The Commodity Futures Trading Commission has filed a civil lawsuit against Royal Bank of Canada (NYSE:RY) on the grounds that the bank was operating a “trading scheme of massive proportions”. According to CFTC, the motive was to gain Canadian tax benefits.
The accusations go further. CFTC says that a group of senior employees at Royal Bank of Canada were operating a “wash trading” strategy. Wash trading is when someone purposely allowed subsidiaries of the bank to buy and sell stock futures without actually making the action of taking a position in the market. According to the CFTC, this scheme started in June 2007 and ended in May 2010 and involved hundreds of millions of dollars in the process.
RBC has responded to the lawsuit saying that the charges are “absurd” and false. The bank has also said that the CFTC has already reviewed the suspected trades and been watching their trades. Wash trading is illegal in the US and since the RBC was making its future trades over the US-based CME Group, the action is illegal regardless of what Canada’s laws saw about wash trading.
The move comes after the futures market came under scrutiny after the failure of MF Global. CFTC is embarrassed by the MF Global nightmare and clearly has stepped up its enforcement.
The Royal Bank of Canada has said constantly that they have opened their books for the CFTC to review, yet they are still pressing charges which puzzles the bank. Look, I am tired of seeing this common trend in the US government over the past decade; the trend of doing nothing then once something terrible happens, they go overboard in enforcement. Examples? The 2008 financial crisis, MF Global, etc. Doesn’t it make more sense to actually regulate what you say you are going to regulate so that we can avoid disasters?
The issue extends past the stock market into national security and other areas. Regardless of whether the Royal Bank of Canada actually conducted a wash trade scandal, it clearly shows that the CFTC is under pressure to not be caught sleeping at the wheel again after MF Global.
A full investigation will be conducted of RBC and if the bank is found guilty, they will have to pay a fine and they will likely hear from the Canadian government as well. Bottom line, individuals that conduct financial fraud are always caught sooner or later so play by the rules and make money rather than going to jail.