In For a Penny

Updated 10/12/12

"In for a penny, in for a pound" justice encourages us to believe that in large financial disasters if we can find someone to blame for a tiny part of the problem, then we are justified in blaming them for the whole mess. It's an interesting flip on the Occupy Wall Street claim that large banks only focus on the wealthiest 1% and ignore the rest of us.  In this case, the Bank of Montreal (The Bank) focused its shareholder's and Federal Regulator's attention on the 1% of blame The Bank ascribed to Optionable, and managed to blind them all to the fact that huge trading losses come with the territory given the risky and exotic trading The Bank engaged in.

A matter of Independence 
Divisions within the Bank of Montreal had a long standing disagreement about whether or not the bi-monthly Bid/Ask summary reports they collected should be 'independent' of Bid/Ask quotes from their own traders. The Bank's Market Risk Division wanted 'independent' quotes and The Bank's Commodities Group did not.

Kevin Cassidy's company Optionable collected Bid/Ask quotes anonymously and hence they could not (and did not) promise The Bank's Market Risk that the reports they sent were 'independent' of The Bank's own traders.  This didn't sit well with The Bank's Market Risk Division, and there were a fair amount of discussions and meetings (both internally and with Optionable) about it.  At the end of the day, Cassidy told The Bank's Market Risk that since Optionable could not provide 'independent' reports that The Bank's best insurance was to use reports from multiple brokerages, in addition to the industry standard reporting agencies.  (Advice that The Bank eventually followed)

The Bank Bet Huge in Exclusive Tiny Markets
When The Bank's star trader, David Lee, who had made hundreds of millions of dollars in profit for The Bank in exclusive, exotic and risky markets (where angels fear to trade) started losing money, industry analysts began criticizing The Bank's risky trading.  The Bank needed someone to blame.  With the help of their public relations/crisis management team they found Kevin Cassidy, who had an unrelated criminal conviction 15 years earlier.  Deliberately ignoring the fact that Cassidy had dealt honestly and ethically with The Bank for years, The Bank pretended that this ex-con had tricked them 'somehow' with his reports that were not 'independent' of The Bank's money losing trader David Lee.  (I put the word 'somehow' in quotes because The Bank has never even attempted to provide any type of explanation showing a correlation between Cassidy's reports and David Lee's trading losses.)

The Bank's scheme worked.  The Bank's scheme put Optionable out of business and placed Kevin Cassidy under Federal Criminal Indictment.  Cassidy struck a deal with Federal Prosecutors and agreed to plead guilty to failing to put a disclosure statement into the reports he sent to The Bank's Market Risk division alerting them to what they already knew, that the reports were not 'independent' of the Bank's own traders.     

So, was Cassidy ever really "In for a Penny"?
If you subscribe to "in for a penny, in for a pound' justice, where 1% of the guilt gets you 100% of the blame, here's the question I want you to ask yourself.  Was Kevin Cassidy ever 'in for a penny'? All we need to debunk The Bank's Penny theory is show that The Bank knew the reports Cassidy sent were not collected Independently of The Bank's own traders.  Well - Cassidy provided exactly this proof under oath during his deposition.  Cassidy provided the names and dates of The Bank's officers to whom he specifically explained the non-independent nature of his reports.  (see who he told and when in my previous blog)

So there it is: Optionable's business was destroyed, Cassidy is going to jail, and yet The Bank's claim that Cassidy was somehow 'in for a penny' doesn't hold up.
 
Post Script: Kevin Cassidy is scheduled to begin serving a 30 month sentence in a New York State Federal prison on October 26, 2012. 

Standard disclaimer:  I am an investor in Kevin Cassidy's former company Optionable.  This blog does not offer advice regarding buying or selling any security.