Sentencing Delay Stalls Cassidy Deposition

(photo: Justice takes a breather. Statue outside the Federal Courthouse in NYC.)

December 20 Civil case conference with Judge Daniels

Note: audio recordings are not permitted in the court house, so I am relying on my own handwritten notes. I am not a lawyer and may have misunderstood some statements made during the conference. Corrections to these notes by any persons who attended this conference are welcome. Send comments to traderelvis@gmail.com

Cassidy Status:
Kevin Cassidy was scheduled to be sentenced on December 15th. Cassidy's lawyer Lawrence Gelber told the court that sentencing will now be on January 31st. Gelber said that the new date was set by the government and was not at the request of Cassidy.

The expectation is that there will be a 30 to 60 day window between when Cassidy is sentenced and when he goes to jail. During this time Cassidy will be deposed (asked questions under oath) and allowed to speak, for the first time, about the business rules that existed between Optionable and the Bank of Montreal defining how pricing information was to be shared between Optionable and BMO's back office. Judge Daniels expressed his personal doubt that Cassidy would have anything game-changing to say but supported the process by which Cassidy would be sentenced first and deposed later.

[Personal note: I have always doubted BMO's version of events as presented to BMO's Shareholders and Industry Analysts at their 2007 press conference and have been waiting for four years to hear Cassidy's version of events. Unlike Judge Daniels I'm thinking that Cassidy's deposition will reveal a credible alternate interpretation of the admitted actions taken by Lee, Cassidy and BMO's back office that will poke holes in BMO's publicized interpretation that scapegoated Cassidy to mask their own massive losses on excessive risky investments.]

First Up: CFTC
Eugene Smith of the CFTC reported that the CFTC recently finalized a Consent Order with Optionable and O’Connor and that the CFTC expects to reach a similar outcome with Cassidy. Lawrence Gelber said that he needs to wait until after Cassidy is sentenced, before having further discussions with either the CFTC or the SEC. No one from the SEC attended the conference. Marni Rae Robin stated that O’Connor has not settled with the SEC.

Next Up: CMEG / NYMEX
Daniel Pollack said that CMEG filed a motion for Summary Judgment and anticipates an answer from Nordlicht and Cassidy by January 18th. Pollack's position is that when Nordlicht, Cassidy and O'Connor sold NYMEX a 19% stake in Optionable, a warantee was broken because Optionable did not disclose certain alleged criminal acts in their SEC filings, even though the acts had not yet been alleged when the documents were filed. Several Defense lawyers jumped up simultaneously, outraged, to respond while Pollack was talking.

Judge Daniels told both Gottlieb/Nordlicht and Gelber/Cassidy to submit documents to him as to why CMEG’s request for a Summary Judgment is premature – otherwise he expects them to file an answer by January 18th. The problem here is that CMEG wants their motion answered BEFORE Cassidy is deposed.

And Then: BMO
Anne Beaumont's update covered 1) Pleadings 2) Discovery and 3) Document Production. Beaumont said that document production should be done by the end of February. She suggested that Cassidy’s deposition should happen after document production is completed. [personal note: document production seems to be putting a strain on BMO and it was not clear to me why this is the case, or what its relevance is going forward. I feel like I did not fully grasp parts of Beaumont's update]

Norton (for Optionable) asserted that he wants BMO trader David Lee deposed during this time as well. Beaumont clarified that she is not representing Lee and was not sure when Lee will be sentenced. Judge Daniels said that he would expect Lee’s deposition to happen within 30 to 60 days of Lee’s sentencing.

Regarding Joseph Saab of MF Global
Owen Pell wants Saab’s portion of the case stayed (halted) while MF Global’s bankruptcy is figured out. Pell is waiting to see if MF Global’s insurance will pay Saab’s legal fees, because if it doesn’t Saab may need to find another lawyer. Judge Daniels said that he will not halt this case himself, but he would honor such a request from the Judge handling the MF bankruptcy if such a request were made.

Next conference March 1, 2012

Plaintiffs Present: CFTC, Bank of Montreal, CMEG / NYMEX
Plaintiffs Absent: SEC
Defendants Represented: Optionable, Ed O’Connor, Mark Nordlicht, Kevin Cassidy and Joseph Saab

Plaintiffs:
CFTC: Eugene Smith
BMO: Anne Beaumont
CMEG: Daniel Pollack

Defense:
Nordlicht: Jason Gottlieb
Cassidy: Lawrence Gelber
O’Connor: Marni Rae Robin
Optionable: Michael Norton
Saab: Owen Pell

Hook.Line.Sinker

The following story is fiction. Any resemblance to any persons either living or dead is purely coincidental.

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So let’s say there is this company in Japan called the Bank of Marine Organisms (BMO for short). They are the 4th largest fish processing company in Japan. They buy fish, they sell fish, they warehouse fish and they mortgage fish inventories.

