Jefferies LLC will pay almost $4 million for improperly handling "pre-released" American depositary receipts, the Securities and Exchange Commission announced Dec. 9.
The practice of "pre-release" authorizes ADRs to be issued without the deposit of foreign shares, given that brokers who will receive those ADRs have an agreement with a depository bank and the broker, or its customer owns the number of foreign shares equal to the number of shares the ADRs represent.
The SEC's order states that the company improperly borrowed pre-released ADRs from other brokers when Jefferies should have known that those brokers did not possess the foreign shares necessary to support the ADRs. Additionally, the order found that Jefferies "failed reasonably" in supervising its securities lending desk personnel with respect to the borrowing of the ADRs from the brokers.
Jefferies did not admit nor deny the SEC's findings but agreed to hand over $2.2 million in ill-gotten gains and pay more than $468,000 in prejudgment interest, as well as a $1.25 million penalty for total monetary relief of nearly $4 million.