JPMorgan Chase (JPM) - Get Report will shell out more than $135 million to the U.S. Securities and Exchange Commission to settle charges related to what the agency contends was "improper handling" of American Depositary Receipts by the bank, according to an agreement released Wednesday.
The New York-based bank "improperly" provided the ADRs to brokers "in thousands of "pre-release" transactions when neither the brokers nor their customers had the foreign shares needed to support those new ADRs," the SEC said in a press release.
ADRs are U.S. securities that represent stocks in foreign companies. ADRs can be pre-released, meaning the U.S. securities can be released by a financial institution -- in this case JPMorgan Chase -- without brokers or their customers having to first deposit the foreign shares used to back up the securities.
However, while the regulations give brokers and their customers some flexibility when it comes to depositing those shares in a bank, they still must actually own the foreign stock used to back up the transaction.
Brokers and their customers were able to take advantage of this lending quirk to "inflate" the amount of foreign stock owned, which, in turn, led to "abusive practices like inappropriate short selling and dividend arbitrage," the agency states.
"We're pleased to have resolved this matter, which is related to an industry practice we voluntarily ended a few years ago," the JPMorgan Chase said in a statement, declining further comment.
JPMorgan agreed to pay out $71 million in what the SEC termed a "disgorgement" of "ill-gotten gains," $14.4 million in pre-judgement interest, and a $49.7 million penalty.
The JPMorgan Chase settlement is part of a broader campaign by the SEC against "abusive ADR pre-release practices" that to date have resulted in eight actions against brokers and banks, the agency said.
"Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs," said Sanjay Wadhwa, senior associate director of the SEC's New York Regional Office, in a press release.