Saturday, October 27, 2007

RBC Rejects Ex-Trader's Claim on Bond Pricing

The Globe and Mail, Tara Perkins, 27 October 2007

Royal Bank of Canada, accused of ignoring complaints that traders were improperly valuing bonds, says it investigated matters within days and has found that its employees were not deliberately mispricing securities.

The complaints that it acted on came from Gregory O'Connor, a 44-year-old towering former college football player from California who had been working at the bank's office in Memphis for about three years.

Mr. O'Connor, who has spent his career in the bond business, alleged that some of his former colleagues were intentionally mismarking, or improperly valuing, government agency and corporate bonds in an effort to inflate profits in RBC's investment banking business.

In an interview yesterday, Mark Standish, the co-president of RBC's investment bank and head of global markets, said the bank carried out an investigation into its bond business, as well as its risk management practices, "and we concluded that there was nothing malicious involved here."

What happened, he said, is that some traders were slow to change the price, or value, of securities on their books as the market became much more volatile this summer. The bank took prompt action, he said.

"I'm not saying that losing a penny is not important, but the numbers are not material given the size of the business, and given what's happening in the marketplace," he added.

Mr. O'Connor was fired on Thursday, with the bank citing breach of its code of conduct. He gave an interview to The Wall Street Journal for a story that ran in yesterday's paper. The article noted that Mr. O'Connor had previously been in discussions with the bank about a severance package.

Mr. O'Connor had been the co-head of agency trading at RBC until February, when he was made a sales manager in RBC's Memphis office, overseeing a small team of about half a dozen sales staff.

In February, Mr. O'Connor called up the head of RBC's government agency trading desk in New York and raised questions about the price of a bond. "In February, I told them they had a problem, and they did not respond," Mr. O'Connor said in an interview yesterday.

Mr. Standish said RBC investigated and concluded that the bond was priced correctly.

In July, Mr. O'Connor sent an e-mail to Jonathan Hunter, head of RBC's fixed-income business, claiming that there were broader mismarks in the portfolio.

Mr. Hunter passed on the allegations, and, as a result, an official at the bank had an independent price verification done at mid-month that was more detailed than usual, Mr. Standish said. Further checks were then done.

"What we concluded is we did have a number of securities that the trader had been slow to update the marks on," Mr. Standish said. The end result was a markdown of about $8-million on the book, he added, but about $3-million of that was related to one bond issue that had just been launched at an "awful" time.

The bank said that, while it can be difficult to separate out trading losses from mismarks, losses in its government agency book were between $5-million and $8-million. In addition, losses in its corporate bond book were about $5-million.

The amount is not material for the bank, which reduced the size of its agency book by about two-thirds this summer to roughly half a billion dollars. "That's what you basically do when you get into periods of [market] turmoil," Mr. Standish said.

The bank also tightened up what's called "the aging process," which is how it moves inventory off its books. If inventory is sitting for a period of time, "you basically start charging that trader for having that position," Mr. Standish said. "You want to incentivize the trader to move it off the books."

As to the allegations, "I guess the question here is: Should the trading desk themselves have been more reactive, or pro-active, in terms of daily mark-to-markets. And the answer is, we've determined they were slow," Mr. Standish said.

Mr. O'Connor said in an interview yesterday that he sent an e-mail to Mr. Standish and Chuck Winograd, chief executive officer of RBC Dominion Securities, in mid-September, as he sensed that a number of job cuts were coming in RBC's sales force. The e-mail detailed his allegations of the "mismarking situation."

He said he sent that e-mail because people who had been mismarking bonds were still employed at the firm, while dozens of people in sales were going to be cut.

"I was looking for someone who would care," he said.
Dow Jones Newswires, 26 October 2007

The Royal Bank of Canada has rejected claims by a former bank trader alleging that some of his colleagues intentionally misstated the value of government and corporate bonds in an attempt to boost profits at the bank's New York-based investment-banking unit.

"These are meritless allegations," said RBC spokesman Kevin Foster in an email to The Associated Press on Friday. "His explanation for the existence of the small number of mismarkings is factually incorrect, and we acted immediately to address these issues."

The allegations were made by Tennessee-based trader Gregory O'Connor on Thursday, and were published in the Wall Street Journal's Friday edition.

The Journal had obtained emails that O'Connor sent to superiors at the bank alleging that other bankers were mismarking, or improperly valuing, bonds.

"Losses have been intentionally hidden over the last 5 months," O'Connor states in one e-mail, dated July 24.

Last month RBC, Canada's largest bank, recognized trading losses totaling US$40 million, of which US$13 million was related to bonds O'Connor alleges were mispriced, and fired several traders in its corporate-bond business.

The bank didn't acknowledge that the terminations were related to mismarking securities. O'Connor said in an interview that the fired traders' books were marked down to reflect losses after they left.

RBC also fired O'Connor on Thursday after the newspaper made inquiries, because, according to the bank, he violated the bank's code of conduct.

O'Connor, who worked in the bank's Memphis office, is seeking a severance package. His lawyer didn't immediately respond to calls for comment on the case.
The Globe and Mail, Tara Perkins, 25 October 2007

A former Tennessee-based trader at the Royal Bank of Canada is alleging that some of his colleagues were intentionally misstating the value of government and corporate bonds in an effort to boost profits in RBC's New York-based investment banking unit, the Wall Street Journal reports in its Friday edition.

Canada's biggest bank fired the trader -- who paints himself as a whistleblower -- on Thursday, after the newspaper made inquiries, the Journal alleges.

It obtained emails that Gregory O'Connor sent to superiors at the bank. He alleges in them that other bankers were mismarking, or improperly valuing, bonds.

In one, dated July 24, he said “Losses have been intentionally hidden over the last 5 months.”

In statement to the Journal, RBC said: “Mr. O'Connor knows full well that the firm took pains carefully to investigate the facts and took remedial action.”

“He is choosing to distort facts and damage the firm's reputation for his personal gain.”

Mr. O'Connor, who worked in the bank's Memphis office, is seeking a severance package, having been notified Thursday that he had violated Royal Bank policy by disclosing company information without approval, the article states. Mr. O'Connor spoke to the paper in an interview, as did his lawyer, who said Mr. O'Connor was “trying to do the right thing.”

As far back as February, Mr. O'Connor says he alerted a banker in charge of RBC's government agency trading desk that certain government bonds were mispriced.

He tracked a series of government agency bonds owned by RBC, and found that a number of bonds were actually cheaper than the prices traders had given them on RBC's books, he alleges.

Last month, the Royal Bank recognized $13-million of trading losses relating to the bonds that Mr. O'Connor alleges were mispriced, and the bank fired several traders in its corporate bond business -- though it didn't acknowledge that the firings were related to any alleged mismarking of securities -- the Journal reports.

Mr. O'Connor told the newspaper that the fired traders' books were revalued, or marked down, to reflect losses after they left the bank.

While the financial world is increasingly skeptical about the street's ability to accurately price mortgage-related securities, the issue is not associated with that type of investment, the article says, implying that this is an instance involving plain-vanilla corporate and government bonds.

While the bonds' values are fairly easy to determine, traders might have an incentive to boost their prices because it could have an impact on their bonuses.