The U.S. Securities and Exchange Commission has a noble mission: “The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” Right now, this mission is on pause, because the SEC has only a skeleton crew in place due to Trump’s tantrum government shutdown over his border wall. But just before the SEC went on hiatus on December 27, the agency announced a massive victory in service of its mission.
On December 26, the SEC announced that JPMorgan Chase Bank N.A. would be paying more than $135 million to settle fraud charges. As part of the settlement, JPMorgan Chase neither admitted nor denied the SEC’s findings, but did agree to a pretty specific breakdown of the total settlement amount: disgorgement of more than $71 million of ill-gotten gains, $14.4 million in prejudgment interest, and a hefty penalty of $49.7 million. Remember hearing about that? Yeah, didn’t think so. You probably also don’t remember earlier in December when the SEC forced Bank of New York Mellon to pay more than $54 million for (allegedly) doing the same thing, or when Citibank N.A. fell under the SEC’s crosshairs in November and agreed to pay $38.7 million in a similar settlement, or when two U.S.-based subsidiaries of Deutsche Bank settled virtually identical charges for almost $75 million back in July. That’s more than a quarter of a billion dollars recouped from four big banks in less than six months. And that is just a sampling of the big fish the SEC has netted in this crackdown.
So what was JPMorgan Chase allegedly doing? Well, if you guessed that it had to be something pretty bad for them to have jumped at a nine-figure settlement, you are correct.
The charges were for improper handling of “pre-released” American Depository Receipts, referred to as ADRs. You can’t be faulted for not knowing what the hell that means, so let me try to explain. It’s actually pretty simple when you cut through all the needlessly confusing terminology. ADRs are American securities that represent foreign shares of a foreign company. As should surprise no one, to issue ADRs, depository banks, like JPMorgan Chase, are required to maintain custody of a corresponding number of foreign shares. You can buy an ADR as an investor, and that ADR represents shares in some foreign company, and in order to issue you the ADR, institutions like JPMorgan Chase are actually supposed to be holding the foreign stock that the ADR says you own. Makes perfect sense, right?
The “pre-released” part is where things got sticky. Technically, although it seems like a horrible idea to me, ADRs may be issued by a depository bank through the practice of “pre-release” without the depository bank actually holding the corresponding foreign shares. This is legal as long as the broker receiving the ADRs or its customers own the number of foreign shares that correspond to the number of foreign shares the ADR represents, and as long as the broker has an agreement in place with the depository bank.
The problem, according to the SEC’s charges, was that JPMorgan Chase improperly provided ADRs to brokers thousands of times in pre-release transactions when the brokers and their customers did not actually own the foreign shares that were supposed to be underlying those ADRs. As the SEC put it in their press release, “[s]uch practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices….” As I’m going to put it, they were basically writing bad checks. Lots of really big, intentionally confusing bad checks. They were pumping out worthless shares with nothing to back them up, and saying there was something of value backing them up. They were issuing ADRs that neither they nor the brokers actually had enough foreign shares to cover. For profit. Allegedly.
The hardworking staff at the SEC deserves a big pat on the back for putting a stop to this. I’d sure as hell like to see more work like this from the SEC in the New Year and less pointless babysitting of Elon Musk’s Twitter feed. For now though, kudos SEC. Great work! I hope you are all enjoying your involuntary shutdown-related vacations, and that you come back at the end of this government shutdown refreshed and ready to continue your noble struggle against the financial oligarchs robbing us all blind. Maybe just a little more pizzazz with the headlines next time.
Jonathan Wolf is a litigation associate at a midsize, full-service Minnesota firm. He also teaches as an adjunct writing professor at Mitchell Hamline School of Law, has written for a wide variety of publications, and makes it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.
SEC Heroically Stops Big Banks’ Quarter-Billion Dollar Fraud, Pretentious Financial Jargon Keeps Anyone From Noticing curated from Above the Law
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