Monday, February 21, 2011

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?

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