In a case that conjures up memories of the Windfall scandal of 1964, RBC Dominion Securities and four of its traders are accused of what is called "wash trading" in shares of the brokerage firm's parent, Royal Bank of Canada, and in those of rival Bank of Montreal.

This time, the mechanisms are more complex, the characters are less colourful and the alleged motive is not price manipulation. Even so, it is alleged that prices were distorted and bystanders lost about $231,000 as a result.

The RBC foursome is accused of buying and selling more than $33 million worth of shares at the same time — improperly taking both sides of the trades — to cut risks they faced because of a series of trading errors and misunderstandings.

The allegations were posted on Monday by Market Regulation Services, the agency that polices trading on the Toronto Stock Exchange. RBC did not immediately respond to requests for comment. The firm is scheduled to defend itself in a contested regulatory hearing starting July 27.

Wash trading, one of the classic ways of rigging markets, involves buying and selling between allied accounts. The trades look legitimate but there is no real change in ownership; in Bay Street parlance, the transaction is "a wash."

Viola MacMillan, then known as "the Queen Bee of Canadian mining," was convicted of wash trading in the Windfall affair, which led to somewhat closer supervision of a wide-open Toronto mining stock market.

In the latest case, RBC and four men are on the spot, facing penalties that theoretically could exceed $1 million apiece. They are:

• Ian MacDonald, managing director of Canadian equity derivatives.
• Edward Boyd, vice-president of Canadian equity derivatives.
• David Singh, director of Canadian equity derivatives.
• Peter Dennis, senior equity and derivatives trader.

Their troubles allegedly began on the morning of Aug. 11, 2004. RBC is alleged to have made a deal with an unnamed brokerage firm working on behalf of an unnamed bank. RBC would buy 344,500 Bank of Montreal shares and sell 265,000 Royal Bank shares, and the unnamed bank would take the other side of the trades, selling and buying identical numbers.

According to Regulation Services, the aim of this deal was to hedge risks on separate derivatives transactions, details of which are unclear. There is no suggestion that the arrangement was improper.

Doug Maybee, communications director of the regulatory agency, said the unnamed players are accused of no wrongdoing and their names will not come out in the hearing. "That's confidential information," he told CBC Online.

In any case, technical trading errors by the unnamed brokerage firm are alleged to have put RBC in a very awkward position.

The purchases and sales were scheduled to take place at 4 p.m. through what is called the market-on-close facility. MOC trades are executed at the closing price, whatever that turns out of be.

RBC entered its orders as promised but the other firm failed to match them, partly because an inappropriate code caused the system to reject one of its orders and partly because it got the idea, wrongly, that RBC had failed to complete its part of the deal, the regulators allege.

Thus RBC was left with lopsided orders that could compel it to buy and sell at unknown prices, and it tried to neutralize them by entering its own matching orders, they allege.

The regulatory agency (known as RS) says the RBC men seemed to know they were courting trouble.

Before the trades were entered, "Singh and MacDonald and Dennis and Boyd separately discussed whether they should seek guidance from RS," it says in a statement of allegations. "Dennis and MacDonald made the conscious decision not to contact RS and decided simply to have Dennis and Boyd enter the offsetting orders."

RBC and the four men "did not contact RS because they believed RS would not approve of the wash trading plan," it asserts.

"Boyd and Singh discussed how the was trade would stick out to RS market supervision 'like a beacon,'" it continues. "After the offsetting orders were entered, MacDonald and Boyd discussed how their actions were going to cause 'some sort of inquiry.'"

The agency does not identify any bystanders who allegedly lost money because the prices of the two stocks were temporarily distorted.

But it says the transgressions are made worse by the fact that one of the stocks was Royal Bank, in which the RBC men "should have exercised more vigilance in their trading." They should not have taken the situation "into their own hands and compounded the situation by effecting the subject wash trades," it says.