Kristian Rouz — The US Securities and Exchange Commission (SEC) has moved to slap a hefty fine on Deutsche Bank as a settlement payment in a probe into the bank's mishandling of American Depositary Receipts (ADRs).
Deutsche agreed to comply with the decision without saying whether or not it admits to the SEC's findings.
The regulator said Deutsche extracted "ill-gotten gains" from its mishandling of pre-released ADRs. According to the regulator's Enforcement Division, its investigation unearthed "industry-wide abuses" pertaining to ADRs, which might suggest additional action against other financial institutions could follow suit.
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The SEC's fines will apply to two of Deutsche's subsidiaries rather than the bank itself, as these particular companies were immediately involved in the alleged wrongdoing.
The entities in question are depositary bank Deutsche Bank Trust Co. Americas and registered broker-dealer Deutsche Bank Securities Inc., which, according to the SEC, enable "abusive practices" in the use of ADRs.
"Failures at each institutional link in the chain of these transactions, from depositary bank to broker-dealer, left the markets for those ADRs ripe for potential abuse at the expense of ADR holders," Stephanie Avakian of the SEC's Enforcement Division said.
Deutsche's alleged wrongdoing includes inappropriate short-selling and inappropriate profiteering from dividend payments.
For its part, Deutsche Bank said it would fully comply with the SEC's decision, and its subsidiaries are working with the investigation to determine the scale of the alleged abuse.
"The bank provided substantial cooperation to the SEC in its inquiry and voluntarily stopped engaging in pre-release ADR transactions entirely by late 2016," Deutsche said in a statement.
The SEC also explained the mechanisms of ADR mishandling by Deutsche's subsidiaries. The SEC said Deutsche Bank Trust Co. Americas had issued thousands of pre-released ADRs over at least five years, whilst neither brokers nor customers had access to the actual shares of foreign companies traded in US exchanges through those ADRs.
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This might point to an alleged speculative practice of trading in non-existent assets as it remains unclear whether or not the ADRs in question were representing actual foreign stocks.
Additionally, the SEC said, Deutsche Bank Securities Inc. failed to detect and prevent at least 850 questionable transactions involving such ADRs.
In a broader context, the actions of Deutsche's subsidiaries could have contributed to an artificial expansion of the US stock market by inflating equity valuations for the purpose of extracting ill-gotten gains.
