CFTC Accuses Royal Bank of Canada of Sham Trades
U.S. regulators are accusing one of Canada's largest banks of engaging in hundreds of millions of dollars in sham futures trades to reap tax benefits on its holdings of company stocks.
Commodity Futures Trading Commission on Monday sued Royal Bank of Canada [RY 59.19  1.14 (+1.96%)  ] , alleging that a small group of senior RBC employees created and managed a "wash trading" strategy in which they improperly coordinated to allow subsidiaries of the bank to buy and sell stock futures without taking a position in the market. The suit, which was filed in the Southern District of New York, also said RBC concealed and made false statements about its wash trading scheme to the futures exchange CME Group.
Wash trades are banned under U.S. futures law. The CFTC did not name any RBC employees in its complaint.
RBC called the allegations "absurd" and said the CFTC and the exchanges reviewed and monitored the trades in question.
"RBC's trading was permissible in 2005, and it is permissible today under the CFTC's published guidance," Elisa Barsotti, a spokeswoman for RBC said in a statement.
"This lawsuit is meritless and we will rigorously defend ourselves against such baseless allegations," RBC said.
The CFTC said the "wash trading scheme of massive proportion" occurred from at least June 2007 to May 2010.
It said the trades in narrow-based stock index futures and single stock futures were pre-arranged among RBC and two subsidiaries and then executed as "block" trades on OneChicago.
The goal of the trades was to earn an undisclosed amount in Canadian tax credits, while limiting market exposure, the CFTC's complaint alleges.
The CFTC said the alleged activity is one of the largest wash trading cases it has brought.
The agency is seeking to be seen as a stronger enforcer, especially as it probes the collapse of futures brokerage MF Global.
The CFTC is also taking a tougher look at wash trades and has proposed guidance on how companies could conduct block trades between affiliates and not run afoul of CFTC rules or the Commodity Exchange Act.
"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 a statement.
"As we allege, 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 civil monetary penalties and a permanent injunction against further violations of the Commodity Exchange Act and the CFTC's regulations.
cnbc.com
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