by T. GormanPosted on Posted in SECActions

Resurging enforcement officials at the Commodity Futures Trading Commission brought another significant enforcement action this week. The settled proceeding was against JPMorgan Chase Bank, N.A. It arose out of the unlawful handling of customer segregated funds belonging to Lehman Brothers Inc. customers shortly prior to and after that firm’s bankruptcy. This is the same issue which is at the center of the current inquiry regarding the collapse of MF Global.

The Commodity Exchange Act and the pertinent regulations prohibit depository institutions from using or holding segregated funds that belong to a customer of a futures commission merchant as though they belong to anyone other than the customer. From November 2006 through September 2008 Lehman Brothers, a registered FCM, deposited funds with the bank. Those deposits included large amounts of customer segregated funds which always exceeded $250 million. During the period JPMorgan extended intra-day credit to Lehman daily based on its “net free equity.” That sum was not to include customer segregated amounts.

As early as November 17, 2006 however Lehman’s customer segregated funds were included in the calculation of “net free equity,” the predicate for the bank’s daily advances to Lehman. That violated the prohibitions regarding customer segregated funds. In addition, after the September 15, 2008 Lehman bankruptcy filing the bank improperly declined a request to release the customer segregated funds from Lehman. JPMorgan maintained its refusal for another two weeks until directed to release the funds by CFTC officials. No customer suffered a loss.

To resolve the action JPMorgan agreed to pay a $20 million civil monetary penalty. The bank also agreed to implement undertakings to ensure the proper handling of customer segregated funds in the future.

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by T. GormanPosted on Posted in SECActions

The Commodity Futures Trading Commission filed an enforcement action against the Royal Bank of Canada alleging a years long, riskless wash sale scheme conducted by a small group of RBC personnel to generate certain lucrative Canadian tax benefits. The trades were not conducted in an arms-length manner between the counterparties as required by law or in accord with the price discovery purposes of the futures market, according to the complaint filed by the agency. CFTC v. Royal Bank of Canada (S.D.N.Y.).

Beginning in June 2007 and continuing to May 2010, RBC traded hundreds of millions of dollars worth of narrow based stock index futures and single stock futures contracts with two of its subsidiaries. Prior to each transaction the bank identified stocks in the U.S. and Canada that would could be used to create certain tax benefits. The bank and a subsidiary then bought and sold those stocks as well as the stock index futures and single stock futures. The trades were conducted in a riskless manner so that the profits and losses would wash to zero. The transactions, reported as block trades, were arranged by a small group of senior RBC personnel acting for the financial institution. The purpose of the transactions was to realize Canadian tax benefits from holding the securities of certain public companies in Canada and offshore trading accounts.

The complaint also claims that RBC attempted to conceal the transactions from CME Group. When the transactions were reported to CME Group RBC falsely stated that the single stock futures trading was at arms-length between two counterparties. It concealed the fact that all the trades were orchestrated by a small group within the bank. RBC also concealed the fact that the transactions were designed to exclude non-RBC affiliated parties from its futures trades.

The complaint seeks a permanent injunction and a civil monetary penalty. The case is in litigation.

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