Miami-based education lender U. S. Education Loan Trust (USELT) is pursuing legal action in the United States District Court for the Southern District of New York regarding the Royal Bank of Canada’s actions as underwriter, broker-dealer, remarketing agent and back-up purchaser of auction rate securities (ARS) issued by USELT.

The securities were backed by U.S. government  insured education loans. 

The lawsuit stated that the bank’s actions caused USELT to lose more than $100 million and the education company is seeking damages for RBC’s practices and self-dealing.

Historical Perspective

Prior to this current litigation,the Securities and Exchange Commission (SEC), the New York Attorney General (NYAG), various Attorneys General of other states, and the North American Securities Administrators Association (NASAA) had pursued legal action against RBC.

The previous suit stated that RBC made misrepresentations to investors when it said that the ARS were safe and highly liquid cash equivalent and money market alternative investments. 

To support the lawsuit, the NASAA formed a multistate taskforce of banking/securities commissioners and attorneys general from across the U.S. such as California, Massachusetts, Maryland, Washington, Kansas and the District of Columbia.

This resulted in a 2008 settlement between the SEC, the NYAG and the NASAA where RBC agreed to buy back $850 million worth of ARS from over 2,200 retail clients and pay a fine of $9.8 million. In the Consent Orders, the regulators said that RBC sold ARS without full disclosure of the risks involved.

More recently, in September 2011, RBC agreed to pay $30.4 million to settle SEC charges related to misconduct in the sale of unsuitable investments to five Wisconsin school districts and the bank’s inadequate disclosure of the risks associated with those investments.

USELT Legal Aciton

The USELT lawsuit currently at issue builds on a June 2009 SEC investigation that showed RBC’s misconduct against ARS issuers, according to a release from USELT.

That investigation also demonstrated that while RBC was publicly stating it was standing strongly behind the ARS market, RBC’s management group made the secret decision to stop supporting the ARS auctions  and its issuer clients.

ARS liquidity was premised on supporting these instruments and its secret 2007 decision to cease its auction support caused the collapse of RBC-managed ARS auctions in February 2008, the USELT release cited.

In its case, according to USELT, RBC had knowledge and expertise for advice regarding all facets of the ARS process including professionally managing the auctions, supervising remarketing and submitting clearing bids to ensure their success.  

However, USELT said that RBC used this expertise to induce it to issue a series of interest rate ceiling waivers that significantly increased the interest rates on more than $1.25 billion of ARS. This greatly increased costs to the firm.

These extra expenses were supposedly used to support the auction process, but in reality it only allowed RBC to earn much higher interest rates on $400 Million of USELT’s ARS that RBC had secretly bought and not disclosed its ownership thereof to USELT, the education company said.

“The facts show that RBC was not only complicit in the demise of ARS but put its own interests well ahead of those of the issuers and investors who placed their trust with the bank,” said Henry B. Howard, president of USELT. “There was no reason for RBC to deliberately cease supporting the ARS auctions it managed.  Shortly after February 2008, RBC repeatedly touted to its depositors and shareholders its strong capital position and enormous liquidity.”

USELT makes long-term low interest consolidation loans to individuals with already completed graduate degrees.

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