Merrill Lynch Pierce Fenner & Smith Inc. agreed to settle charges of improper handling of "pre-released" American depositary receipts with the SEC for more than $8 million.
The regulator found that the company improperly borrowed prereleased ADRs from other brokers when it should have known that those brokers did not own the foreign shares needed to support the ADRs. This inflated the total number of a foreign issuer's securities, resulting in abusive practices like inappropriate short-selling and dividend arbitrage.
According to the order, the company's policies and procedures failed to prevent and detect these securities law violations.
Merrill Lynch did not accept or deny the charges but agreed to pay more than $4.4 million in disgorgement, more than $724,000 in prejudgment interest and a $2.89 million penalty to settle the matter.