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Sunday, December 10, 2023 | Back issues
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Feds Accuse Canadian|Bank of Illegal Trading

MANHATTAN (CN) - The Royal Bank of Canada made hundreds of millions of dollars in illegal "wash" trades, for the tax benefits, the Commodity Futures Trading Commission claims in Federal Court.

The CFTC claims says the Canadian bank "conducted a wash trading scheme of massive proportion" between June 2007 and May 2010 with two of its subsidiaries.

It claims the RBC pre-arranged stock futures transactions with its subsidiaries and then put them as "block" trades on a Chicago-based electronic futures exchange.

The complaint involves "narrow based stock index" (NBI) and "single stock" (SSF) futures.

"A small group of senior RBC personnel acting on RBC's behalf designed the NBI and SSF strategies and controlled the trading activity," the complaint states. "The scheme was designed and orchestrated as part of RBC's strategy to realize certain lucrative Canadian tax benefits, which prior to and during the relevant period RBC sought to and did realize by holding certain public companies' stock, or 'securities,' in its Canadian and offshore trading accounts.

"In each instance, RBC identified, and purchased or already held, securities that RBC believed would generate a tax benefit. Purportedly to offset risk from holding the tax-beneficial securities, RBC and a subsidiary would buy and sell opposite each other NBI or SSF futures contracts referencing the same securities. As a result of the futures trades, RBC and its respective subsidiary held futures positions that were equal and offsetting in size and price in the same contracts of the same delivery month.

"In almost every instance, RBC and its respective subsidiary expected that NBI futures contracts would periodically be 'rolled,' or effectively extended, for at least one year, and that SSF futures contracts would be settled by physical delivery of the underlying stock. Thus, RBC's futures trading was conducted in a riskless manner which ensured that the positions of each counterparty washed to zero, in disregard of the price discovery principles of the futures market, leaving RBC to reap large tax benefits.

"RBC knew that the NBI and SSF transactions were riskless and intended them to be so, and knew and intended that its NBI and SSF transactions would and did achieve a wash result for RBC."

These wash sales violated the Commodity Exchange Act, the CFTC says.

It seeks an accounting, including tax benefits, penalties of at least $130,000 for each violation, an injunction and costs.

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