Transcript from Kevin Cassidy's Sentencing

It's the nature of human interactions, and certainly complicated business matters, that two people can both be telling the truth -from their own point of view- and still have very little common ground between them about what happened and who is to blame. 

In the transcript that follows we hear from the lawyer for defendant Kevin Cassidy (Mr. Jensen) and the lawyer for the US Government (Mr. Levy) as each attempt to explain to The Court (Judge Griesa) what happened from their point of view.  Were the actions a reasonable misjudgement lacking criminal intent as Mr. Jensen contends or the felony labeled "conspiracy to commit wire fraud" as Mr. Levy professes.

The transcript is quite lengthy, so I am asking for a lot of your time by asking you to read it.  What I hope you will find if you do chose to read further is that regardless of which side rings truer for you, I think you'll come away with the impression that what really happened between The Bank of Montreal and Kevin Cassidy (and his company Optionable) was a failure to clearly communicate business requirements and expectations. While the burden of providing clear communications falls equally on both parties,  it's always sad to see when one side takes their own failure to listen and projects that as malicious intent by the other party. (even though that too is human nature)

In presenting you the transcript, I will limit myself to making one opinionated comment of my own.  The type of service that US Attorney Levy claims that The Bank of Montreal 'really wanted' did exist in the marketplace, and the provider of that service was known to The Bank.  It is my opinion that the fact that the Bank wanted something other than what Cassidy provided does not turn Cassidy's actions into a conspiracy to prevent the Bank from obtaining the type of service they desired.  Attempts by The Bank that claim Cassidy presented his service as if it was the service The Bank 'really wanted' ultimately fall short. All it takes, in my opinion, is to look at the service agreement that The Bank signed.  And with that, my editorializing is over..... here is the transcript.... judge for yourself. 

Transcript of Sentencing Proceedings before Honorable Thomas P. Griesa on April 25, 2012   Source: Court document: 13-2185 Document 43

THE COURT: Maybe it's a question that you don't want to answer and you don't really have to, but why did your client get into this?

MR. JENSEN: Your Honor, there are mysteries in life, and he deeply regrets getting into it. It was a misjudgment.

One of the things that come through in the letters is that he is a loyal, hard-charging businessman, and he places a premium on providing premium service to his customers. He developed a very strong customer relationship with David Lee.

THE COURT: With Lee?

MR. JENSEN: With David Lee. He was a principal customer of his brokerage business. And he made a misjudgment.  He agreed to do something that he shouldn't have agreed to do.

But there were two facts that I think the Court has to bear in mind: One, he believed the information was accurate, because the information was starting with Lee but then it was going to the market, it was being exposed to the other traders in the market. And in his mind --

THE COURT: What do you mean by that? What do you mean by that?

MR. JENSEN: Here's what I mean, Judge: If I get a price for something, and let's say I have a toy, my child wants to buy or sell one of his toys, and so I put that toy up on eBay so the whole world can see I want $10 for this toy; other people in the marketplace can then see, OK, is that a fair price or is that not a fair price. If it is a fair price, they'll buy it; if it's not a fair price, they won't. But it's exposed to the rigors of the marketplace, it's exposed to the world.

Here we're talking about a very small market. We're talking about four or five market makers. Lee was the principal market maker in this market.

THE COURT: These were options to do what?

MR. JENSEN: Buy and sell natural gas contracts.

THE COURT: Buy and sell natural gas?

MR. JENSEN: Correct.  So Lee would give him a price --

THE COURT: Wait, just slow down. Lee would do what?

MR. JENSEN: Lee would give him quotes. He would say, here's a January 2012 contract to buy natural gas, I'm willing to buy that for $10 and I am willing to sell that for $12, that's my market, those are my quotes.

THE COURT: He would tell that to whom?

MR. JENSEN: He would tell that to Optionable. He would send over a sheet in the morning with those prices for all the various contracts. And then Optionable would take those prices and show them to other traders in the market. And that was what, in Mr. Cassidy's mind, made them legitimate.

THE COURT: Made what?

MR. JENSEN: Made the quotes legitimate. Because it was at the end of the day, after exposing them to the market, after showing them to the other traders in the natural gas marketplace, the other market makers -- and, again, there were only a few of them at this period of time, there were four or five, but Optionable would show them to the other traders, didn't do it every single time, there were lapses, but they made an effort to show them. And there is backup that shows that they took those quotes -- it unquestionably started with David Lee -- they took them and then they showed them to Billy and Bob and Sue and the other traders in this market.

THE COURT: Well, what would Billy and Bob and Sue do?

MR. JENSEN: They would trade on them in some instances.

THE COURT: They would what?

MR. JENSEN: Trade on them in some instances, they would buy or sell.  If you look at David Lee's 3500 material, he goes out of his way to say, when I was creating these quotes, I sat there in my room the night before and I was creating and when I read them, I was careful in the way that I did because I knew that Optionable was going to show them to the market, and I knew that other traders could buy or sell them.