The Bank of Marine Organisms also trades Fugu. Fugu is a tasty fish that if cooked incorrectly will kill you. The Japanese government strongly regulates Fugu and only allows carefully trained chefs to prepare it. The livers of the Fugu fish are the most lethal part of the fish, but are also reported to be the tastiest. Like any natural product, Fugu has an expiration date past which it can not be sold.

The Bank of Marine Organisms is a publically traded company. They don’t hide the fact that they deal in Fugu, but they downplay it. Instead, they present themselves to their shareholders as a cut and dried fish operation. Even though Fugu represents less than 1% of the fish BMO sells by volume, it generates a much larger percent of their total profits.

Fugu traders get special treatment at BMO, but nothing compared to the elite traders who trade Fugu livers near their expiration date. These traders ‘swim’ in highly profitable, yet highly toxic waters where a highly regulated precious commodity is on the brink of becoming worthless.

David Eel was one such trader and he was good at his job. The market for near expiration Fugu livers is so small, and Eel’s influence in it was so large, that Eel was able to set the market prices. Things went on this way for a number of years, David Eel made a lot of money for BMO and in turn BMO rewarded David Eel with a huge salary and bonuses.

But nothing so risky runs smoothly forever. A large Fugu hedge fund, aMerInch, collapsed and the market still hadn't fully recovered from the stench caused by EnRoe. The Securities and Exchange Commission was sniffing around fish trader's financial reports, and it was just a bad time to be trading Fugu.... let alone near expiration Fugu liver. David Eel's influence weakened and he was no longer able to make his prices stick in the marketplace.

BMO was worried because they were looking at Eel's huge inventory of near expiration Fugu liver – and over a million dollars worth of the stuff was expiring daily.

Without David Eel’s ability to set and enforce prices, BMO had to dump a lot of their near expiration Fugu livers at a loss. They had some explaining to do. They knew that with the amount of blood they were spilling into the waters Government sharks were gonna be circling.

In an attempt to distract the Government and their own shareholders, BMO fired David Eel and repackaged his diminished influence in the market instead as a fraud. BMO's spin was that Eel had been lying to them when he reported the value of his near expiration Fugu livers inventory rather than saying that Eel had previously been able to set market market prices and now he wasn't. After all, this strategy had worked for them several years earlier when they fired Eel's predecessor under similar circumstances.

Luckily it turned out that David Eel traded a lot of his near expiration Fugu livers through a small brokerage firm called Oceanable. Oceanable was also a publically traded company and its CEO had a public, but not commonly known criminal record. This made Oceanable an easy scapegoat. BMO held a press conference and spun their conspiracy theory which blamed reports from Oceanable based on Eel's valuations as a cause of their losses on near expiration Fugu livers.

When the criminal record of Oceanable’s CEO, Kevin Bassidy was reported, the press, shareholders and even Government agencies swallowed BMO’s story: Hook, Line and Sinker. "Oh, I get it now", came the collective sigh of relief, "there was a Criminal involved - that explains everything". Oceanable’s CEO was arrested and eventually, years later, took a plea deal.

The irony is that Oceanable's reports actually brought more transparency to the near expiration Fugu liver trading market than was previously possible. The toxicity levels were accurately reported and expiration dates were accurately tracked. The only ‘crime’ that happened was that Oceanable accurately reported the valuation of David Eel’s near expiration Fugu livers during the period of time that Eel controlled the market.

What Would Mark Nordlicht Do?

The underlying premise of this blog is that I stink at picking stocks. See those birds flying away in the upper right hand corner of this page? You can think of those birds as your investment dollars flying away if you invest the way I do.

But recently, someone with a better track record than me proclaimed to the world (as well as to the SEC) that he thought Optionable shares were undervalued. That someone is Mark Nordlicht.

Who is Mark Nordlicht?

* One of the founders of Optionable

* Operates a hedge fund known for seizing opportunities others miss.

* Is represented by lawyers who have studied the BMO and NYMEX lawsuits

* In June put $1.5 million on the table in a Tender Offer to buy Optionable outright

* As a result of the Tender Offer Nordlicht is once again an Optionable Insider (owns more than 10% of the company)

* Unlike fellow Optionable founder Kevin Cassidy, Nordlicht does not have to “bite his lip” out of concern for a criminal indictment

* Has the money needed to defend Optionable at trial

Here is a link to a more complete bio of Mark Nordlicht

Here is a link Mark Nordlicht's portfolio performance with Platinum Management

On August 15th Kevin Cassidy took a plea on one count in the criminal case against him. So far, everyone is keeping very quiet about what happens now. What WILL Mark Nordlicht do?

Pssst..... The Ex-Con Did it.

He did what? Kevin Cassidy pleaded guilty today (8/15) to one count in the criminal case against him. Statute 18 U.S.C. § 371 - which is the general conspiracy statute.

