ADR Abuse: A Chronic Issue

This week, JPMorgan Chase announced a settlement with the SEC to the tune of $135 million in light of alleged ADR abuse. The SEC complaint alleged that JPMorgan was involved in the pre-release of ADRs to broker-dealers lacking the corresponding international shares. What may surprise you more than the settlement sum is the fact that JPMorgan does not stand alone in regard to ADR abuse allegations. In fact, the SEC has been investigating – and bringing suits against – top international investment institutions for their alleged involvement in various ADR abuse practices. To date, the financial watchdog has brought suits against eight leading international investment banks and broker-dealers, including SG Americas, Citi and Deutsche Bank for ADR abuse practices spanning 2011-2015.

The Effects of ADR Abuse

While certain conditions regarding the pre-release of ADRs are allotted by the SEC, the vast majority of these transactions are not approved. Pre-releasing ADRs when neither the broker nor its customers have the foreign shares needed to support those new transactions can inflate the total number of a foreign issuer’s tradeable securities, and result in abusive practices such as inappropriate short selling and dividend arbitrage.

ADR Abuse and Fraud

While investment banks and broker-dealers are solely in search of increased returns in their perpetration of ADR abuse, savvy scammers can take advantage of these investment abuses to commit investment fraud. One such form of fraud takes the form of fraudulent short-selling, or short-and-distort fraud.

How to Spot a Short and Distort Scam

The Securities and Exchange Commission (SEC) actually reports short and distort scams as a persistent, growing problem. The issue is that these types of scams subsist on an assumed position of authority. Essentially, theses scams are perpetrated one of two ways:

1. The fraudster may hide behind false identity or present themselves as being in association with a legitimate source.
2. The source of the information has legitimate authority or esteem but may be corrupted and acting to suit their own interests.

Whatever the case, it can be extremely difficult to spot these types of scams. These types of scams exploit our vulnerabilities; our doubts and trust in others. But you can avoid falling victim to them. There are ways to spot word-of-mouth scams and investment practices you can adopt to mitigate risks.

Find out where your information is coming from

As we mentioned above, there are essentially two potential sources for short and distort scams. Whatever (or whomever) the apparent source, it’s important that you actually find out where the information you are receiving originated and to what extent that information is valid. The internet age has made it remarkably easy for people to hide behind false names and identities. Scammers especially have been able to capitalize on access to these new technologies.

Be wary of email and/or social media campaigns

If you start seeing negative press about a stock or security online, make sure you investigate the poster.

• What is their post history? If there is limited to no prior history of posts, it’s a good sign the account was set up recently.
• Examine the content. Look for typos or inconsistencies in the text. A legitimate source of information would have a consistent tone and style.

Determine motives

Even if you know that the source of the information you are receiving is legitimate, you need to make sure the information itself is valid. To do this, you need to understand the motives behind that individual or entity disseminating that information. Ask yourself what they may have to gain by sharing negative press about a stock or security. Is that person/entity taking a short-sell position? If so, that’s a clear indication of short and distort manipulation.

• Celebrity Endorsements
  • We’ve all seen ads for products featuring celebrity endorsements and it’s no different with investment-based products. While celebrity endorsements are meant to lend credibility to a product, it by no means ensures a product’s legitimacy or usefulness. This is especially true with investment products. Find out more here.
• Aggressive Solicitation Practices
  • Aggressive or unwarranted solicitation of services or information should be an immediate red-flag. If you have been receiving repeated calls, emails or requests for correspondence from an individual claiming to be a broker-dealer associated with your account, you need to verify they’re identity.

Do your investment due diligence

Regardless of whether a word-of-mouth scam is being perpetrated, you should always do your homework on a stock or asset before making any financial decision. Basing your decision solely off the advice of others – or worse, unsubstantiated rumors – is foolish and dangerous. You should have a fundamental understanding of the performance and status of your investment portfolio. That way, you are able to verify the validity of negative claims against a stock or security.

Additional Resources

If you want to find out more about ADR investing check out this helpful investor bulletin. You don’t have to weather investment-loss on your own. If you become the victim of ADR abuse, we can help you assess your options and formulate a plan of action to recoup your losses. Contact our team today if you believe you have suffered an investment loss due to fraud.