Wedbush is responsible for paying breaks down like this: a penalty fee of $2.4 million, disgorgement fines of $4.8 million, plus over $800,000 in interest charges. This newest charge follows a long history of Wedbush drama, including that of ex-CEO, Ed Wedbush, stepping down last year after the SEC alleged the company turned a blind eye to a broker engaging in a ‘pump and dump’ scheme. The violations across customer protection and net capital rules cost the Wedbush firm millions then too. They paid the Financial Industry Regulatory Authority and the SEC $2.5 million in fines and penalties for the violation.

The Shoddy ADR Practices Coming To An End

The SEC is continuing its investigation firm to firm, large to small in order to locate deals where broker-dealers who did not own ADR supported foreign shares took part in obtaining the pre-released ADRs from bank depositories anyway. These shady practices had a clear impacting result – inflation in the total number of foreign-issued securities (tradeable) leading to several practices that shouldn’t have occurred, including dividend arbitrage and inappropriate short-selling.

Is an ADR worth investing into?

ADRs, American Depository Receipts, offers investors in the U.S. a way to invest in non-U.S. stocks without worrying about the hassles and complexities of dealing with a foreign stock market. The ADR (equity security) was explicitly created to simplify the foreign investing process for investors in America. A significant number of big-name foreign global businesses are represented by ADRs, including Unilever, Nokia, and RDP (Royal Dutch Petroleum, the Shell gasoline maker). These companies and many others located outside of the United States list their stock shares through ADRs on the United States stock exchanges.

Do you need legal advice?

Levin Law has recovered tens of millions of dollars for investors throughout the world.  If you have been the victim of broker or investment fraud, please contact us for a free case evaluation. Our law firm serves clients around the world in a wide array of needs, including financial, securities, business litigation, employment disputes, and class actions. Call our investment fraud lawyers at (305) 402-9050 to discuss your situation, email, click here to fill out our contact form for a free consultation.

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