Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit against Canada’s Royal Bank (TSX:RY) yesterday, saying it engaged in hundreds of millions of dollars in sham futures trades to reap tax benefits on its holdings of company stocks.
According to the regulator, RBC, Canada’s biggest bank, also concealed the true nature of the trades and made false statements to a futures trading exchange, said CFTC in a statement.
The practice, known “wash trading”, is an illegal stock trading activity in which an investor simultaneously buys and sells shares in a company through two different brokers, usually to avoid taxes. This kind of trading is illegal in the U.S. according to futures laws.
CFTC said the RBC’s trading strategy was devised to gain Canadian tax credits on its holdings of U.S. and Canadian company stocks. It claimed the strategy was created and carried out by a group of executives at the bank. However, the agency’s suit didn’t give away any names.
“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,” added Meister.
Absurd allegations
In a statement released late Monday, Royal Bank defended itself against what it called “absurd” allegations, saying it consulted stock exchanges and the commission itself for guidance when the trades were made and there was no objection from either.
“Given no objection to the trading activity by either the exchange or the CFTC in 2005, it is absurd to now claim these trades were either fictitious or wash sales,” it said.
Royal Bank said it “proactively contacted the exchange to seek its guidance” before making any trades — a move it claims was fully documented, transparent and reviewed by the CFTC.
“RBC’s trading was permissible in 2005, and it is permissible today under the CFTC’s published guidance,” the bank added.
“This lawsuit is meritless and we will rigorously defend ourselves against such baseless allegations.”
Royal Bank also noted it did not consider the situation to be material.
The bank’s shares were down almost 3% today at 14:51 GMT.
