U.S. regulators plan action against Royal Bank

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U.S. regulators plan action against Royal Bank

C/P Canwest News Service
Published: Thursday, September 25, 2008


U.S. federal enforcement officials are turning their sights to the Royal Bank of Canada as they crack down on financial institutions amid mounting public anger over a plan to bail out banks exposed to the credit crisis at the expense of taxpayers, according to officials.

Canada's largest bank is at the top of the list for enforcement agents at the Securities Exchange Commission who are pursuing financial institutions implicated in the collapse of the $330-billion auction-rate securities market, according to two federal officials.

The collapse of the market in the spring left many Americans unable to access funds they believed would be there for them to pay for short-term needs like college tuition and medical expenses, according to the SEC.


RBC faces an estimated payout of $1 billion based on precedent-setting agreements negotiated with other U.S. and international institutions by state and federal authorities to buy back securities held by individual customers, charities and small businesses, and to reimburse those clients for damages.

The disclosure is the first time officials at the agency have acknowledged they are preparing a federal enforcement action against RBC, and follows a parallel probe being pursued by state authorities. The pending enforcement action would make RBC one of the first Canadian banks to be called to account for its role in the credit crisis.

The regulator is actively pursuing a case against RBC after previous investigations found firms dealing in auction-rate securities misled customers into believing the financial products were safe and highly liquid investments comparable to cash deposits, according to an enforcement officer.

A U.S. federal official said there had been a brief hiatus in enforcement actions amid the recent market panic that swept Wall Street, but authorities were redoubling their efforts after a bailout plan was proposed that leaves taxpayers on the hook for losses on complex securities that have gone bad.

An RBC executive said the bank was working with regulators, and indicated management at the bank's capital markets operations expected to reach a comprehensive settlement with U.S. authorities.

The bank faces an estimated payout of $1 billion based on precedent-setting agreements negotiated with other U.S. and international institutions by state and federal authorities to buy back securities held by individual customers, charities and small businesses, and to reimburse those clients for damages.

RBC is also the target of a class-action law suit from customers of the bank alleging there was mis-selling of the securities pursuant to "top down management directives", according to a filing submitted to in a U.S. District Court by law-firm Girard Gibbs.

The filing and the wider probe by federal authorities is also investigating the extent to which dealers continued to market auction rate securities as liquid investments even after it became clear the system for maintaining cash flows could collapse.

The focus of the investigation into RBC's activities is its treatment of individuals and families rather than institutional investors, reflecting a significant shift by U.S. authorities that have focused largely on bigger shareholder losses in recent financial crisis.

Auction-rate securities became a favoured form of financing used by dealers amid the credit boom, but when the market froze many customers were unable to access their money and some were left holding securities that will not mature for decades.

The focus of regulators has been on getting these customers their money back, though the SEC is now expected to zero in on the conduct of bankers after a fresh agency directive that investigations encompass the conduct of individuals as a deterrent to others.

RBC has already begun writing down its estimated $4.9-billion exposure to the auction-rate securities market and has been setting aside money for losses on U.S. credit markets.

But over the past decade the bank's American and capital markets operations have been a big contributor to earnings. Wednesday RBC underlined its continued commitment to its U.S. operations by dividing its capital markets empire between Toronto and New York, appointing co-heads in each city.

Mark Standish will stay on in New York and become co-chief executive of capital markets for RBC along with Doug McGregor, who will run investment banking operations out of Toronto. The promotions accompany the retirement of Chuck Winograd, the veteran bank executive who has led the dramatic growth in RBC's capital markets operations over the past 10 years, during which time it has seen it grow from under 30 offices to more than 75 worldwide with the New York operation overtaking the Toronto unit.