In my mind there are still a lot of open, unanswered questions - but - I think it is also important to admit that the game is different now. I have no insight into what contingency plans have been put in place for this outcome - but it would be my assumption that the lawyers on both sides are figuring out what to do next in the civil cases.

Federal guidelines calls for a 30 to 37 month prison term. An interesting coincidence is that by the time Cassidy appears for sentencing, by my count, it will have been 37 months since he was indicted. (November 13, 2008 to December 15, 2011 = 37 months) (in effect doubling the time Cassidy's life will be impacted by taking this plea - if you add his house arrest time to the maximum sentence. )

Links to some press clips:

Reuters:

http://www.reuters.com/article/2011/08/15/us-bankofmontreal-optionable-plea-idUSTRE77E4JL20110815

Bloomberg:

http://www.bloomberg.com/news/2011-08-15/ex-optionable-chief-kevin-cassidy-pleads-guilty-to-conspiracy-in-new-york.html

Worth Noting: It is true that Cassidy had a previous criminal record, and it is true that he did not disclose it in SEC filings. What some reporters keep missing is that back in 2008 Judge Kaplan ruled that Cassidy's criminal past did not need to be disclosed in SEC filings.

Here are some press clips that avoid dredging up Cassidy's previous criminal record.

The Terra News quoted Chad Bray of the Wall Street Journal as saying that Cassidy admitted in court that he failed to provide independent quotes regarding the value of Bank of Montreal's natural-gas options positions and that he knew this was wrong at the time.

http://www.theterranews.com/content/?p=46090

The Globe and Mail (Canadian)

http://www.theglobeandmail.com/globe-investor/guilty-plea-in-bmo-trading-scandal/article2130042/

Forbes:

http://www.forbes.com/sites/billsinger/2011/08/19/guilty-pleas-in-bank-of-montreal-natural-gas-portfolio-pricing-scam/

A Brief Description of the Case: USA vs. Kevin Cassidy

To date in this blog I have been offering my opinions about a wide range of topics involving the company called Optionable. My opinions are also influenced by my ownership of common stock of Optionable. Today I am going to share a brief description of the case as seen by Kevin Cassidy's Defense team. This description is what the Defense proposes be told to prospective jurors as a part of the Jury Selection process.

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BRIEF DESCRIPTION OF THE CASE

Kevin Cassidy (the “Defendant”) is the former chief executive officer of a company called Optionable Inc. (“Optionable”), which was based in New York. Optionable was a commodities brokerage firm, which means that it brokered – or acted as the “middle man” – between traders who wanted to buy and sell commodities contracts. Commodities are goods like gold, coffee, natural gas and other forms of energy. Optionable focused on energy commodities, and received a commission for each transaction it brokered. Optionable often acted as a broker for a type of energy contract called an “option.” An option in the commodities market is a contract granting its owner the right to buy or sell a commodity at a certain price on a later date.

One of Optionable’s largest clients was the Bank of Montreal (“BMO”). BMO is a Canadian bank that has a division in New York which trades, among other things, natural gas options. BMO paid Optionable to act as “middle man” for these options. Until mid-2007, the head energy trader at BMO’s New York Office – that is, the person in charge of deciding which natural gas options to buy or sell – was a man named David Lee. As part of his job, David Lee was required to provide daily valuations for every investment he was making for BMO, including the options in his natural gas portfolio. At least once a month, a separate department at BMO conducted an independent verification of the valuations Lee provided. For part of this independent verification, BMO claims it relied on pricing data provided to it by Optionable.

The Government has charged the defendant, Mr. Cassidy with three things arising out of Optionable’s relationship with BMO. David Lee is not a defendant in this case. First, the Government has charged Mr. Cassidy with conspiring with David Lee to subvert BMO’s independent verification of Lee’s valuations. Under the Government’s theory, Lee and Mr. Cassidy agreed that Lee would send Mr. Cassidy pricing data for natural gas options, and that Mr. Cassidy’s company, Optionable, would then send this data back to BMO, without telling BMO that the data originated with its employee, David Lee.

Second, as the Chief Executive Officer of Optionable, Mr. Cassidy was responsible for signing each of Optionable’s public filings submitted to the U.S. Securities and Exchange Commission (the “S.E.C.”). The S.E.C. is the government regulatory agency whose job it is to regulate the securities industry, which includes commodities traders and brokers. The Government asserts that Optionable should have revealed in those public filings that Mr. Cassidy was conspiring with David Lee to defraud BMO. So the Government has also charged Mr. Cassidy for having failed to disclose his alleged conspiracy with Mr. Lee in the reports Optionable filed with the S.E.C.

And third, the Government alleges that Mr. Cassidy failed to reveal the alleged conspiracy with David Lee in negotiations with a company called NYMEX, when NYMEX purchased an ownership interest in Optionable.

Have any of you here heard about this case or know anything about it based on this short description? If so, please raise your hand now.