So that was a check, that was a check, because the quotes were exposed to the marketplace. It wasn't done every –

THE COURT: Let me go back.  What gets listed as an asset on the Bank of Montreal's book?

MR. JENSEN: The Bank of Montreal would list an option, option X.

THE COURT: OK, and they owned that option?

MR. JENSEN: They owned that option.

THE COURT: So that option had been purchased?

MR. JENSEN: Correct.

THE COURT: OK. And it was listed, and obviously a lot of options --

MR. JENSEN: Correct.

THE COURT: -- were listed on their books?

MR. JENSEN: Correct. And every single day --

THE COURT: Wait a minute.

MR. JENSEN: I'm sorry, Judge.

THE COURT: So obviously the bank, being a buyer of options, has to pay for the options, so there's an initial purchase price, is there not?

MR. JENSEN: Correct.

THE COURT: Now, I take it the problem is that option might be held for months, right?

MR. JENSEN: Correct.

THE COURT: And periodically, during those months, that option has to be valued -- or is it just carried at cost?  What happens?

MR. JENSEN: No, every single day, David Lee would assign a value to it. So it would say, let's say, $11, he's saying, today I think option XYZ is worth $11.

THE COURT: OK, and so in some way that is recorded, his valuation?

MR. JENSEN: Correct.

THE COURT: Now, as I understand it, there was some form of request for independent check of that value that Lee had assigned; am I right?

MR. JENSEN: It's a little more complicated than that.

THE COURT: All right.

MR. JENSEN: What Lee was supposed to get -- let's say he has this option on his book, XYZ option, he says it's worth 11 bucks. What he was supposed to get would be quotes from the marketplace, from brokers, that would indicate where people were bidding and offering for that option. So, in other words, he's got option XYZ on his books, he's saying it's worth 11, he's got to go to a broker and say, hey, Mr.  Broker, what are people buying and selling option XYZ for. And the broker would say, OK --

THE COURT: I take it that there isn't just one XYZ option in the whole world, right?

MR. JENSEN: Correct. They are traded --

THE COURT: In other words, what we're talking about as XYZ options -- and maybe at the moment Bank of Montreal is not trading that, it simply has it on its books?

MR. JENSEN: Correct.

THE COURT: But there are XYZ options which are being traded, it's not the only one in the world, just that if I own a share in AT&T, it's not the only share of AT&T in the whole world?

MR. JENSEN: Sometimes yes, sometimes no. David Lee traded -- there are two types of options, and I will try not to get too technical. There are at-the-money options, which trade a lot in any single day, you would see a lot of at-the-money options; there are also deep out-of-money options, which are very illiquid and traded very infrequently.

THE COURT: What's the meaning of that?

MR. JENSEN: Well, an at-the-money option is where the strike price is very close to the price today at which you could either buy or sell actual natural gas. And there's a very liquid market in those because they're very close to what you could buy or sell physical natural gas today at, much more liquid market in that.  In deep out-of-the-money options, it's a very illiquid market.

THE COURT: What's the meaning of that market?

MR. JENSEN: It means -- let's say natural gas – I could buy a gallon of natural gas today for ten bucks, but it's an option to buy a natural -- a gallon of natural gas two years from now at 20 bucks. So it's way out, way far beyond what the current market is trading at, both in terms of time and in terms of dollar amount. And those --

THE COURT: Are these options to be exercised fairly soon then?

MR. JENSEN: Typically, the deep out-of-the-money options? No, they are --

THE COURT: I mean the other -- what do you call them?

MR. JENSEN: The at-the-money ones are more typically to be exercised relatively soon, not exclusively but more typically, yes.  The point is, one market is very liquid and the other types are very illiquid and not traded very frequently.

THE COURT: OK, anyway, I guess Lee had bought both kinds?

MR. JENSEN: Both kinds, but he specialized in the illiquid --

THE COURT: Oh, he did.

MR. JENSEN: -- portions, the ones that very few people trade in.  So the point is, you can't go into your office, punch up, pull up a screen, like you can on NASDAQ, and say – you mentioned shares of AT&T, I think -- you can't go in and pull up AT&T on your screen and see, OK, where are people buying and selling these things today. For the deep out-of-the-money options, very few people, if any, are trading those.

