San Gold Corporation

I wonder what other investment banks are doing this between subsidiaries and non aggregate accounts. I also wonder if I had control over 80 million shares of San Gold, if they'd be in the wash everyday.

http://www.theglobeandmail.com/globe-investor/us-regulator-accuses-royal-bank-of-wash-trade-scheme/article2389622/

RBC facing CFTC case over wash trades

Royal Bank of Canada (C:RY)
Shares Issued 1,442,073,027
Last Close 4/2/2012 $58.74
Monday April 02 2012 - Street Wire

by Mike Caswell

The Royal Bank of Canada is facing a civil suit in the United States from the Commodity Futures Trading Commission over hundreds of millions of dollars worth of wash trades on OneChicago, an electronic futures exchange owned by the CME Group. The CFTC claims that the bank repeatedly traded stock futures contracts with its own subsidiaries, with the sole purpose being to obtain tax credits in Canada. The trades had no risk to the bank, and the only reason for them was to allow RBC to realize the tax benefits.

The bank, for its part, denies any wrongdoing. In a statement released Monday, it says that the CFTC had full knowledge of the transactions when RBC started carrying them out in 2005. The regulator did not object then, and it monitored the trading for the next several years. Moreover, no market participants suffered any negative effects.

CFTC's complaint

The allegations are contained in a civil complaint the CFTC filed in the Southern District of New York on Monday, April 2. The complaint describes a scheme that took place between 2005 and 2010, in which RBC and a subsidiary repeatedly bought and sold futures contracts for U.S. and Canadian stocks. The non-arm's-length transactions occurred between RBC branches in Toronto, London, the Bahamas and the Cayman Islands, and were co-ordinated by RBC's Central Funding Group. The trading violated rules requiring trades to be executed openly and competitively, and prohibiting any practices that undermine the "price discovery process," such as wash trading.

According to the CFTC, the pricing of almost all of the RBC trades was set internally. Somebody at the bank's Central Funding Group created prices for the contracts, and transmitted them to traders by phone or e-mail. The contracts later traded at the price specified. The trading was so substantial that it comprised all of the NBI trading on OneChicago and on average 51 per cent of the SSF volume for the years in question. (NBI stands for narrow-based stock index futures and SSF for single stock futures.)

This, according to the CFTC, resulted in a significant tax gain for RBC. It is not completely clear exactly how this tax strategy worked. It is explained in the complaint as one in which "Canadian taxpayers were entitled to an offset against their Canadian taxes in an amount equal to the U.S. taxes they paid on dividend income received from owning securities issued by U.S. companies." RBC employed a similar strategy with Canadian stocks, which the complaint describes as one in which "Canadian companies were entitled to an offset against Canadian taxes in an amount equal to Canadian taxes paid on dividend income ... as long as the Canadian taxpayer owned the securities for one year or longer."

The complaint also cites RBC for misleading the CME Group in response to inquiries about the trading. According to the CFTC, the CME Group started questioning RBC about the transactions in September, 2005. It sought assurances that each side of the trade had a separate account controller. In response, RBC's lawyer explained that the trades were "part of an arms length organizational structure" that included separate managers.

According to the CFTC, that answer was not true. The trades had originated at the bank's corporate level, with the intention of insuring that only RBC entities were on the other side. The CFTC cites internal documents at RBC that stated its intention to "avoid the outsourcing" of the trades to "capture both sides of the profitability" within RBC. The CFTC did not discover these communications until 2010, when it started investigating the trades.

The complaint seeks an accounting of RBC's gains from the scheme, and civil penalties of up to triple those gains. It also seeks orders barring future violations and directing RBC to pay court costs.