This trial is about to begin because Mr. Cassidy denies that he committed any crimes. Mr. Cassidy has pleaded not guilty to the charges against him and has asked for a trial by jury. He is presumed to be innocent of all these charges until and unless the government proves the charges beyond a reasonable doubt.

Nordlicht buys 3.3% of Optionable's Shares

Mark Nordlicht is once again an Optionable Insider.

On June 13th Mark Nordlicht issued a "Tender Offer" through which he agreed to purchase every share of Optionable that he did not already own. (He owned 9.5% of the company when he made the tender offer, and needed to get above 10% ownership in order to be considered an Insider)

On July 19th, the tender offer expired and Nordlicht purchased the 1,586,686 that had been offered for sale. The figure represented 3.3% of the company's shares bringing Nordlicht's ownership up to 12.8%

Nordlicht's interest in Optionable is pursuing legal actions against The Bank of Montreal, NYMEX (since purchased by CME) and undisclosed "others". It remains to be seen how (or if) Nordlicht's interest will gel with Optionable's current plans.

Mark Nordlicht updates his offer

Mark Nordlicht has updated his tender offer and filed it with the SEC. You can view the updated tender offer here: http://sec.gov/Archives/edgar/data/1303433/000114420411038180/v227390_sctota.htm

I am an Optionable shareholder, so I'm just going to re-post the "Good Part" here, and bold the "Best Parts" and not offer any comments for now.

==== start Quote of Nordlicht's updated tender offer =============

The Purchaser is making the Offer because he wants to increase his ownership of Optionable’s outstanding Shares to the maximum extent possible pursuant to the Offer. The Purchaser understands that Optionable has a valuable legal claim for damages against Bank of Montreal (“BMO”), NYMEX Holdings, Inc. (now CME Group NYMEX, Inc.) (“NYMEX”) and others, and that time is of the essence to initiate and preserve the claims. The Purchaser understands that initiating legal actions against BMO, NYMEX and others would involve significant legal costs and that Optionable may not have the ability to fully support the claims without capital investment from its significant stockholders such as the Purchaser. The Purchaser understands he has sufficient resources to finance vigorous legal actions by Optionable against BMO, NYMEX and others but seeks to increase his ownership percentage of Optionable to justify any such investment he may make.

The Purchaser believes that BMO repeatedly in its public filings and on analyst conference calls represented that it was running a "client driven" book of business. In fact, the Purchaser believes BMO was running a book engaged heavily in market making and proprietary trading. As part of what the Purchaser believes to be a cover-up of this fraud, the Purchaser believes BMO knowingly blamed Optionable for trading losses in order to divert attention from this fraud and BMO’s general lack of risk management controls. The Purchaser believes Optionable should seek monetary damages from BMO of no less than $500 million representing the market valuation of Optionable at the outset of what the Purcahser believes to constitute BMO’s fraudulent activities.

As part of its agreement with Optionable, NYMEX agreed to joint marketing and technology cooperation. The Purchaser believes that not only did NYMEX knowingly breach its agreement with Optionable, but it deliberately listed a competitive product on the CME trading platform, thereby preparing for its own $10 billion or more merger with the competing company. The Purchaser believes that Optionable should seek monetary damages from NYMEX of no less than $500 million representing the market valuation of Optionable at the time of what Purchaser believes to constitute NYMEX’s misconduct.

==== end Quote of Nordlicht's updated tender offer =================

Mark Nordlicht makes an offer

Mark Nordlicht has filed an offer with the SEC to buy all the outstanding shares of Optionable for 3.5 cents a share. Optionable management has 10 days from June 13th to reply to the offer.

You can read more about this on the SEC website: here

Options are not a Buy & Hold investment

BMO claims that David Lee mismarked (lied about the value of) their portfolio under his management for 4 years - and that this deception was successful in fooling them.

One of the things that bothers me about BMO's statement though is that Options are not a "Buy & Hold" investment. Options expire. David Lee wasn't able to just hold the options he bought for BMO and then lie about their value. He had to trade them. David Lee's marks were his estimation of the portfolio's value, but his trades were for real money.

Note: Neither the Government nor BMO is claiming that Lee's trades were ever falsely reported.

David Lee was either able to monetize the portfolio from 2003 until 2007 for roughly what he marked it at - or he wasn't. If he was monetizing the portfolio for roughly what he marked it at, then ummmmmm.... the books weren't really mismarked in the first place?? (am I right? Do you follow this?) And, if he could not monetize the portfolio for what he marked it at, consistently, over a period of four years, and nobody said anything to him about the discrepancy, then was there really anyone monitoring this guy?

How can BMO claim that they were truly fooled by Lee's daily valuations, or Cassidy's twice-monthly reports, which were at best an estimation of the portfolio's worth, when they had the cold hard numbers generated by Lee's actual trades?

Can Everything The Government Says Be True, and Cassidy Still Be Innocent?

