August 1, 2016

Armageddon for ADRs

Here’s a scary piece from Carl Hagberg’s “Shareholder Service Optimizer”:

The SEC’s Enforcement Division has issued wide-ranging subpoenas to the four largest ADR banks – and to many of their top officials, we are told – demanding detailed information going all the way back to 1997, according to our source – the chief whistleblower, who, while wanting to be anonymous for now, knows the ADR business inside and out.

The Treasury Department and the FBI are also heavily involved – investigating the use of ADR programs to launder money on a huge, global scale according to our source, who has provided investigators with a detailed “roadmap” as to exactly how it’s done. The Senate Banking Committee is following this closely too, with one staffer reportedly sending a message to regulators that “We will not be looking for millions in fines and penalties, but billions.”

All four banks have ‘lawyered up’ with four of the country’s biggest and best-known law firms, who are scrambling like mad to reach a settlement and avert disclosures that are likely to rock the banks in a major way. More class action suits will be filed soon, according to our source, revolving around foreign exchange transactions that were systematically rigged in favor of the big-four players – and the big-four ADR banks recently settled massive IRS claims for back taxes on their ill-gotten, and we guess, previously concealed gains – “for pennies on the dollar.”

And oh yes, a book – and a movie – entitled “ADRmageddon” are on the drawing boards as we write this.

For over 25 years we have been asking why there are ADRs anymore – since issuers of securities are perfectly capable of issuing ‘ordinary shares’ – and easily making any and all payouts in currency of the owners’ choosing, based on current, and well-publicized exchange rates.

The answer is a simple one: ADR banks have been charging excessive fees for buying, selling and ‘lending’ ADRs, short-changing owners on the exchange rates and ‘nicking’ the proceeds a second and sometimes a third time with fees and surcharges…because they make tons of money this way and have been blithely getting away with it….until now.

We think the upcoming revelations may well turn out to be an Armageddon for ADRs…and may do serious harm to the already tarnished reputations of several major banks – which we used to expect would deal with clients fairly, and honestly…so do stay tuned.

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Broc Romanek