Bank of Montreal Leaks, Ex-Con Plugged.

* 5/31/12 Conference before Judge Daniels
* Plaintiffs: Bank of Montreal, CMEG / NYMEX, CFTC and SEC
* Represented Defendants: Mark Nordlicht, Optionable, Edward O'Connor and Kevin Cassidy
* Location: Daniel Patrick Moynihan Courthouse 500 Pearl Street New York, NY

* Standard disclaimer: I am an Optionable shareholder and I attended the May 31 conference.  I took notes to the best of my ability.  These notes are not investment advice. These notes contain some personal observations and opinions.  Please do not send me to jail for 30 months for failing to disclose things you already know.

Part One: An Analogy

During the conference, several people tried but only partially succeeded in coming up with analogies that illustrated the actions Kevin Cassidy took in 2007 which brought him to a plea bargain in 2011. One defense lawyer compared Cassidy's actions to talking on a cell phone while driving.  Judge Daniels however chose to only see Cassidy's actions as a felony.  When the Judge wanted to know if Cassidy's actions were minor or serious, he asked to be told the length of Cassidy's prison sentence. Neither of these ways of evaluating Cassidy's actions seems complete. I am fairly confident that when Kevin Cassidy received quotes from David Lee, he wasn't comparing his actions to talking on a cell phone while driving, or much less wondering if his actions might one day be considered a felony.  He probably wasn't comparing himself to a hole in a granite fountain either, but we'll get to that.

Outside the courthouse I found a sculpture (pictured above) that is actually a self enclosed fountain. You can't see the water unless you look through one of the fountain's two holes.  If you stand close however, you can feel the water racing through it. Slowly, it began to occur to me that I just might have stumbled upon a viable analogy not just for Kevin Cassidy's actions, but for the whole mess that began when the Bank of Montreal needed a scapegoat to blame for its trading losses. I've been tinkering with this analogy for a few days - please read it through and see if works for you.

* The mysterious self enclosed fountain represents the Bank of Montreal (BMO)
* The water swirling around inside the fountain represents billions and billions of dollars.
* The large hole in the fountain represents ex-con Kevin Cassidy (of Optionable) receiving Bid and Ask quotes from David Lee and not specifically disclosing Lee's participation in the market survey reports later sent to BMO's Risk Management. (also known as "the felony")
* The small hole in the fountain represents Joseph Saab (of MF Global) receiving Bid and Ask quotes from David Lee and not specifically disclosing Lee's participation in the market survey reports later sent to BMO's Risk Management. (curiously, not deemed a criminal offense)

Now..... if BMO discovered the fountain was losing water they might call in a plumber.  In this analogy the auditing firm of Deloitte and Touche represents the plumber.  Let's say that the plumber identified several problems with the fountain's plumbing infrastructure as well as a few structural issues with the frame of the fountain itself.  Included in the list of structural issues were the two holes: Optionable and MFG.

OK, so now BMO has the list of its plumber's recommendations, but implementing the recommendations would take time, time that BMO did not have. BMO's fountain was losing water, and it was getting near time to meet with shareholders.  BMO hired a public relations firm to help them regain the trust of shareholders and industry analysts.  The public relations firm looked at the plumber's recommendations searching for a way to spin it so that BMO's management appeared to be in control, even though the fountain is leaking, and no one knows how much water has been lost.  The public relations team seizes upon Kevin Cassidy with his previous criminal record as the scapegoat to offer Federal Regulators, industry analysts and shareholders as the cause of the leaks.  The public relations firm knows that when people look at the fountain, they won't be able to see any of the plumbing flaws going on inside, but they will be able see the holes on the outside.  The PR firm knows it will intuitively make sense to people that the holes are to blame.

Once BMO focused people on the holes, no one seemed to be able to look beyond them.  In my opinion, the scheme BMO's PR firm developed fraudulently induced the US Government to bring criminal charges against Kevin Cassidy.  Once that was in play a myriad of other misfortunes befell Optionable, including the alienation of affection from NYMEX, the loss of any future potential business relationships, a class action lawsuit, and...  and... I'm sure I'm leaving something out, but I think you've got the idea. Optionable drowned in the leak BMO fraudulently blamed them for.

