WASHINGTON, D.C. — Citibank has reached a $38.7 million settlement with the U.S. Securities and Exchange Commission (SEC) to resolve charges that the bank inappropriately gave American depository receipts (ADRs) to brokers prior to thousands of transactions without the required corresponding foreign shares in a depository bank.
The SEC alleges Citibank did not properly handle ADRs or U.S. securities relating to foreign company shares held in a depository bank. According to the SEC, ADRs are permitted to be issued during pre-release practices as long as the receiving broker or customer owns a corresponding number of foreign shares. The SEC alleges Citibank issued ADRs without the broker or customer having the required foreign shares which led to inflation of "foreign issuer's tradeable securities" and "short selling and dividend arbitrage."
“Our charges against Citibank are the latest in our ongoing investigative effort to hold accountable Wall Street institutions that participated in an industry-wide fraud,” SEC New York Regional Office senior associate director Sanjay Wadhwa said in a statement. “Our investigation into these practices has revealed that banks and brokerage firms profited while ADR holders were unaware of how the market was being abused.”
Citibank has agreed to pay more than $20.9 million in disgorgement for "ill-gotten gains," $4.2 million in pre-judgement interest and a $13.5 million penalty, the SEC said.