Trust Me. I'm Elvis.

Sometimes it’s hard to be a lunatic voice on the internet claiming that when a multinational bank lost money in sketchy high risk derivatives they sacrificed their own employee and scapegoated a small brokerage firm while explaining the hundreds of millions in losses to industry analysts and investors.  It doesn’t get any easier when a Federal Court Judge sentences the guy I'm thinking did nothing wrong to 30 months in jail.  At times like this, even a lunatic needs to take a step back and say, perhaps I was wrong.

Take a look at how neat and tidy Grant McCool of Reuters makes the story sound.  (link below) After reading a few factual and concise paragraphs anybody but a lunatic would conclude the following:

* David Lee inflated the fair market value of the natural gas options positions in his derivatives trading portfolio in the daily reports he sent to BMO's Market Risk Division from 2003 to 2007.
* David Lee funneled a portion of his business to Optionable in exchange for Kevin Cassidy agreeing to use David Lee's valuations, as opposed to the valuations of other non-BMO traders in the same markets, as the baseline for the twice monthly reports that Cassidy sent to BMO's Market Risk Division.
* Had BMO only known that Cassidy's reports contained input from Lee, they would have been quicker to take certain corrective measures when Lee's trading slipped from being profitable to unprofitable. .
* Both David Lee and Kevin Cassidy have taken plea bargains admitting their roles.

What’s not to get?  How could anyone but a lunatic claim that there's more to the story?

Well, here's something the story doesn't address: There was no valid business reason for BMO to use Optionable's validation services - period.  There were other industry standard valuations services around that didn't come with such inescapable conflicts of interest.  If BMO had wanted to throw Lee and Cassidy a bone while Optionable was beta testing its then new "Real Marks" service in early 2007, then sure, they could have used Real Marks as a back-up second opinion valuation. But there was no valid business reason to rely on Optionable's valuations exclusively.  These reports were what BMO was using to safeguard not just hundreds of millions of dollars of investments, but hundreds of millions of dollars in sketchy high risk investments where even the best market intelligence money could buy was subjective and murky at best.

Here's why I say that: 

* At all times from 2003 to 2007 an industry-standard multi-contributor independent valuation service was available to BMO.  A second service became available in 2004. BMO did not subscribe to, let alone rely upon, such a service until the latter part of 2006, after Lee's trades became unprofitable.

* At all times from 2003 in 2007, BMO was aware of the temptation their traders faced to mismark their valuations.  After incurring a large loss, BMO had fired Lee’s predecessor and accused him of mismarking his portfolio too.

* At all times from 2003 to 2007 BMO’s Market Risk Division was required to select the valuation service used to validate their trader’s marks.  BMO created this requirement to protect themselves as well as to prevent their traders from yielding to temptation.  David Lee was denied the protection from temptation that this requirement would have given him, had it only been enforced.

* At all times from 2003 to 2007 the people working in BMO’s Market Risk Division knew that they had not selected the validation source of David Lee’s marks.  Instead they knew that David Lee himself had selected the validation source against their strenuous objections.

* At all times from 2003 to 2007 David Lee's insistence on selecting the validation service created an appearance of impropriety.  After all, if Lee had nothing to hide, why would he force the Market Risk Division to accept his validation source instead of the industry standard one?  This point was never lost on the people in the BMO Market Risk Division.

* At all times from 2003 to 2007 BMO could have enforced the requirement to have the Market Risk Division rather than Lee, the trader under review, select the valuation service. Interestingly, BMO chose not to ruffle Lee's feathers while he was up, but then ordered the Market Risk Division to "release the hounds" when Lee's trading was down. And friends..... weren't they quick to parade Lee's bloody shirt around for industry analysts and investors.



Additionally: 

* At all times from 2003 to 2007 BMO had accurate Accounting records of Lee’s trades.

* At all times from 2003 to 2007, size mattered.  BMO claims they were misled about the value of Lee's portfolio, but they can not claim that they were ever misled about the massive size of it. At times, Lee's positions were the largest of any trader in those tiny markets. If Lee wasn't holding so many sketchy high risk derivatives in illiquid markets where valuations vary widely, then any variances in the reported valuations would not have mattered quite so much. Whether his motivation was greed, or a desperate attempt to get back to even, BMO knew that Lee had become a Pig.

* At all times from 2003 to 2007 BMO was able to compare the difference (if any) between the portfolio valuation claimed by Lee and revenue realized when Lee traded those positions for cash.  If Lee was monetizing his portfolio at prices near the valuations in his daily reports, this calls into question the entire notion that he was "systemically mismarking" in the first place.

* When taking the plea, Cassidy said that he believed the reports he sent to BMO’s Market Risk unit were accurate despite Lee’s involvement.  That's either a very brazen lie to make under oath while accepting a plea bargain, or it's the truth. Why didn't the Federal Prosecutors challenge Cassidy's statement?  Could Cassidy be going to jail for 30 months for sending BMO accurate reports that only fell under suspicion due to BMO's Market Risk Division being cut out of the selection process?

I know, I know, I know.  Tie me down and call me Elvis.  The bank’s version of events has held up so far, and people who question it wind up looking crazy, like me.

Read Grant McCool's story here:

Disclosure: I am an Optionable investor.

Read this story on the CNN self publishing website (iReport) here: