Settlement resolves lawsuit with US Commodity Futures Trading Commission
Royal Bank of Canada has settled a lawsuit with the U.S. Commodity Futures Trading Commission, which accused the bank of running an illegal trading scheme involving more than 1,000 illegal wash sales, fictitious sales, and noncompetitive transactions over a three-year period. RBC agreed to pay a fine of US$35 million.
Details of the settlement were filed in a consent order on Thursday in the Manhattan federal court.
According to the findings of fact agreed by the commission and RBC, the Canadian bank conducted block trades with branches in the Cayman Islands and the Bahamas involving multiple stock index futures and single stock futures between June 2007 and May 2010.
Senior RBC personnel designed the trades so that RBC entities would be both buyer and seller in the block transactions. By coordinating the timing, quantity, price and composition of the blocks of contracts traded, RBC conducted identical trades at both ends with its Cayman and Bahamas subsidiaries which would come due at the same time and offset each other, the consent order said.
As such, the transactions “were designed to and did achieve wash results for the RBC corporate group,” the order said.
The trades were “fictitious” in the sense that the profits and losses accrued to RBC subsidiaries netted to zero, the order said.
Wash trades typically involve the buying and simultaneous selling of the same securities through two different brokers or by the same firm without a change in ownership to give the appearance that a stock is highly traded.
Wash trading is illegal because it intends to manipulate the market and prompt investors to buy the stock in the belief that it is subject to more market activity than is actually the case.
In RBC’s case, the trades were part of a larger strategy designed to profit from stock loan business, optimize capital and achieve tax benefits for certain subsidiaries in the group.
CFTC Director of Enforcement Aitan Goelman said while illegal wash trades may seem innocuous, they are not. “They provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason. This matter clearly demonstrates that the CFTC will vigorously enforce this prohibition to protect the integrity of our markets.”
Although the trades were privately negotiated, they were carried out under exchange rules and cleared on OneChicago, an electronic futures exchange.
While the trades had to be reported to the exchange without delay, RBC had reported only the initial transaction but not the intention to carry out an offsetting trade.
It therefore failed to comply with OneChicago’s block trade rules and thus the trades were non-competitively executed, the consent order noted.