Royal Bank of Canada was sued by U.S. regulators over claims that the Toronto-based lender engaged in 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 yesterday in a complaint filed in Manhattan federal court.

 

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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. Photographer: Norm Betts/Bloomberg

“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-mailed 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-mailed 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, which also described the lawsuit as “not a financially material event to RBC.”

Royal Bank traded at $58.50 in U.S. after-markets trading yesterday, down 1.2 percent from the U.S. market close.

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.

Trading Strategy

Between 2006 and 2010, the narrow-based index trades between a Toronto-based bank account and RBC Europe Ltd., a London-based bank subsidiary, represented all of the narrow- based index volume on OneChicago, the CFTC said in the complaint. Senior members of the bank’s Central Funding Group determined the prices and contracts traded. A co-head of the group, unnamed in the complaint, created and coordinated the trading strategy, the CFTC said.

From 2005 to 2010, RBC concealed material information and made false statements about the trades to CME Group Inc. (CME), which had regulatory oversight of the exchange, according to the CFTC. RBC’s responses to CME questions about the trades “concealed information concerning the central role” of the central funding group employee and the bank’s single-stock futures trades, CFTC said.

Chris Grams, a CME spokesman, declined to comment.

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

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds atmreynolds34@bloomberg.net

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