The US Securities and Exchange Commission has induced two American subsidiaries of Deutsche Bank to settle charges that they handled 'pre-released' American Depositary Receipts improperly.

The case stems from an SEC investigation into abuses involving pre-released ADRs that is still continuing. In proceedings against Deutsche Bank Trust Co of the Americas (DBTCA), a depositary bank, and Deutsche Bank Securities Inc (DBSI), a registered broker-dealer, the SEC found that their misconduct allowed pre-released ADRs to be used for abusive practices, including inappropriate short selling and inappropriate profiting from matters related to dividend payouts.

Between June 2011 and September 2016, DBTCA’s net revenues from the negligently conducted pre-release transactions came to some $44.5 million. It has to disgorge (the SEC's order, for some reason, says 'pay disgorgement of') $44,458,001.08 and prejudgment interest of $6,597,826.59 to the SEC, which will then transfer it to the general fund of the US Treasury, its owner. It is also to pay a penalty of around $22.2 million. DBSI is paying nearly $1.6 million, disgorging $1.1 million in ill-gotten gains and prejudgment interest and paying a penalty of almost $500,000 on top of that. Neither bank has admitted any wrongdoing, as this is a normal civil settlement of the kind that private litigants conclude daily.

ADRs allow a US bank to purchase a job lot of shares from a foreign company, bundle the shares into groups and reissue them on the New York Stock Exchange or NASDAQ. They are US securities that represent foreign shares of foreign companies and require corresponding numbers of foreign shares to be held in custody at depositary banks. The practice of 'pre-release' allows ADRs to be issued without the deposit of foreign shares, as long as the brokers that receive them have agreements with depositary banks and they or their customers own the number of foreign shares that correspond to the number of shares that the ADRs represent.

In the order against DBTCA, the SEC found that it improperly provided thousands of pre-released ADRs over a period of more than five years when neither the broker nor its customers had the requisite shares. The order against DBSI found that its policies, procedures and supervision failed to prevent and detect contraventions against America's securities laws to do with borrowing and lending pre-released ADRs, involving approximately 850 transactions over more than three years.

Last year, the SEC announced settled charges against two brokerages, ITG and Banca IMI Securities, which at times obtained pre-released ADRs from DBTCA and other depositaries and lent them to other brokers, including DBSI. The SEC also charged a former managing director and head of operations at ITG for failing to supervise people on the securities lending desk who improperly handled pre-released ADRs.