Newspaper article International Herald Tribune

R.B.C. Accused of Fictitious Trades ; U.S. Says Canadian Bank Concealed Tax Plot Worth Hundreds of Millions

Newspaper article International Herald Tribune

R.B.C. Accused of Fictitious Trades ; U.S. Says Canadian Bank Concealed Tax Plot Worth Hundreds of Millions

Article excerpt

A civil lawsuit filed by American regulators claims that the Royal Bank of Canada concealed a plot involving hundreds of millions of dollars in trades for years.

U.S. regulators have accused Royal Bank of Canada of orchestrating an elaborate trading scheme and booking bogus trades to generate lucrative tax benefits.

Regulators at the U.S. Commodity Futures Trading Commission say R.B.C., the biggest Canadian financial institution, concealed a plot involving hundreds of millions of dollars in trades, according to a civil lawsuit filed Monday. The action is the agency's most significant enforcement case in recent memory.

In the lawsuit, filed in U.S. court in New York City, the trading commission accused the bank of creating "fictitious trades" between its various arms. The trades, involving hundreds of stocks that the commission did not identify, were "noncompetitive" and "unlawful," the agency said. The bank, regulators say, handpicked stocks paying out dividends that came with generous tax benefits.

By buying and selling the investments internally, the bank made sure that all profits and losses canceled out each other, the complaint said. The alleged violation, known as wash trading, allowed the bank to reap the tax benefits from the Canadian government while trading in a risk-free environment.

While a bank is allowed to trade with its subsidiaries, it must be done "at arm's length," meaning that the respective divisions must have independent controllers and other checks on wrongdoing. But the R.B.C. trading was done by one internal team, according to the complaint.

"Today's action should make clear that the C.F.T.C. will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain," David Meister, the agency's enforcement chief, said in a statement. …

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