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US regulator sues RBC over Caribbean operations

Published:Monday | April 9, 2012 | 12:00 AM

The United States Commodity Futures Trading Commission (CFTC) has filed a legal suit against Canada’s biggest bank by assets, accusing it of carrying out hundreds of millions of dollars of “wash trades” in the Caribbean, among other offices,  in a bid to claim dividend tax credits from Canada’s Revenue Agency (CRA).

The CFTC claims that the “wash trading scheme” took place over several years, from at least 2007 to 2010, during which Royal Bank of Canada (RBC) affiliates in the Cayman Islands, Toronto, Luxembourg and London traded futures contracts between themselves, “so that prices were essentially set by the bank rather than the market”.

The CFTC charged that RBC “wilfully concealed, and made false statements” about its trades.

In addition, it charged that the trades were “designed and controlled by a small group of senior RBC personnel acting on RBC’s behalf”.

The CFTC identified an RBC executive in the lawsuit as “CFG Member 1”, describing him as head of global arbitrage and trading for RBC’s Caribbean branches and co-head of the Central Funding Group, which offers “secured balance sheet funding solutions” to clients.

In denying the allegations as “absurd,” RBC said the US regulators were kept abreast of  RBC’s actions, adding that it had approved the strategy.

“This lawsuit is meritless, and we will rigorously defend ourselves against such baseless allegations,” said RBC in a statement.
The CRA declined to comment on the matter, saying that confidentiality laws prevent it from talking about individual cases.

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, said it is “following the situation”.
Observers say the CFTC rarely goes after big banks, typically preferring smaller game, such as brokerages and hedge funds.
“This is a bit unusual,” said Dan Waldman, a lawyer at the Washington-based law firm, Arnold & Porter.

“Usually someone does a (questionable) trade, and it’s uncovered by the regulator and that’s that,” he added.

“But, obviously, this (alleged scheme) has been going for some time. People inquired about it, assumptions were made about what kinds of trades were made,” Waldman continued. “It was a whole dialogue with regulators, [and it] took place over a period of time.”

Alan Mak, a principal at the Toronto-based forensic accounting firm, Rosen & Associates, said he doesn’t think RBC will take this laying down.

“As a player with global ambitions, it has little choice but to fight the allegations to protect its reputation,” he told reporters, adding “I think when challenging the integrity of the bank, the bank will have to clear its name”.