The regulator has focused part of its probe on the former managing director and head of operations at the firm.
The SEC reports additional charges in an enforcement investigation involving the improper handling of American depositary receipts (ADRs) by a former supervisor at broker-dealer ITG Inc.’s securities lending desk.
The SEC investigation alleges that Anthony Portelli, ITG’s former managing director and head of operations, who ran ITG’s securities lending operations and was responsible for the firm’s compliance with “pre-release agreements” for transactions of ADRs, made “supervisory failures.”
ADRs are the U.S. securities that “represent foreign shares of a foreign company.” Before obtaining a “pre-released ADR” to lend to a customer, brokers like ITG must own, or determine that a customer owns, the number of foreign shares that corresponds to the number of shares the ADR represents, the SEC points out.
However, “under Portelli’s watch, personnel on ITG’s securities lending desk failed to take reasonable steps to determine whether the proper amounts of foreign shares were owned and held by ITG’s customers,” SEC officials are alleging. “This failure opened up the possibility that the ADRs could be used improperly for short selling or dividend arbitrage.”
According to the SEC’s settlement order, from 2011 through 2014, Portelli allegedly “knew that ITG securities lending personnel under his supervision routinely obtained pre-released ADRs without taking any reasonable steps to comply with the Pre-Release Representations.
“For example, Portelli knew that these ITG securities lending personnel routinely obtained pre-released ADRs through the Pre-Release Agreements and then lent them to counterparties pursuant to standard MSLAs [master standard securities loan agreements] that did not address pre-released ADRs, and did not contain any provisions requiring compliance with any of the Pre-Release Representations,” according to the SEC.
“Consistent with the firm’s use of such MLSAs, he was not aware of anyone at ITG confirming whether counterparties complied with the Pre-Release Representations. Nor was he aware of any other procedures at ITG addressing compliance with the Pre-Release Agreements,” SEC officials say.
The SEC order alleges that, if “Portelli had taken reasonable steps to follow-up with respect to the handling of ITG’s pre-release transactions by securities lending desk personnel, it is likely that he would have prevented and detected ITG’s securities lending desk personnel’s ongoing misconduct.”
An ITG spokesperson confirmed that Portelli is no longer employed by ITG, but declined additional comment.
At the time of the earlier story, in January 2017, an ITG spokesperson directed FTF News to the following passages from the company’s 3Q16 earnings call, during which CEO Frank Troise said:
“We recognize that there is heightened sensitivity among some of our clients with respect to regulatory matters… What I’d like clients to take away is that this is a legacy matter, with activities run out of our middle office. It was shut down in the fourth quarter of 2014.”
“We want to put this legacy matter behind us,” Troise continued at the time. “Additionally, we’re committed to pressing forward with our strategic operating plan and we’ve made a number of enhancements to our risk and controls and governance environment. They start of the top of the house, with changes that we’ve made to the Board. We named a new General Counsel, a new Global Chief Compliance Officer. We’ve introduced new processes, and additionally, in coordination with the Board, we’ve hired an external Compliance Consultant so we’re dedicated to operating with the highest level of integrity.”
Portelli, 60, a resident of New York’s Staten Island, has agreed to settle the charges and pay a $100,000 penalty, per the SEC, and he is also “prohibited from acting in a supervisory capacity for at least 18 months.”
Portelli agreed to the settlement without admitting or denying the SEC’s charges.
The action against Portelli follows ITG’s own agreement with the SEC to “pay more than $24 million” to settle the case against the firm.
To read about the broker-dealer’s settlement with the SEC, click here.
“Supervisors at broker-dealers have a responsibility to act reasonably to prevent and detect violations of the securities laws,” Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, says in a prepared statement.
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