The Bank of Montreal and Optionable

6 years later – what if it all was a simple misunderstanding?

 

Duck or Rabbit?

Back in 2007 when the Bank of Montreal alleged that reports from Optionable were linked to the Bank’s trading losses, they set off a long and protracted series of litigation, which in my opinion as an Optionable shareholder, sent an innocent man to jail (on a plea bargain) and forced an up and coming brokerage firm (Optionable) out of business.
 
Despite all the litigation, what if a lot of this was triggered by a simple misunderstanding?

In his 2012 deposition testimony, Optionable’s Ed O’Connor stated that when preparing the reports that BMO believes defrauded them, the process was to only review financial instruments (products) on David Lee's list that Optionable actually brokered on a regular basis. The products Optionable didn't broker - they left alone - and returned those quotes to BMO unchanged. To my knowledge, this detail about the process has never been made public before, and for me anyway, it changes the way I'm looking at the overall picture of what happened.  

Reading through O'Connor's deposition testimony, it seems to me that brokers from Optionable performed their review in a manner consistent with BMO’s expectations (including changing Lee's quotes when variations existed)  BUT – they only reviewed the products on the list that they actually brokered.  This makes sense because those were the products that Optionable had a basis from which to provide the Bank with a professional review.  As for the products Optionable didn't broker, O’Connor said it was his belief at the time that BMO had other sources looking at those quotes.

Based on O'Connor's testimony, I have a theory about what happened.  My theory is that for reasons we do not fully understand, (most likely including poor process definition and a general lack of communication) the people in the Bank’s Back Office assumed that Optionable was reviewing David Lee’s entire list rather than just the products they brokered.

If this is what happened, it would explain why the Bank feels justified in accusing Optionable of “regurgitating” and “U-Turning” David Lee’s Bid/Ask quotes, while Optionable insists to this day that they provided BMO with accurate reports.  I have a hunch that you will find a near perfect match between the quotes the Bank claims Optionable “regurgitated" and "U-Turned" and the quotes Optionable sent back to BMO unchanged because those quotes were for products that Optionable did not broker.

My theory also reveals an opportunity through which David Lee may well have mismarked his Bid/Ask quotes on products he knew Optionable did not broker and felt some confidence that they would pass through Optionable’s review without being challenged.

My theory does not prove that David Lee mismarked quotes, but it does show a path through which he could have. It also shows how he could have pulled off such a scheme without any consent or cooperation from Optionable.

It saddens me to think that I may actually be right, when I consider all the time lost and opportunity squandered had only a neutral party, such as NYMEX (now part of The CME Group) stepped in as a mediator to clear up the miscommunications.  I strongly believe that all of the people at Optionable and most of the people at BMO were honest people trying to do their jobs honestly and ethically.  It's a shame if a simple misunderstanding derailed them.

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