RBC Capital Faces Misconduct Charges

Jack Humphrey, Regulatory journalist
September 27, 2011 /

RBC Capital Markets LLC is facing a lawsuit filed by the US Securities and Exchange Commission for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments.

According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.

The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments.

RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund.

Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts.

“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 Division of Enforcement.

Kenneth Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “RBC Capital did not provide these school districts with full and accurate information regarding the risks of these complex structured products. We are pleased that today’s settlement will result in a significant recovery by the school districts.”

According to the SEC’s order, the five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and School District of Whitefish Bay. The board members and business managers for the school districts had no prior experience investing in CDOs or instruments tied to CDOs. Compared to the typical buyers of instruments tied to CDOs, the school districts were not sophisticated investors. The SEC’s order finds that the school districts lacked sufficient knowledge and sophistication to appreciate the nature of such investments.

RBC Capital consented to the entry of the SEC’s order without admitting or denying any of its findings. The order censured RBC Capital and directed that it cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which among other things prohibit obtaining money by means of an untrue statement of material fact and engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon the purchaser.

RBC Capital agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a penalty of $22 million.

The SEC’s investigation was conducted jointly by the Enforcement Division’s Municipal Securities and Public Pensions Unit led by Elaine Greenberg and Mark Zehner and Structured and New Products Unit led by Kenneth Lench and Reid Muoio.


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