Canada bank accused of sham trades

By Marcy Gordon , AP

WASHINGTON — U.S. regulators are accusing one of Canada’s largest banks of engaging in hundreds of millions of dollars in illegal futures trades to reap tax benefits on its holdings of company stocks.

The Commodity Futures Trading Commission (CFTC) filed civil charges Monday against Royal Bank of Canada, saying the bank made the sham trades with itself. The agency said it is the largest case it has brought against so-called wash trades, which cancel each other out. Royal Bank of Canada engaged in “a wash-trading scheme of massive proportion,” the CFTC said.

In addition, the agency alleged that the bank concealed the true nature of the trades and made false statements to a futures trading exchange, OneChicago.

The CFTC alleged that Royal Bank of Canada made the trades in stock futures contracts from June 2007 to May 2010 at noncompetitive prices with two foreign subsidiaries. The transactions weren’t “at arm’s length,” as required by law, and as reported by the bank to the exchange, the agency said.

An arm’s length transaction either is one in which the buyer and seller aren’t directly related or one done at a price that would prevail if they were unrelated. The federal rules allow futures trades between companies and subsidiaries, but only if they are done on an arm’s length basis.

Toronto-based Royal Bank of Canada called the CFTC’s allegations “baseless” and said it will contest them in court. The bank said the trades had been vetted in advance by the CFTC and futures exchanges back in 2005 with no objections being lodged against them, and they were monitored for several years.

The CFTC is seeking a permanent injunction against the bank committing further violations of the federal commodities laws and rules, and unspecified monetary penalties in its civil lawsuit filed in federal court in Manhattan.

The CFTC said the bank’s trading strategy was devised to gain Canadian tax credits on its holdings of U.S. and Canadian company stocks. The strategy was created and carried out by a group of executives at the bank. However, the agency’s suit didn’t name any individuals.

“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,” SEC Enforcement Director David Meister said in a atement.