RBC rejects any deal with U.S. regulator

Bank calls wash-trade allegations, ‘absurd, meritless’

The lawyer representing Royal Bank of Canada as it defends itself against allegations of improper stock trading says the bank would not be willing to accept a settlement deal.

“In serious matters people dialogue with each other, but unequivocally our position is that we didn’t do anything wrong here,” Arthur Hahn, a partner at Katten Muchin Rosenman LLP in Chicago said in an interview Wednesday.

RBC, Canada’s largest bank, has been slapped with a lawsuit by the Commodity Futures Trading Commission alleging that a small group of bank executives operated a massive wash trading scheme, where various subsidiaries traded large blocks of shares among themselves at set times and at set prices, in order to reap Canadian tax credits.

The subsidiaries are alleged to have been located in Europe, Toronto, the Bahamas and Cayman Islands.

The CFTC also alleges that RBC executives gave misleading and false statements when exchange officials asked about the trades.

RBC has called the allegations “absurd” and “meritless.” On Tuesday, chief executive officer Gord Nixon weighed in, saying the bank will vigorously defend itself from the “unwarranted” allegations.

Sources familiar with the proceedings say that RBC was offered a chance to settle and pay a cash penalty, but declined, saying it did nothing wrong.

“We have a strong case here and look forward to presenting it to the judge,” Bart Chilton, a commissioner with the CFTC, told the Star. He declined to comment on whether the commission offered RBC a settlement deal.

The court documents, filed in New York on Monday, allege that RBC’S aim was to hold certain securities to gain Canadian tax credits, and that it sold futures contracts on the shares to mitigate the risk of the stock prices fluctuating during that time.

RBC says that it informed the regulator and the exchange, Onechicago, as far back as 2005 that it was making large block trades between various subsidiaries.

“We called the exchange and fully detailed everything we were doing and we wanted to make sure this is OK. We had essentially a green light. We proceeded to do these exact trades as we described them, all the way through 2010,” Hahn said.

“They now would like to take a different position. Our view is that’s fine. Change the rule, but don’t bring in enforcement action after the fact.”

According to the court documents, there were two main types of transactions. The RBC Canadian Transit group in Toronto sold derivatives known as narrow-based index futures to RBC Europe Ltd. in London. These offices also bought and sold shares of the underlying securities. Profits and losses between the two offices were consolidated and the Canadian arm reaped the tax credit.

The other trades involved RBC Caribbean in the Bahamas and Cayman Islands selling single stock futures contracts to RBC Capital Markets Arbitrage, with offices in New York. These contracts were timed to expire just after dividends were collected to capture the tax benefit.

The lawsuit alleges that the scheme was worth hundreds of millions of dollars, though it does not give an exact value.