And that's the situation we find ourselves in today.  Optionable's defense team can talk until they're blue in the face, and provide all sorts of factual explanations that show how BMO was disingenuous in linking Optionable to the losses that they knew were their own responsibility, but at the end of the day, to the casual observer, it's all just noise.

Try this exercise.  Take a look at the picture of the fountain (above).  If you heard in the news that this fountain was leaking and a hole installed by an ex-con was to blame, would you believe it? Maybe you're like me and you'd question the story, but even I have to admit that it makes a very compelling sound bite. I mean, it really doesn't make a lot of sense that holes that high up on the structure would be the source of the leak once you start thinking about it, but at a glance, it comes off as a very likely possibility.  I understand why people continue to buy BMO's version of the story, while Optionable's is so difficult to explain.

And.... not that it matters.... but in case you're wondering about the actual fountain outside the courtroom.... Being something of an inquisitive person, I put my hand inside the hole to see if it was wet.  It wasn't.

(Note: If anyone knows the name of the artist who created this sculpture, please let me know, as I would like to thank him or her publicly in this blog.)

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Part 2 - the notes

OK - enough of my analogy - here are the conference notes.  

  

* Disclosure: I am an Optionable shareholder and I attended the May 31 conference.  I took notes to the best of my ability.  These notes are not investment advice. These notes contain some personal observations and opinions.  

CFTC (on the phone):  Expects to resolve with Cassidy within a month.  Agreed to check in at the next conference in September.

BMO: has completed document production of over 6 million pages of data related to this case.  BMO requested 4 to 6 hours of access time during the depositions.  To be fair, I think it is worth noting that this document production was a huge undertaking by BMO and they should be commended for completing it. 

SEC: wanted to exclude the other prosecution teams from its depositions.  Judge Daniels said no that, but agreed that the SEC should get the 7 hours of deposition time they requested.  The Judge announced a Discovery schedule for the SEC case with milestones happening from Feb 2013 to May 2013.  Optionable is not named in that action. (although Cassidy and O'Connor are)

Depositions:  Kevin Cassidy will be deposed on June 21 and 22.  A third day with the SEC may be scheduled (if needed).  Kevin Cassidy's deposition schedule was the only deposition schedule discussed at the 5/31/12 hearing.  (Each day will consist of 7 hours of questioning - meaning that Cassidy is already scheduled to be questioned under oath for up to 14 hours, with a possibility that the SEC will want more time, pushing this up to a max of 21 hours of interrogation of a single witness.) 

CMEG / NYMEX (the main event of the 5/31/12 hearing) Motion for a Summary Judgment on the Express Warranty

NYMEX believes that Cassidy’s acceptance of a plea bargain, by itself, is enough for their request for a Summary Judgment to prevail.  Why?  Cassidy admitted to a crime and the warranty said – no crimes allowed.  NYMEX believes it had no obligation to Optionable once a crime was committed.  

Defense:

·         Nordlicht

·         The Nordlicht and Optionable defenses are allowed to claim that Cassidy’s actions were not a crime even though the Cassidy defense is prevented from saying or even implying this. 

o   The Judge thought this was a desperate Hail Mary strategy, and his comments had the SEC team snickering and elbowing each other.

·         * BMO knew that Lee was contributing quotes

·         * BMO could have told Cassidy to ‘cut it out’ but didn’t

·          * Cassidy’s actions were but one of several breaches in BMO’s preferred but undocumented  process. 

·         * Cassidy had no reason to believe that his breach of BMO’s preferred but undocumented  process was likely to have a material impact on Optionable’s business. 

·        *  If BMO hadn’t needed a scapegoat to blame for its losses, it never would have singled out Cassidy’s breach as having any significance – especially considering the myriad of other breaches by BMO itself.
* Personal observation: Basically, if you've got a Swiss Cheese process, there's gonna be holes, right?  And it's not just me, some kook on the internet saying that BMO's process had holes, it was the Auditors that BMO hired that said that BMO's process was significantly flawed in several key areas. 

