The US Securities and Exchange Commission (SEC) has fined ITG $24.4 million, following a settlement that stemmed from a breach in federal securities laws in relation to American Depository Receipts (ADRs), per an SEC filing.
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The fine of ITG, an independent Execution broker and financial data firm, constitutes the second edict in under six months for $20 million or more. Back in August, the group was also hit with fine of $20.3 million, together with its affiliate AlterNet Securities for breaches in breach of Dark Pool trading confidentiality.
However, the recent settlement details a violation of securities law of ADRs, without possessing the underlying foreign shares. ADRs represent US securities that are components of shares of an international firm – for all issued ADRs there must exist a corresponding number of foreign shares in custody.
According to the SEC order, an investigation determined that ITG had facilitated transactions known as ‘pre-releases’ of ADRs to its counterparties, neither owning foreign shares nor taking the necessary steps to ensure they were custodied by the respective counterparty on whose behalf they were being obtained.
Three-Year Violation
More specifically, several of the ADRs that were obtained by ITG via pre-release transactions were also used to engage in short selling and dividend arbitrage – ITG was guilty of this procedure (Section 17(a)(3) of the Securities Act of 1933) for a three year period lasting between 2011 to 2014.
As such, ITG was hit with a fine totaling $24.4 million, which it agreed to pay. This included more than $15.0 million in disgorgement as well as an additional $1.8 million in interest and a penalty of more than $7.5 million.
According to Andrew M. Calamari, Director of the SEC’s New York Regional Office, in a recent statement on the order and consequent settlement: “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.”
