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Royal Bank of Canada is being sued by U.S. regulators over claims that the Toronto-based lender engaged in a series of illegal futures trades worth hundreds of millions of dollars to garner tax benefits tied to equities.

Canada’s biggest bank made false and misleading statements about “wash trades” from 2007 to 2010 in which affiliates traded among themselves in a way that undermined competition and price discovery on the OneChicago LLC exchange, the Commodity Futures Trading Commission said in a statement today. The allegations will be laid out in a complaint set to be filed in U.S. District Court in New York, the CFTC said.

“A fundamental purpose of the futures markets is to provide an arm’s-length mechanism for market participants to discover prices and shift risks associated with products traded in those markets,” CFTC enforcement director David Meister said in an e-mail statement. “RBC not only designed and executed a wash sale scheme that undermined that purpose, it went a step further and misled the exchange into believing that its conduct was lawful.”

The lawsuit is meritless and the bank intends to defend against the allegations, Kevin Foster, a Royal Bank spokesman, said in an e-mail statement.

“Before we made a single trade, we proactively contacted the exchange to seek its guidance,” Foster said. “These trades were fully documented, transparent, and reviewed by both the CFTC and the exchanges, and for the next several years were monitored by them.”

The trading was permissible under the CFTC’s published guidance, Foster said in the statement.

Hundreds of Transactions

Royal Bank enlisted affiliates to help carry out hundreds of futures transactions that were done off-exchange and then reported to OneChicago as block trades between independent affiliates, according to the CFTC. A single group of RBC employees designed and managed the strategy, the agency said.

The trades, which resulted in Royal Bank not having a financial position in a market, were conducted for Canadian tax benefits tied to holding certain stocks, the CFTC said in its statement. The transactions, involving single-stock futures and narrow-based indexes, were used to hedge the risk of holding the equities, according to the statement.

The CFTC is seeking monetary penalties and an injunction against further violations, the agency said.

How the U.S. CFTC alleges RBC “washed” its trades

STEP 1: RBC would buy common stock worth a certain amount in a U.S. dividend-paying company.

STEP 2: The bank would then allegedly sell futures to its own foreign subsidiary, which would then bet against that same stock.

THE EFFECT: RBC would allegedly get a Canadian tax credit for the dividend even though it had effectively “washed” itself of any risk from holding the stock.

THE CHARGE: The U.S. CFTC charges RBC “concealed material information … and made material false statements” and undermined the integrity of the market through hundreds of millions of dollars worth of trades.

RBC’s RESPONSE: “These trades were fully documented, transparent, and reviewed by both the CFTC and the exchanges…. it is absurd to now claim these trades were either fictitious or wash sales.”
With files from Financial Post

Bloomberg.com

http://business.financialpost.com/2012/ … -millions/

Statistics: Posted by yoda — Mon Apr 02, 2012 4:15 pm