(Reuters) - Royal Bank of Canada (RY.TO) is in a court battle with a former executive it dismissed after moving him to the Bahamas where it could continue a lucrative trading business hindered by U.S. regulations.
The dispute, according to court documents, centers on whether the former executive, Tebogo Phiri, has the right to valuable intellectual property such as data and trading strategies underpinning the business he ran for RBC. But it also reveals ongoing fallout from a controversial financial reform measure known as the Volcker rule banning proprietary trading, which banks have tried to fight in sundry ways.
Phiri first filed a lawsuit in New York State court in December against RBC’s U.S. investment banking division, saying his former employer had agreed in writing to let him take certain intellectual property if the business did not survive offshore. The information and trading strategies involved generate tens of millions of dollars in annual revenue, according to court filings.
Phiri’s group engaged in proprietary trading, in which a bank’s own capital is used to place speculative market bets. That type of trading was largely banned by the Volcker rule, which was part of a broad set of U.S. financial reforms after the 2008 crisis.
Lawyers for RBC and Phiri did not respond to requests for comment. A spokeswoman for RBC declined to comment. Phiri could not be reached for comment.
According to Phiri, RBC came up with a plan in 2015 to move him and other traders offshore because of the Volcker rule. An exception to the rule allows non-U.S. banks to engage in proprietary trading activity as long as the trading is conducted outside the United States.
But by mid-2016, the bank changed course and decided to shut down the Bahamas operation. RBC terminated Phiri’s employment in October, but did not grant him the intellectual property rights he was expecting, according to court papers.
Wall Street banks have fought hard against the Volcker rule on Capitol Hill and at regulatory agencies, and have recently been lobbying the new Congress to make changes that would soften its impact.
They have also taken advantage of exemptions related to hedging and merchant banking. But moving proprietary trading offshore has been a challenge for some foreign banks because of compliance issues.
“Many big global banks have ended up implementing Volcker procedures around the world anyway,” said John Williams, a partner at Milbank, Tweed, Hadley & McCloy. “Even if banks can take advantage of the exemption it’s hard to do so in a global market.”
The Botswana-born trader launched an arbitration proceeding before the Financial Industry Regulatory Authority (FINRA) seeking a decision that would allow him to use the intellectual property and award him more than $2 million, according to court records.
He also filed the New York lawsuit, through which he obtained a court order in December preventing RBC from selling or transferring the intellectual property to third parties.
On Feb. 15, the FINRA panel granted Phiri’s request for an injunction. On Tuesday, RBC filed a new lawsuit seeking an order declaring FINRA’s ruling unenforceable.
The bank argues that FINRA’s decision is too vague to implement, while Phiri argues it grants him rights to the intellectual property at issue. RBC said doing so would cause “immediate and irreparable harm.”
Reporting by Olivia Oran and Nate Raymond in New York; Editing by Dan Grebler and Andrew Hay