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Regulatory

Citibank settles with SEC over ADR practices as part of ongoing investigation

Citibank will pay $38.7 million to settle charges that it improperly handled U.S.-listed shares of international companies, the Securities and Exchange Commission announced Wednesday.

The SEC said Citibank "pre-released" American depository receipts to brokers in thousands of transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.

Such practices inflate the total number of a foreign issuer's tradeable securities, which the SEC said can lead to abusive practices like inappropriate short selling and dividend arbitrage.

It is the SEC's second action against a depository bank and sixth action against a bank or broker resulting from the SEC's ongoing investigation into what it said are abusive industry-wide practices.

Sanjay Wadhwa, senior associate director of the SEC's New York regional office, said in a statement that the investigation "has revealed that banks and brokerage firms profited while ADR holders were unaware of how the market was being abused."

Citibank did not admit or deny the SEC's findings, and will pay more than $20.9 million in disgorgement, $4.2 million in prejudgment interest and a $13.5 million penalty.

The SEC order acknowledges Citibank's remedial acts and cooperation in the investigation.