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
Statistics: Posted by yoda — Mon Apr 02, 2012 4:15 pm
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Something sure stinks in stinksville.
The trustee handling the unwinding of fallen broker dealer MF Global has uncovered some “suspicious” trades made by the company in the last days leading up to its Halloween collapse, a bankruptcy judge was told yesterday.
The trades could strike at the heart of the mystery surrounding $1.2 billion in missing customer funds — and help the army of investigators searching for the cash since the Oct. 31 Chapter 11 filing.
Just 24 hours earlier, the disgraced Wall Street titan Jon Corzine, MF’s former chief executive, told lawmakers in Capitol Hill testimony that he had no idea where the cash was.
James Kobak, a lawyer for MF trustee James Giddens, did not provide any details surrounding the shady trades because there are a number of regulatory and criminal probes under way.
Corzine, 64, in three hours of testimony before the House Agriculture Committee Thursday, denied any wrongdoing and said that he never “intended” to break the law by mingling hundreds of millions in customers’ accounts with the firm’s money.
One bright spot during yesterday’s bankruptcy court hearing in downtown Manhattan was the move by Judge Martin Glenn to approve a third distribution to MF clients who have had their hard-earned cash stuck in MF accounts since Corzine’s company crashed.
Judge Glenn, setting aside creditor objections, approved the distribution of $2.2 billion to MF customers — bringing the trickling distribution to most clients to about 72 percent of their account balance.
More than a month after MF went under, regulators at the Commodity Futures Trading Commission, the Securities and Exchange Commission, the Financial Industry Regulatory Authority and a host of government enforcement agents have been trying to locate some $1.2 billion in customer funds that has gone missing.
Kobak cautioned against anyone thinking that the number is exaggerated and noted that the trustee has no reason to believe that the shortfall in customer accounts is anything less than $1.2 billion.
Clients of MF, who range from small-time city-dwelling investors to grain farmers in the heartland using commodities dealers like MF to hedge their inventories, have so far received about 60 percent of their money.
The next round of distributions is slated to be rolled out over the next two-to-four weeks, noted a spokesman representing the trustee.
MF Global’s chaotic bankruptcy, the eighth largest in US history, has resulted in a slugfest between average clients and deeper-pocketed creditors who have their funds frozen as a result of the broker dealer’s collapse.
One of those heavyweight creditors, HSBC, sued MF, Global on behalf of clients claiming that it is owed $850,000 in contracts for gold and silver bullion.
Although a relatively small amount of money, the dispute highlights the hundreds of similar issues that have erupted around MF Global, whose tentacles extend to thousands of companies worldwide.
Statistics: Posted by yoda — Sat Dec 10, 2011 12:02 pm
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