ITG pays $24 million to settle despository receipt case

Broker failed to ensure receipts were backed by foreign shares.

Agency broker ITG has agreed to pay $24.4 million to settle charges by the Securities and Exchange Commission (SEC) over the improper handling of American Despository Receipts (ADRs).

According to the SEC, ITG facilitated transactions of ADRs known as “pre-releases” to counterparties without owning the foreign shares or ensuring they were custodied by the counterparty. ADRs are US securities that represent shares in foreign companies and all ADRs must have a corresponding number of foreign shares custodied.

Many of the ADRs obtained via ITG were then used in short-selling and dividend arbitrage even though they may not have been backed by actual foreign shares. The SEC alleges this activity took place between 2011 and 2014.

“ITG’s failure to properly supervise its securities lending desk caused ADRs to be issued that were not backed by actual shares, leaving them ripe for potential market abuse,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

ITG did not admit or deny the charges but agreed to be censured and pay $15 million in disgorgement, $1.8 million in interest and a penalty of $7.5 million. The SEC said ITG cooperated with its investigation and took remedial action, which is reflected in the final settlement.