Let’s face it. The Government Prosecutors have something like 350 gigabytes of electronic data related to this case, some of which was collected by the FBI. So, I’m going to say it is pretty likely that the Government can back up the accusations in the “Overt Acts” section of their Complaint. The question we’re faced with then is: If we assume that Lee and Cassidy did all of the things listed as “overt acts” in the complaint, can it still be possible that Kevin Cassidy is innocent of helping Lee deceive his employer?

I think it’s possible, although I have doubts. As an Optionable shareholder it's not a comfortable feeling. I’m reminded of the freeze frame at the end of the movie "Butch Cassidy and the Sundance Kid". The two outlaws are holed up in a doorway, about to attempt to shoot their way out. Unfortunately for them, the entire Bolivian Army is waiting outside. The odds are so heavily stacked against them, and the outcome is so obvious that the director must have figured that the audience didn’t actually need to see the carnage to understand what happens next. Two banditos? Two? Against the whole Army? And y’know, my amigos, I’m thinking that this is pretty much how the Government and the Bank of Montreal are looking at this case too. They’re seeing Kevin ‘Butch’ Cassidy (who has a previous criminal record) and David ‘Sundance’ Lee as BANK ROBBERS and they’re seeing themselves as the Army. They certainly have more spreadsheets and emails than the Bolivian Army had bullets. (Also, in this version of the story David “Sundance” Lee has taken a plea.)*

But are they right?

For one thing, I’ve yet to see the Bank of Montreal (BMO) own up to the fact that they hired David Lee, and they are responsible for his actions. BMO may now want to see Lee as a criminal, but he is a criminal who was on their payroll. His crimes were committed in the performance of the job that they paid him to do. David Lee was a fully vested agent of the Bank of Montreal when he showed up at Kevin Cassidy's door. There was no difference between orders from Lee and orders from BMO – they were one and the same entity.

So far BMO has been successful in getting people to only look at the Lee and Cassidy partnership as it appeared in 2007, after Lee’s crimes had been exposed as well as Cassidy’s criminal past. But in order to understand what really happened here, I think you need to look at David Lee as Kevin Cassidy saw him in 2003. Landing the Bank of Montreal’s account was a huge win for Cassidy’s small startup brokerage. Rather than looking at the significance of the BMO account as 'proof' that Cassidy must have been a partner to Lee's deception (as the Government and BMO claim) - I think it is just as likely that Cassidy must have provided the best customer service to BMO as was humanly possible, and that he followed the Bank's instructions honestly, ethically and to the letter.

When BMO tells us that they had an Independent Price Verification process (IPV) and that Cassidy ‘fully knew’ what it was, that just doesn't ring true. Was there an IPV contract? Was there an IPV process guide with rules that participating brokerages agreed to follow? No, there were no such things, because the IPV process was an in-house BMO process that Kevin Cassidy had no role in. The process that Kevin Cassidy followed was the instructions that Lee, as a fully vested agent of the Bank gave him. [see Side Note below]

Now, what exactly is it that Lee, as an agent of BMO told Cassidy to do? I’m going to have to go with the accusations in the Government’s Complaint here, and say that most likely Lee sent Cassidy some numbers to verify (marks) and that as long as the brokers at Optionable who had been placing trades for Lee thought the numbers (marks) looked reasonable, (looked similar to the numbers Lee had been making trades through Optionable at) Cassidy sent them back to BMO unchanged. The Government has proof that Lee and Cassidy did communicate to eliminate any typos in Cassidy’s report. But even the Government admits that Cassidy did change one or two of the values (marks) in at least some of the reports they presented as evidence – and in that sense, even though the numbers came from Lee the reports were still independent of Lee.

So, that’s how I see the “overt actions” in the Government’s complaint being true and Cassidy still being innocent. It’s not the strongest theory in the world, but I think it is plausible. Lee was a rogue trader who was deceiving his employer. Kevin Cassidy was running a brokerage which wanted BMO’s business. Lee as an agent of BMO instructed Cassidy to perform certain perfectly legal tasks, (as far as I know it is perfectly legal to review numbers for reasonableness and then to pass them on for further analysis by Bank experts) and these tasks were not in contradiction to any other documented set of instructions from any other member of BMO. Basically, Kevin Cassidy and other members of Optionable acted in good faith, and that good faith was taken advantage of by a criminal employed by BMO.

Disclaimer: I own shares of Optionable. The statements in the blog are my own opinion based on the information currently available.



[Side Note: BMO had an internal Independent Price Verification (IPV) process. The process was meant to keep its Trader's honest. BMO accuses Cassidy of Fraud, because Cassidy's company Optionable was frequently the sole source of data used in the verification. BMO admits that the reason Optionable's data was the sole source was because David Lee insisted on it. I am confused as to why BMO thinks this is proof that Cassidy participated in Lee's scheme. To me it looks like proof that David Lee was calling the shots within the BMO department that was supposed to be policing him. Why in the world did BMO allow Lee to choose the source of verification data? Lee had so much influence over the IPV process that he even got the department to CONTINUE using Optionable AFTER other people at BMO started to complain about the valuations Optionable was providing. At Lee's insistence, BMO started using a brand new valuation service from Optionable (which was still in beta test development) rather than adding an additional valuation service. Why was Lee given this much leeway to run the IPV process Lee's way?

