RBC to pay $35 million to settle U.S. lawsuit on trading scheme

By Nate Raymond

NEW YORK (Reuters) - Royal Bank of Canada has agreed to pay $35 million to resolve a lawsuit by the U.S. Commodity Futures Trading Commission that accused it of running an illegal trading scheme to gain lucrative Canadian tax benefits.

The settlement, disclosed in papers filed on Thursday in Manhattan federal court, would resolve claims that a group of RBC employees improperly coordinated to allow bank subsidiaries to buy and sell stock futures without taking a position in the market.

RBC neither admitted nor denied the allegations in settling the lawsuit, which was filed in 2012. The deal was approved by U.S. District Judge Alvin Hellerstein.

In its complaint, the CFTC said that from June 2007 to May 2010, RBC and its subsidiaries conducted a "wash trading" scheme involving the illegal trading of hundreds of millions of dollars' worth of stock index futures and single stock futures.

Wash trading, the simultaneous and offsetting purchase and sale of a contract, is banned under U.S. futures law.

RBC in a statement said it was "pleased to put this matter behind us and continue to remain committed to complying with our regulators' requirements."

Aitan Goelman, director of enforcement at the CFTC, said while wash trades may seem innocuous, they "provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason."

"This matter clearly demonstrates that the CFTC will vigorously enforce this prohibition to protect the integrity of our markets," he said in a statement.

The lawsuit said RBC and the subsidiaries pre-arranged the transactions between themselves and then executed them on Chicago-based futures exchange OneChicago LLC.

The CFTC said a small group of RBC employees conducted the trading in a scheme intended to help RBC realize Canadian tax benefits by holding certain companies' securities in its Canadian and offshore trading accounts.

As part of the settlement, RBC agreed to be permanently enjoined from entering into or confirming execution of a wash sale trade, according to court documents.

The case is U.S. Commodity Futures Trading Commission v. Royal Bank of Canada, U.S. District Court, Southern District of New York, No. 12-02497.

(Reporting by Nate Raymond in New York; Editing by Bernadette Baum)