CFTC Accuses Royal Bank of Canada of Massive Trading Scheme
On Monday, the Commodity Futures Trading Commission (“CFTC”) filed civil charges against Royal Bank of Canada (“RBC”), accusing the bank of engaging in hundreds of millions of dollars in illegal stock future trades to gain Canadian tax credits.
“Today’s action should make clear that the CFTC will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain,” said David Meister, Director of the CFTC’s Division of Enforcement.
The complaint, filed in the Southern District of New York, alleges that from at least June 2007 to May 2010, RBC conducted a massive wash sale scheme in connection with exchange-traded stock futures contracts. According to the CFTC, a small group of senior RBC employees allegedly created and managed a trading strategy whereby they improperly coordinated trades to allow subsidiaries of the bank to buy and sell stock futures without taking a position in the market, thereby eliminating, or washing, the risk of a loss.
Wash trades, the simultaneous and offsetting purchase and sale of futures contracts, are banned under U.S. futures law.
The lawsuit claims that the bank bought and sold stocks in U.S. and Canadian companies, and then took opposing positions on futures written on those same stocks. Specifically, RBC “allegedly non-competitively traded hundreds of millions of dollars’ worth of narrow based stock index future and single stock futures contracts with two of its subsidiaries,” and then executed block trades on OneChicago LLC, an electronic futures exchange.
According to the complaint, those trades were not negotiated at arm’s length, as required by law. Federal regulations allow futures trades between companies and subsidiaries only if they are conducted on an arm’s length basis. In its complaint, the CFTC alleges that the trades were designed and controlled by senior RBC personnel acting on behalf of RBC’s behalf.
The goal of the scheme was to “realize lucrative Canadian tax benefits from holding certain public companies’ securities in its Canadian and offshore trading accounts,” while limiting market exposure.
The complaint also accuses the bank of concealing and making false statements about its scheme from OneChicago and CME Group, Inc., the entity that exercised regulatory compliance for OneChicago. When asked to describe the trades to CME Group, the bank allegedly falsely stated that its trading activity was conducted at arm’s length, and concealed the fact that the strategy was created and managed by a group of RBC personnel.
“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,” added David Meister. “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 CFTC is seeking monetary sanctions and a permanent injunction against further violations of the Commodity Exchange Act and the CFTC’s regulations.
RBC has called the allegations “absurd,” and has promised to defend itself against “such baseless allegations,” said Elisa Barsotti, a spokeswoman for the bank.
To read more about the charges filed by the CFTC, see the Commission’s full press release at http://www.cftc.gov/PressRoom/PressReleases/pr6223-12.
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This entry was posted on Tuesday, April 3rd, 2012 at 9:05 pm and is filed under Recent News, SEC Whistleblower Program, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.