CFTC CHARGES ROYAL BANK OF CANADA WITH WASH SALE SCHEMING

FROM CFTC
CFTC Charges Royal Bank of Canada with Multi-Hundred Million Dollar Wash Sale Scheme
CFTC also charges that bank concealed material information from, and made material false statements to, a futures exchangeWashington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a complaint in federal district court in New York charging theRoyal Bank of Canada (RBC), a Canadian bank and financial services firm doing business in New York, with conducting a multi-hundred million dollar wash sale scheme in connection with exchange-traded stock futures contracts. The CFTC’s complaint also alleges that RBC willfully concealed, and made false statements concerning, material aspects of its wash sale scheme from OneChicago, LLC (OneChicago), an electronic futures exchange, and CME Group, Inc. (CME Group), the entity that exercised the regulatory compliance function for OneChicago.

From at least June 2007 to May 2010, RBC allegedly non-competitively traded hundreds of millions of dollars’ worth of narrow based stock index futures (NBI) and single stock futures (SSF) contracts with two of its subsidiaries that RBC reported as “block” trades on OneChicago.  The CFTC’s complaint alleges that RBC’s NBI and SSF trading activity, which accounted for the majority of OneChicago’s volume during the relevant period, constituted unlawful non-competitive trades, wash sales and fictitious sales.

Specifically, according to the CFTC’s complaint, RBC’s NBI and SSF trades were not negotiated at arm’s length between the counterparties to the trades, as required by law, but were instead designed and controlled by a small group of senior RBC personnel acting on RBC’s behalf.  The trading scheme was allegedly designed as part of RBC’s strategy to realize lucrative Canadian tax benefits from holding certain public companies’ securities in its Canadian and offshore trading accounts.

Prior to each trade, RBC allegedly identified stocks in U.S. and Canadian companies that RBC believed would generate a tax benefit.  RBC and a subsidiary allegedly bought and sold these stocks, and also bought and sold NBI or SSF futures contracts written on the stocks opposite each other.  According to the complaint, RBC’s futures trading was conducted in a riskless manner that ensured that the positions, profits and losses of each RBC counterparty washed to zero, in disregard of the price discovery principles of the futures markets, which resulted in a financial and position nullity for RBC while allowing it to reap the tax benefits.

In addition, the CFTC’s complaint alleges that, from at least January 2005 to April 2010, RBC unlawfully concealed material information from, and made false statements to, CME Group concerning RBC’s SSF trading activity.  Specifically, the complaint alleges that when RBC purported to describe the trades to CME Group, RBC falsely stated that its SSF trading was conducted at arm’s length between the counterparties to the trades, and concealed the fact that the trading strategy was created and managed by a group of senior RBC personnel acting on RBC’s behalf.  In addition, the complaint alleges that RBC concealed from CME Group the fact that it had intentionally designed its stock futures trading strategy to exclude non RBC-affiliated parties from RBC’s futures trades.

“A fundamental purpose of the futures markets is to provide an arm’s-length mechanism for market participants to discover prices and shift risks associated with products traded in those markets,” said David Meister, the Director of the CFTC’s Division of Enforcement.  “As we allege, RBC not only designed and executed a wash sale scheme that undermined that purpose, it went a step further and misled the exchange into believing that its conduct was lawful.  Today’s action should make clear that the CFTC will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain.”

In its continuing litigation, the CFTC seeks civil monetary penalties and a permanent injunction against further violations of the Commodity Exchange Act and the CFTC’s Regulations, as charged.

The following CFTC Division of Enforcement staff members are responsible for this case: Susan Gradman, David Slovick, Lindsey Evans, Joseph Rosenberg, Joseph Patrick, Scott Williamson, Rosemary Hollinger and Richard Wagner.

COURT ORDERS TRADER ON CME TO PAY NEARLY $2.5 MILLION IN PENALTIES AND RESTITUTION

The following excerpt is from the CFTC website: “Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) announced today that the U.S. District Court for the Northern District of Illinois entered a final default judgment on May 5, 2011, against defendant Carmine Garofalo, an Italian national who purports to reside in Tunisia, requiring him pay $614,925 in restitution and a $1,844,775 civil monetary penalty. The CFTC charged Garofalo with fraud and noncompetitive trading in connection with transactions executed on the Chicago Mercantile Exchange (CME) in March 2010 (see CFTC Press Release 5813-10, April 22, 2010). On August 16, 2011, the court entered a distribution order requiring that funds previously frozen in a personal account held by Garofalo at Interactive Brokers LLC be used to pay restitution and a portion of Garofalo’s civil monetary penalty. The court’s order requires that full restitution of $614,925 be paid to the victim of Garofalo’s fraudulent transactions. The court’s final judgment order finds that Garofalo simultaneously entered trades for his account at Interactive Brokers LLC and an account held at an Italian bank on behalf of a Luxembourg-based client. Garofalo intentionally executed parallel orders to buy and sell E-mini S&P 500 options and Euro/U.S. Dollar European Style Premium options during after-hours trading on the March 5, 2010 trading day -- a period of low volume options trading -- with the purpose of having the opposite orders find and match each other on the CME’s Globex trading platform, the order finds. According to the order, during a 5-hour period on the March 5, 2010 trading day, Garofalo fraudulently executed 168 trades in the account of the client and was successful in matching 119 of the orders with orders placed in his personal account, resulting in a money pass. The CFTC thanks the CME Group, the Italian Commissione Nazionale per le Società e la Borsa, and the U.S. Consulate in Milan, Italy, for their assistance.”