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.