* In its Motion to Dismiss, Defense estimated the volume of electronic data collected by the Government to be approximately:
+ 1.5 Million Excel pages

+ 100,000 word processing documents

+ 150,000 non-transcribed audio recordings

+ 375,000 emails

Will David Lee throw Kevin Cassidy under the Bus?

When David Lee was accused of being a “rogue trader” who lied to his employer about the value of their portfolio under his management, he took a plea deal and began cooperating with the Government. As part of his deal, Lee was required to be honest with the Government, and remain silent to everyone else. So, we find ourselves in a situation where we’re headed to court and the Government knows a lot about what Lee really did, and we don’t. In particular the Government should know whether Lee considered Cassidy to be a partner in crime – or just one more person that Lee needed to fool in order to pull off the deception of his employer.

The Government wrote its complaint as if it was certain that Kevin Cassidy was in on Lee’s deception. Additionally, they wrote the complaint as if no one in BMO’s Commodities Group was also in on the deception. (The Commodities Group was responsible for policing BMO’s greed-filled, Red Bull guzzling traders) To listen to the Government’s complaint, BMO’s “Police force” was blissfully and totally unaware of Lee’s deception and was completely hoodwinked by Cassidy’s reports.

So the picture we’re presented with is of David Lee, a sophisticated trader of mind-bendingly complex financial products who has a Devil on one shoulder (Kevin Cassidy) and an Angel on the other shoulder (BMO’s Commodities group). Can you imagine the dialog?
Cassidy: C’Mon Do it Do It Do it! Fake the Numbers! The jackasses in your Commodities Group will never be able to figure this complex crap out! It’s just you and me Baby! BwaHaHaHaHa……..
BMO Commodities Group: La-Di-Da.... David Lee told me to look at reports from Kevin Cassidy and not to look at reports from anybody else and that’s just what I’m gonna do, that’s just what I’m gonna do. Yup-yup-yup.

I don’t know if you have a problem with that picture, but I do. For example, the Government makes it seem like it was impossible for Cassidy *not to have known* what Lee was doing – yet at the same time – they ask us to believe that the reports from a single source, a single source selected by the very person the reports were intended to keep honest, fooled an entire “police” department for over 4 years. Now, you know why banks insist on getting reports like this, don’t you? They do it because traders of these highly complex and lucrative products often get mega-stressed out and they start making shit up. They Lie and they’re Good At It! The banks, as the people who employ these stressed out tactical geniuses, have controls in place to rein these guys in when they start running amuck. You just don’t ever, EVER, let a FOX select your Chicken Counter - and that's what we're being asked to believe BMO did.

So it goes. Despite my sarcasm above, the Government has more lethal precision in their own matters than what they are crediting the BMO Commodities Group with having. All of which has got me thinking: the Government must be pretty sure that David Lee is going to throw Kevin Cassidy under the bus when he testifies.

As far as I can see, Lee’s testimony is the best weapon the Government has. I don't think the examples provided in the Government’s complaint are enough to convict Cassidy – but Lee is an admitted liar - and has proven that when the stakes are high, and the pressure is on, he can come through with a believable story that the people with power over him want to hear.

Disclosure: Yes, I am an Optionable shareholder, and yes, during the course of this blog post I also attempted to throw both BMO's Commodities Group as well as David Lee under the Bus. Consider the source :-)

A comment from the Judge and some side notes

In 2009, during the Oral Arguments to dismiss the NYMEX charges, Judge Daniels made an offhand remark, which caused me to say: “uh oh”. I don’t have access to the transcript, so the following is not an exact quote, but he said something along the lines of: I don’t know what BMO was expecting in these reports but I’m pretty sure that they were not expecting to just see their own employee’s valuations.

Note: If anyone reading this blog has access to the transcripts of those arguments, I would be happy to quote Judge Daniels’ exact statement.

His statement sounded pretty troubling to me – because I could see how it might look like that was pretty much what BMO did get. But here was my next thought. Why doesn’t the Judge know? Why doesn’t the Judge know EXACTLY what BMO was expecting to be in those reports? And believe me, I am not saying this Judge isn’t sharp, because I’m saying the opposite. I’m saying that if the Judge didn’t know what BMO expected to be in those reports – nobody did - and now we’re going to be left sorting out undocumented expectations and finger pointing. If in 2009 the Judge can’t determine what was supposed to be in there – how was Kevin Cassidy supposed to have known in 2003 when he started sending the reports? What BMO wished they had asked for after Lee’s trades lost a lot of money might well be a lot different than what they happily accepted (free of charge no less) back in 2003 when David Lee was one their star performers.

