BMO Source Misrepresented Deloitte Report When Implicating its Own Trader and the Brokerage He Used.

On April 27, 2007 the recently appointed CEO of the Bank of Montreal, Bill Downe, took "decisive actions" to curb losses from its $350 million to $450 million natural-gas trading blunder.  A bank source told journalists that Downe’s actions were based on a report conducted by forensic auditors Deloitte and Touche.  According to the source, Deloitte found “serious mismarking of the book of natural-gas options” managed by the Bank’s trader David Lee and indicated that some of the prices used in Lee’s mismarked book of trades were provided by brokerage firm Optionable, of which I am an investor.

Although the Bank source volunteered these incriminating details to the Press, the Bank managed to keep the contents of the Deloitte report a proprietary secret.  In October 2008 the Bank successfully blocked efforts to access the Deloitte report by Class Action lawyers who were hoping it contained a 'smoking gun' they could use in a suit against Optionable.  In December 2009, long after the Class Action suit failed, the Deloitte report was entered into the court record, and it is available as a free download here: (part 1 / part 2)

If you read through the report, you'll notice some differences between what the "bank source" told reporters and what was actually in the report.  One difference is obvious and another is more subtle.

The obvious difference:  Not one of the three accusations the source cited from the report are actually in the report.  The three accusations were:

•  Deloitte found that there had been “serious mismarking of the book of natural gas options”.  The report neither says nor implies this.
•  Deloitte’s forensic auditors had never seen such a wide discrepancy in terms of pricing between values marked in BMO’s portfolio of natural gas options and their market value.  The report neither says nor implies this.
• Deloitte indicated that some of the prices used in BMO’s mismarked book of trades were provided by Valhalla, N.Y. based brokerage Optionable. The report neither says nor implies this.
• (use the links above to Deloitte report and see for yourself) 

The subtle difference: Using the name brand recognition of Deloitte as world class forensic auditors, The Bank of Montreal made it appear as if Deloitte had uncovered fraudulent activities as the result of a forensic audit into their trading losses.  The subtle difference is that in this case Deloitte didn't conduct a forensic audit.  Deloitte conducted a process review of the Bank's energy trading and documented deviations between the Bank's actions and prevalent industry practices.  As such, it is my opinion that the Bank acted in bad faith when its source misrepresented the content of the Deloitte report to the Press. 

• In a June 2007 statement to the New York District Attorney, Murray McIntosh (BMO Director Credit Products Market Risk) said: “Deloitte was brought in to look at the valuation practices and to determine if they were market practices. They were not brought in to determine if there was fraud.” 
•  Using a Red /Yellow /Green grading system, Deloitte identified 128 Green areas where the Bank met prevalent industry practices; 35 Yellow areas where the Bank deviated from prevalent industry practices and 6 Red areas where the Bank significantly deviated from prevalent industry practices.   
• Rather than damning Optionable, the Deloitte report credited Optionable's CEO Kevin Cassidy as a contributor to the report.  
• Optionable become permanently unable to operate as a brokerage within days of the Bank source's allegations being reported in the media.
• In summary: The report that the Bank used as the basis for its allegations of fraud against Optionable specifically EXCLUDED any testing for fraud whatsoever.

This Financial Post article BMO Moves on Auditors Report: Source memorializes the information the Bank's source provided the Press. 

Disclosure: I am an investor in Optionable.  This blog does not offer advice on buying or selling any security.