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.