TORONTO — The capital markets division of Royal Bank (TSX:RY) has agreed to pay US$30.4 million to settle charges by the U.S. Securities and Exchange Commission over allegations it sold unsuitable investments to five Wisconsin school districts.
The SEC said Tuesday that RBC Capital Markets sold $200 million of credit-linked notes that were tied to the performance of collateralized debt obligations, a type of structured asset-backed security that played a role in the collapse of the U.S. housing market three years ago.
In 2006, the bank allowed the CDO sales to take place “despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts,” the U.S. regulator said.
In total, the school districts contributed $37.3 million to the investments with the rest coming from money borrowed from other trusts.
RBC Capital Markets (TSX:RY) reached an agreement with the SEC without admitting or denying any of the security exchange’s findings.
“We are pleased to resolve this matter and are heartened by the fact that the school districts will be the beneficiary of the settlement,” the bank said in a statement emailed to The Canadian Press.
The SEC has been working its way through numerous cases linked to faulty investments made during the financial crisis.
The bank’s marketing materials also failed to adequately explain the risks that the investments could potentially pose to investors, particularly ones like the school district that “lacked sufficient knowledge and sophistication to appreciate the nature of such investments.”
“RBC failed Securities 101 when it sold complex derivatives that were unsuitable to five school districts without fully informing them of the risks,” said Robert Khuzami, director of the SEC’s enforcement division in a release.
Last month, the SEC filed separate charges against Stifel, Nicolaus & Co. of St. Louis, as well as a former executive at the operations, for fraud connected to the same sale of the CDO investments to the school districts from June to December 2006.
At that time, Stifel blamed RBC for the losses, and accused the bank of intentionally understating the profits it was going to earn on the CDOs.
Royal Bank addressed those accusations indirectly, essentially pegging the blame on Stifel.
“We did not know that Stifel Nicolaus & Co., an investment bank, was misrepresenting the product’s risks to its clients and would not have participated in the transaction if we had full knowledge of Stifel’s communication with its client,” the bank said.
Stifel issued a statement on Tuesday saying it was “gratified” that the SEC determined that RBC failed to adequately disclose the risks associated with the CDOs
“Importantly, the SEC found not only that RBC was aware of those risks but that RBC disguised the risks in the marketing materials provided to the school districts and Stifel. We continue to believe that if RBC’s product was as represented, it would have been suitable for the districts. The SEC findings confirm that RBC’s actions deprived both the districts and Stifel the opportunity to fairly assess the suitability of the investments.”
“We believe that the SEC order supports what Stifel has been saying about RBC: it created a flawed product and made major misrepresentations that contributed to the products’ failure and the loss the school districts suffered,” Stifel said in an email to The Canadian Press.
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