o   The Judge countered that BMO’s actions are not relevant to the warranty made to NYMEX

o   The Judge said that Cassidy’s plea defines his actions as a crime and his admitted actions were happening during the period that the warranty was made to NYMEX.
o   Personal Opinion: What I believe the Judge missed is that Cassidy's actions were legal.  It was perfectly legal for Kevin Cassidy to receive quotes from David Lee, run them by a few other traders to check for reasonableness and then send them to BMO's Risk Management team.  Those are the "actions" we keep talking about.  The actions were outside of BMO's preferred but undocumented process, but they were not a crime.  These legal actions only became viewed as a crime after BMO lied to Federal Regulators, Industry Analysts and Shareholders at their Press Conference that: a) they were not aware of the actions, when they were and b) that the actions caused BMO to be misled about the value of Lee's portfolio, when BMO didn't even use Cassidy's reports to value Lee's portfolio.
"Whoa! Slow down there cowboy", you might interject.  If what I'm saying is true, why did Cassidy take a plea bargain?  Answer: As far as I can tell, where they snagged Cassidy was that he didn't disclose that Lee was a contributor of quotes from whom the report was based every time he faxed or emailed a report. Although it is clearly documented that both Cassidy and yes, even Lee (OMG!!!) told BMO Market Risk that Lee's quotes were included, Cassidy could not claim that he personally disclosed this fact each and every time he sent a report to BMO's Market Risk.  

·         Nordlicht’s summary points

o   Cassidy's plea is not binding to Nordlicht

o   Nordlicht has presented facts to NYMEX that they have failed to address

o   NYMEX’s request for Summary Judgment is premature – because the depositions have not happened yet, and they are only a few weeks away.

·         Optionable

o    Cassidy’s plea is not binding to Optionable

o   Optionable's reports disclosed their limitations.  BMO chose to ignore those warnings.

o   Optionable deserves the opportunity to defend itself.  The NYMEX request is premature.

O'Connor
o    While a technicality, O'Connor's lawyer pointed out that NYMEX missed a filing deadline and therefore NYMEX's reply papers should be stricken.  Judge Daniels acknowledged this point but decided to allow the papers - however he added that this point could be revisited if he rules in NYMEX's favor.
o    Corrected NYMEX's accusation that Optionable used the word 'independent' in their SEC filing when describing their quote service called Real Marks.  NYMEX has been corrected on this point previously.  You see, if Optionable had used the word 'independent' it would strengthen the argument that Kevin Cassidy was somehow legally obligated to disclose that the reports he sent to BMO were not independent.  The fact that NYMEX keeps claiming Optionable used the word 'independent' when they didn't, in my opinion weakens the argument that Kevin Cassidy was somehow legally obligated to disclose that the reports he sent to BMO were not independent.  Now, to be fair here, I will acknowledge that when Cassidy took the plea, he did admit that he knew BMO wanted independent quotes and that the quotes he sent were not independent.  What's interesting to me is that Optionable did not promise BMO independent quotes, and yet NYMEX's keeps saying in court hearings that they did.

Cassidy

·         BMO did not pay Optionable for the reports  (Personal note: I think the implication here is that a claim of fraud is weakened if the ‘victim’ did not pay for the purportedly fraudulent information)
*·         Cassidy sent Lee reports for several years, but there were only 7 or 8 reports sent during the time period under review.
** The reports were accurate.  (Let that sink in for a second.  The reports were accurate.  Optionable was destroyed, and a man is being taken away from his family for 2 1/2 years for sending ACCURATE reports.  That defies any concept of justice.)

·         Cassidy’s lawyer read Cassidy’s full allocution to the court.  He pointed out several allegations and assumptions that were being tossed around liberally by NYMEX that were not included in the allocution.  (And friends - there could be a lot more of that type of clarification coming from the depositions)  

·         NYMEX itself survived the discovery of a 10 year fraud being exposed, so it is not a fair conclusion to say that Optionable could not have survived this much less significant breach.  (Personal note:  Rather it was NYMEX's own abandonment of Optionable and not Cassidy's breach of an undocumented BMO process that caused NYMEX to lose money on their investment in Optionable.) 

·         Optionable did not provide BMO with valuations, they provided them with Bid and Ask quotes.  BMO had their own department that handled valuations.  (The confusion between valuations and quotes is a misunderstanding I was guilty of as well … until now.  How important is that clarification?  Well, it sure makes you wonder why BMO claimed the reports from Optionable confused them about the valuation of Lee's holdings.)

·         NYMEX had people living and breathing at Optionable months before it invested.  It had plenty of time for due diligence.  It had the knowledge and sophistication to understand how Optionable rolled.