Just earlier today, the Royal Bank of Canada (ticker RY) found out they have a serious situation on their hands involving some of their trading practices. It appears the Commodity Futures Trading Commission (CFTC) is now claiming that RBC not only intentionally made a large number of fictitious trades to reap benefits from tax arbitrage, but they covered their tracks for the past five years. According to the NYTimes:
“In a civil lawsuit filed in federal court in Manhattan, the trading commission accused the bank of creating “fictitious trades” between various arms of the firm. The trades, involving hundreds of unnamed stocks, were “non-competitive” and “unlawful,” the agency said. The bank, regulators say, handpicked stocks paying out dividends that came with a generous tax benefit. While a bank is allowed to trade with its subsidiaries, it must be done so “at arm’s length,” meaning that the respective divisions must have independent controllers and other checks on wrongdoing. But R.B.C.’s scheme was the product of one internal team, according to the complaint.By buying and selling the investments internally, the bank was ensured all profits and losses cancelled each other out, the complain said. The alleged violation, known as so-called wash-trades, allowed the bank to reap the tax benefits from the Canadian government while trading in a risk-free environment.”
This marks the largest case in the history of the CFTC and the outcome is expected to set precedence for future cases to come. So far, no specific names have emerged from the accusations, but defending parties are bound to be identified as the situation progresses.
Regulator Accuses R.B.C. of ‘Massive’ Trading Scheme – NYTimes.com.