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Regulatory Sanctions

Wedbush Securities: Tough Year Just Got Tougher

June 25, 2019

by Howard Haykin



Last week, the SEC hit Wedbush Securities with $8.1 million in disgorgement, prejudgment interest and penalties for its improper handling of "pre-released" American Depositary Receipts (ADRs).  Previously, …
  • The SEC sanctioned Wedbush for failing to supervise a runaway registered rep.  [SEC]
  • NYSE Arca clipped Edward Wedbush’s wings and sanctioned Wedbush for allowing Mr. Wedbush to operate as if he had his own set of rules. [ARCA]
  • FINRA sanctioned Wedbush for trading through protected quotes in violation of Reg. NMS. [FINRA]



Last week’s sanction was also the SEC's 11th action against a bank or broker resulting from the Commission’s ongoing investigation into abusive ADR pre-release practices, which, thus far, has netted over $422 million in settlements.


WHAT WENT WRONG.    The SEC found that Wedbush improperly obtained pre-released ADRs from depositary banks when it should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.  Such practices resulted in inflating the total number of a foreign issuer's tradeable securities, which, in turn, resulted in abusive practices such as inappropriate short selling and dividend arbitrage. 


ADRs - U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of "pre-release" allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.



[For additional details, click on … SEC Order.]