Side notes:

* David Lee is going to admit in court that he mismarked his portfolio. There seems to be an expectation that the numbers he sent to Kevin Cassidy to be validated were also mismarked. (but is this true?) There is an expectation that if David Lee’s marks had been excluded from the reports then Lee’s mismarking would have become self-evident. (but is that true? )

* BMO is saying that Kevin Cassidy ‘rubber stamped’ David Lee’s valuations and sent them back with only 1 or 2 changes. I’m thinking that making 1 or 2 changes to a report is not the same thing as a ‘rubber stamping’ it.

* There is probably an expectation that the reports should have had more than 1 or 2 variances because Lee will admit that he was mismarking his portfolio (book). But was he mismarking his entire book or just part of it? We don’t know. Of the numbers Lee will admit he mismarked, how many of them were included on the report? (perhaps 1 or 2???)

* BMO makes a claim that David Lee tricked BMO's Independent Valuation Team into only relying on valuations from Kevin Cassidy. Why is this Kevin Cassidy’s problem? BMO did have valuations from other sources. Did BMO ignore the other sources? Or did perhaps the other sources show pretty much the same valuations as Cassidy did? And, if the other sources did expose a gap in David Lee’s valuations, due to his mismarkings, why didn’t anyone at BMO say so until after David Lee’s lost a whole lot of their money - and BMO found itself in need of a scape goat for news reporters and its shareholders. (Cassidy was sending these reports for several YEARS)

* In the absence of a documented requirement stating that Lee was not allowed to contribute marks to Cassidy's market survey reports, was it reasonable for Cassidy to include Lee's marks? Was it criminal? The Government says it was, but to me I think it would have been more of a problem if for some reason Cassidy chose to exclude Lee's valuations without BMO specifically telling him to. Perhaps you agree with me, but can we go the next step? Was it reasonable for Cassidy to have 'baselined' Lee's valuations? Not just including them, but using them as the yardstick other traders valuations were measured against? Maybe, maybe not. I can say that this behavior seems at the very least "reasonable" to me, given that Lee's trades made up a very large part of Cassidy's total business. Practically every trade Cassidy made had Lee as either buyer or seller. It makes sense to me that the reports could have been built using Lee's numbers as the constant and then measure everyone else off of that.

* BMO did produce one email as evidence in which a BMO employee asked that valuations from BMO be excluded from that day's report. And to give BMO the benefit of the doubt, the way the email is worded it does sound as if the author assumes that valuations from BMO should be excluded from all reports. But using this email as evidence presents a different problem. It proves that the "no-BMO-contribution" requirement wasn't formally documented and agreed to by both parties. The Government is saying it was a crime for Cassidy to have prepared his reports (starting in 2004) based on Lee's valuations and the best proof they have is a single email written in 2006 that wasn't even addressed to Cassidy himself. (it was written to an Optionable employee - Optionable being the company Cassidy was in charge of at the time)

* The Natural gas options market involves big money yet only permits a few traders to operate there. Lee was a key trader in this exclusive market. Why should Cassidy have expected that BMO wanted to exclude him from his market survey reports? Given the percentage of the total market that Lee represented – can’t we label any market survey that excludes him to be flawed - since Lee was such a large piece of the total pie.

* It is reasonable for Cassidy not to have identified Lee as being a participant in the market survey? Did Cassidy ever identify any of the sources in the survey? Did Cassidy ever try to present Lee’s marks as someone else’s marks? I’m not seeing that he did.

* Lee will admit that he lied to BMO about the value of his book. But BMO still lost money fair and square when the volatility in natural gas options dried up. Why hasn’t BMO admitted how much money they lost fair and square, and why aren’t they suing Lee for the balance? (the balance here being the difference between what BMO really lost and how much they had to write down due to Lee’s inflated marks.)

* Cassidy’s market survey reports were not of the entire natural gas options market – but only selected items within the market. Someone at BMO had to tell Cassidy each time he took a market survey which items they wanted surveyed. Who told Cassidy what items to survey? Was it BMO’s Independent Valuation Team or was it Lee? It is documented that BMO’s IPV team gave Lee blank grids to complete. Does anyone know what BMO expected Lee to do with the grids their IPV department gave him? Why give someone a grid if they are not supposed to participate in the survey?

Some thoughts on the Government's 2/17/11 Memorandum of Law

• Ex-BMO employee David Lee will appear as a Government witness in Kevin Cassidy's criminal trial. Lee will admit that he mismarked his book while employed by BMO. (His "book" is his entire portfolio of Natural Gas Options. His "marks" are what he claimed those Options were worth.)
  
• The Government started with 6 Counts against Cassidy, but have dropped it to 3.
  
• The Government has narrowed the scope of its complaint. My summary of their narrowed scope is:
• 1) The Government will say that Cassidy agreed to "rubber stamp" Lee’s marks.
• 2) The Government will say that Cassidy presented reports to BMO as being independent of Lee’s marks, but they weren't. They're going to call this activity "wire fraud" because the reports were emailed and/or faxed.
  
