You might think that it would be difficult to write a blog about a single
legal matter for six years without repeating yourself. And in my case, you’d be
right. It is difficult and I do repeat myself – a lot. Worse, there is one particular
question that I just keep coming back to: What Risk Management process did the
Bank of Montreal (The Bank)
think was
in place?
Like a pit bull snarling and
slobbering over a half eaten bone, I have latched onto the idea that The Bank lied
to us all when they claimed that their 2007 trading losses were the result of a
conspiracy aimed at subverting their risk management controls. I didn't buy it back in 2007, I don’t buy it now, and so help me God, I feel like a stray dog that's had a bone ripped away and muzzle slapped over its face, because I just haven't been able to find the right words to put into this blog that
will convince you (yes, Y.O.U.) not to buy it either.
Here's how it happened.
The Bank’s Risk Management department
followed a process called the Independent Price Verification Process (IPV)
IPV is an internal proprietary process within
The Bank and as such they’re not obligated to make the steps of the process
public, (and so they haven’t).
Kevin Cassidy
(of Optionable - a company I am invested in) however, is currently sitting in
Federal prison for supposedly conspiring with David Lee (of The Bank) to
subvert The Bank’s IPV process.
Oh sure,
a person can conspire with another person to subvert a process without actually
ever seeing the guidelines for it - no problem there.
But I still find it frustrating however that a
person accused of conspiring to subvert a process can go through the legal
system for 6+ years without the nuts and bolts of the process they are accused
of conspiring to subvert being laid bare for legal review and analysis.
This is why I keep coming back to
the question: What Risk Management process did the Bank of Montreal (The Bank)
think was in place? Just like to the accused
has a right to confront their accuser; we should be given the opportunity to
know exactly what the process was that we’re being accused of conspiring to
subvert.)
I got a bit of a shock the other day when I downloaded the transcript of
Kevin Cassidy’s sentencing hearing, although I completely enjoyed the first part.
In the first part, Cassidy’s lawyer Douglas Jensen
engaged Judge Griesa in a dialog about the RealMarks service that Optionable
performed for The Bank.
The verbal
exchange read like a symphony to someone like me who has hungered for this type
of detail.
It is my impression that the
Judge was right there with Jensen too, based on the number of light bulbs that seemed
to be igniting for him.
As you might expect, Prosecutor Michael Levy wasn’t enjoying Jensen’s
information exchange with the Judge as much as I was (and the Judge seemed to be)
When Levy’s turn came to speak, he said that
he had had to figuratively ‘bolt himself to his chair’ for the previous 45
minutes in order to keep from making objections.
I bring up Mr. Levy’s discomfort to highlight
one point.
Neither Mr. Jensen’s
statements (which I loved) nor Mr. Levy’s statements (which angered me) were
put to the rigors of being proven in a court trial.
Yes, the statements were being made in a
court of law, and yes, they were being spoken directly to a Judge. But at the end of the day, the statements were only statements, not trial proven facts.
And let me tell you, one of Mr. Levy's statements really bothered me, and not just because I believe it is untrue. It bothered me because I believe it is untrue AND its aim was an attempt to falsely fill a gaping hole in the Bank's narrative regarding my most nagging question: What Risk Management process did the Bank of Montreal think was in place? Are you curious to know what Mr. Levy said? (hint: it's about the process The Bank thought was in place)
Please allow me to take a step back before telling you.
Although The Bank’s IPV process is a proprietary secret which the Bank is
within their rights to prevent us from evaluating, the RealMarks contract that
The Bank entered into with Optionable is not a secret.
While we can't know for sure what's in the IPV, we can know for sure what Optionable agreed with The Bank to deliver through the RealMarks service. Remember, the RealMarks contract was drawn up by lawyers at Optionable, vetted by
lawyers at The Bank and signed into effect by The Bank’s Executive Managing Director
of Commodity Markets (Robert Moore).
While
the contract is filled with legal jargon that is hard to understand in the Terms
and Conditions as well as the Disclaimers and Limitations
of Liability sections, (including amusingly enough an agreement not to sue each other over the results of the RealMarks service, ha!), it does make one thing crystal clear.
The first sentence of the contract
says:
“RealMarks provides specific
market information based on actual market quotes obtained by Optionable.
”
Think of RealMarks as a basic input/output device.
You put
actual market quotes into RealMarks and the
specific market information you get out is the market reaction to those actual market quotes.
Are you with me on this? (this is important)
So in their role as a brokerage firm, Optionable took actual market quotes from The Bank, market tested them by entering real buy and sell orders into Optionable's trading platform for those options, at those prices, and then reported the response those orders generated back to The Bank. This wasn’t a hypothetical exercise.
These were real orders that real
traders could
and did trade on. This is what Optionable did, and it is exactly what The Bank contracted with them to do, and so help me God, there isn't a single thing illegal about it.
OK... now I’m ready to tell you what Mr. Levy said.
Mr. Levy said that the process The Bank thought was in effect went like this
: a Risk Manager from The Bank sent a broker at Optionable a list of options to market test through RealMarks, and this list was sent
without including prices at which to place the market testing orders.
The reason I find this so disturbing is: a) I don’t believe it happened and b) simply supplying the names of the options without the prices
for them would not have given Optionable enough information to place the market testing orders c) it
paints a picture that makes what David Lee did (supply Optionable the prices at which to
place the market testing orders) look like some conspiratorial breach in The Bank’s process,
when it fact, it was a key basic requirement in order for Optionable to perform
the service that the Bank asked them to do. If The Bank wanted to only send the names of the options to be market tested, without the prices to test them at, then they didn't want the RealMarks service. That doesn't make RealMarks 'bad', and it doesn't make the RealMarks requirement for actual market quotes into a 'conspiracy'. Likewise, not wanting to provide actual market quotes doesn't make The Bank 'evil'. What makes The Bank 'evil' is putting the company I invested in out of business 6 years ago, and worse, allowing the man who ran that company to go to jail over some imaginary conspiracy theory.
Do you get it?
Do you see it? Am I making any sense? Do you see how The Bank is flat out wrong
when they claim that the transmission of quotes from David Lee to
Optionable was some type of conspiracy?
Lee's participation wasn't a conspiracy; it was a basic requirement for the service The Bank wanted.
I don't know if I can say it any clearer than that.
In closing I'd like to say that back in 2007 The Bank lost a lot of money trading exotic options for natural gas derivatives, and they lost that money fair and square. When it came time to admit it, rather than accepting responsibility, they came up with a conspiracy theory instead, and they did it with the full knowledge and authorization of The Bank's CEO Bill Downe. We still don't know what Risk Management process The Bank
thought they had in place, but we do know that there was no other way for The Bank to have received output from RealMarks other than by The Bank providing prices to Optionable, so that Optionable could test The Bank's prices in the market. I hope I've given you enough information to see how The Bank's
conspiracy theory is contradicted by the practical reality of how the
RealMarks system worked. If I have, I like to ask you to take action against the Bank of Montreal by sharing links to this blog in your social media networks. Let's get the word out!
This blogging platform does accept comments, so if you have any questions about any part of what I've written, please feel free to ask. Thanks for taking the time to read this, whether you agree with me or not. Peace.
Disclosure: I am an investor in Optionable. This blog does not offer advice on buying or selling any security.
