IDCBY Industrial and Commercial Bank of China Ltd (PK)

By Maria Armental 

A New York-based broker-dealer owned by China's biggest lender pleaded guilty to an antitrust charge related to bid-rigging on American depositary receipts and reached a related civil settlement.

Industrial and Commercial Bank of China Financial Services LLC, known as ICBCFS, will pay about $46 million in total fines and penalties, U.S. authorities said Friday.

The case against ICBCFS, the brokerage unit of Industrial and Commercial Bank of China Ltd., represents the second criminal conviction by the Justice Department and the largest recovery by the Securities and Exchange Commission against a broker as part of an investigation around ADRs. The SEC said it has reached settlements totaling at least $414 million with 10 financial institutions as part of the probe.

In the criminal case, ICBCFS admitted it conspired to rig bids for rates to borrow ADRs, coordinating its bids with others to artificially increase profits under an auction-style process, according to court documents filed Friday in Manhattan federal court. It was fined $3.3 million.

In the related civil settlement with the SEC, ICBCFS agreed to be censured for violating antifraud provisions and failing to reasonably supervise workers in its securities and lending desk, without admitting or denying the SEC's findings. ICBCFS agreed to return nearly $24 million in gains and pay about $19 million in penalties and interest.

ICBCFS noted through a representative that it appointed new management after learning of the issues, which it said were the result of misconduct by a former employee.

"We have significantly strengthened and enhanced our compliance program including building a strong compliance culture, strengthening the compliance team and enhancing policies and procedures as well," it said Friday in an emailed statement. "We are committed to this ongoing process."

ADRs were designed to help investors to avoid many of the complexities and costs of directly owning shares overseas while helping foreign companies widen their investor base in the U.S.

ADRs are certificates that represent shares in a foreign company held in custody at a depositary bank. Foreign companies transfer the shares to depositary banks, which use them to back corresponding securities issued to U.S. investors. The securities track the price of the underlying shares.

ADRs can be issued without foreign shares being deposited as long as brokers that receive them have an agreement with the depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent, the SEC said.

However, the SEC found ICBCFS improperly obtained "pre-released" ADRs from depositary banks because neither the firm nor its customers owned the foreign shares that the ADRs represented.

That inflated the total number of a foreign issuer's tradable securities and resulted in abusive practices such as inappropriate short selling and dividend arbitrage, the SEC said.

"By falsely representing that the firm or its customers owned the foreign shares to support pre-release transactions, ICBCFS often played the role of middleman between depositary banks and other market participants in the issuance of what amounted to phantom securities," Sanjay Wadhwa, senior associate director of the SEC's New York regional office, said in a statement.

ICBCFS said it has voluntarily exited the pre-release ADR business.

Write to Maria Armental at maria.armental@wsj.com

(END) Dow Jones Newswires

June 14, 2019 20:17 ET (00:17 GMT)

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