• 3) The Government will say that Cassidy filed reports with the SEC and sold stock to NYMEX without disclosing the practice of rubber stamping Lee's reports. They're going to call that activity "securities fraud" even though Cassidy and Optionable had not been accused of any wrong doing when the reports were filed with the SEC or the shares were sold to NYMEX.
  
• The Government is dropping the murkier parts of their charges that implied that Cassidy had a role in Lee’s mismarking deception. The Government is going with the notion that these 3 items are enough to convict Cassidy. It certainly does help boil the charges down to something that a jury can wrap their heads around.
  
  
• HOWEVER – Here are some things that I’m thinking
  
  
• "Rubber Stamping" sounds bad and unethical, but "baselining" sounds good. When I say that I think Cassidy "baselined" Lee's marks, here's what I mean. I think Lee sent Cassidy a list of marks to verify, and Cassidy took that list, verbatim, and checked each mark for "reasonableness". As long as the mark was "reasonable" he sent it back to BMO unchanged. (NOTE - This is my own THEORY - I have not seen anything from Cassidy stating that this is what happened - as Cassidy has not yet stated ANY sort of defense)
  
• Neither the Government nor BMO has presented any type of documentation that says that Lee's marks were supposed to have been excluded from Cassidy's report. Basically, I'm thinking if it was "criminal" of Cassidy not to have identified Lee as the source of the marks, somebody somewhere should have written down that this was a Requirement. They didn't.
  
• (Also - See my blog post from last year called "You call THAT a Smoking Gun?")
  
• The Government has presented some grids that Lee sent for which Cassidy’s report was only different by 1 or 2 numbers. Let’s call those grids “Bingo grids" because the baseline marks Lee sent were nearly identical to Cassidy's report back to BMO. I'm curious if all the reports were that close or just a few choice ones that the Government selected to present as evidence. Cassidy was sending reports for 4 years - and that's a lot chances to get one or two "Bingos".
• Lee didn't ask Cassidy to check the reasonableness of every mark in his portfolio (book) every month. He sent Cassidy a few sample marks. Since the Government is no longer accusing Cassidy of participating in Lee's mismarking scheme, they are also seeking to ignore the question of whether or not the sample of marks that Lee sent to Cassidy were actually accurate (or at least 'reasonable') (In short - the Government could be trying to convict Cassidy of defrauding BMO by sending them ACCURATE (reasonable) information.
  
• Lee is going to admit in court that he mismarked his portfolio (book). But Lee also lost a lot of BMO's money fair and square when the volatility in natural gas options dried up. BMO would have lost a lot of money even if Lee had marked his portfolio correctly and I don't see BMO taking ownership of that.
  
• The reports in question were not system generated reports based on hard data. The reports were more of an opinion poll taken by brokers of the traders they worked with. It makes perfect sense to me that Lee's "opinion" (his marks) would be given a hefty weight given that Lee was Cassidy's biggest client and he expressed his opinion every time he made a trade.
  
• BMO’s Independent Valuation Team provided Lee with the blank forms (grids) that he used to send his marks to Cassidy – yet BMO claims they were surprised by the fact (defrauded no less) that Lee's marks were what Cassidy baselined his report on.
  
• Not a single trade that Cassidy executed for BMO through Lee, either by voice trade or Optionable’s electronic trading platform (OPEX) is alleged to have been inaccurate either by neglect or by deliberate fraud. Yet during BMO's press conference they accused Cassidy and Optionable of causing BMO's massive losses. The fallout from that accusation cost Cassidy his job and cost Optionable all of its customers. Additionally it poisoned Optionable's then brand new marriage with NYMEX. (NYMEX bought 18% of Optionable's common stock mere days before BMO's press conference accusations) Optionable's shareholders (including NYMEX) paid dearly for the public scape goating BMO foisted on them. Who is responsible for THAT loss?
  
• Important: Note: I am neither a Natural Gas Options Trader nor a lawyer. I use the name Trader Elvis (traderelvis.com) because it makes me smile. I am a trader only in the most basic sense, someone Jim Cramer would call a home-gamer. So, if I'm not an Options trader or a lawyer, what am I doing writing this blog. Well, for starters, yes, I am an Optionable shareholder. As for how I make my living, I am employed as a Project Manager. That's why BMO’s lack of process definition bothers me - but doesn't always register with other people as being such a glaring problem. I get annoyed when people don’t define what they want/expect and then complain (or in this case Sue) when they don't get what they want/expect. This case is a perfect example of how easy it is to be blamed and how nearly impossible it is to be defended when things go wrong and processes and expectations weren't properly documented.
  
• The comments on this blog are my own opinions, based to the best of my understanding on publically available information. At the time of this post I am an Optionable shareholder.