THE COURT: Well, I thought you said a little while ago, though, that these were all exposed to the market as if there was a market for what --

MR. JENSEN: Well, what happened, Judge, for the deep out-of-the-money options -- and this is part of our position -- there's only one way to actually get quotes for deep out-of-the-money options. Somebody's got to make the quotes in the first instance. You can't just look on your screen --

let's assume XYZ, the option I've been using, is a deep out-of-the-money option, very illiquid, very few people are trading it. So you can't pull up your screen and see where is XYZ trading. The only way -- and we would have had expert testimony about this had we gone to trial -- the only way to get a price for that deep out-of-the-money option is for a trader to make a market, a trader like David Lee. He might have been the only person in the world trading at that day or the only person in the world with it in his  portfolio.  So what happened? David Lee would say, OK, I've got XYZ option, I think it's worth 11, but I've got to get some quotes to bolster that. So what am I going to do? I'm going to make quotes, I'm going to say I'm willing to buy it for 10 and I am willing to sell it for 12. Now, nobody else is really interested in this, but I've somehow got to get quotes, so I am going to give those quotes to my broker, Optionable, "Kevin, take these quotes and show them to the market."

So he sent the quotes over to Optionable. Optionable would show them to the market. If people thought the quotes were wildly off, they could buy or sell it. If they didn't -- and sometimes that happened, sometimes they did buy or sell.

And Lee talks in his 3500 material about how he was very careful in the way he came up with his quotes because he knew that people could buy or sell. So if people buy or sell them, they buy or sell them. If they don't, that's an indication that the quotes that came from Lee are within the market, because if somebody else thought they were off, they would buy or sell them.

THE COURT: Let me see. What you're saying is that what Lee was doing was mainly having on the books of Bank of Montreal -- what do you call it, off-the-money?

MR. JENSEN: Out-of-the-money.

THE COURT: Out-of-the-money, let me make a note of that.  - and that he continually had, every day he had to have a value placed on that option, right?

MR. JENSEN: Correct.

THE COURT: Now, what I thought happened -- and maybe we're having to backtrack a little bit and I don't care – I thought that in some form, that value was given to Mr. Cassidy for Mr. Cassidy in some way -- so let's take it very slowly -- that value was given to Mr. Cassidy for Mr. Cassidy to provide some independent check. Am I right?

MR. JENSEN: No. Mr. Cassidy was not given a value.  It's a two-step process, Judge. And I know it's important, so let me see if I can make it clear.  Mr. Lee assigns a value. Again, let's say he says XYZ option is worth 11 bucks. He writes that down in his notebook at BMO, and he submits it to the risk  management department.  Option XYZ is worth $11 it's between him and risk management.

THE COURT: But that ultimately would be used as an asset on the books of the Bank of Montreal, right?

MR. JENSEN: Correct, his --

THE COURT: It isn't bid and ask; there is a value?

MR. JENSEN: Correct, that he assigns, but that's not what he gave to Optionable.

THE COURT: I thought that this was supposed to be checked, and you say I'm wrong.

MR. JENSEN: I'm saying the way it was checked was the following -- I'm not saying you're wrong, Judge. I'm saying Mr. Lee did not take that value of $11 that he assigned to his position and gave it to Optionable. That's not what happened. What he did was, he gave quotes to Optionable. These were live quotes, and he would say, Optionable, for XYZ option I'm willing to buy at a 10 and sell it at 12.

THE COURT: Just a minute. Let me just see if I understand you. You're saying he had a value on his books, it wasn't  buy and sell, it was a value.

MR. JENSEN: Correct.

THE COURT: That value, unless it was changed or corrected, would be the asset value on the books of Bank of Montreal?

MR. JENSEN: Absolutely correct.

THE COURT: But you're saying he did not transmit that value to Mr. Cassidy?

MR. JENSEN: Absolutely correct, your Honor.

THE COURT: What he did, if I understand you was to say to Mr. Cassidy, I'm willing to buy XYZ option at 10 and sell it at 12?

MR. JENSEN: Absolutely correct.

THE COURT: Is that what he said to Mr. Cassidy?

MR. JENSEN: Correct, your Honor.

THE COURT: OK.  Are you saying that that was given to Mr. Cassidy not as some theoretical valuation exercise but he really told Mr. Cassidy I'm willing to buy at 10 and sell at 12? In other words, if Mr. Cassidy could find an option to buy at 10, he would buy it, right?

MR. JENSEN: For Mr. Lee.

THE COURT: For Mr. Lee?

MR. JENSEN: Correct.

THE COURT: So it was really like an order?

MR. JENSEN: Correct, it was a market-making – they were quotes, prices at which he was willing to buy or sell something. And then Mr. Cassidy would show those to the other traders.

THE COURT: I don't understand how it works. In other words, if you say I'm willing to buy at 10 and sell at 12, what does that mean to a broker? He can go and buy it at 10 and then he's supposed to turn around and sell it at 12?

MR. JENSEN: What would happen, your Honor -- and it happens every single day in the market, hundreds of times – a trader would say XYZ, I'm at 10, I'm at 10, buy 12, shop it, work it. That means --

THE COURT: So what does the broker do?

MR. JENSEN: The broker then takes that price and calls other traders or posts them on an electronic screen and says, I've got a guy who's at 10, buy 12, meaning I've got a guy -- I'm not tell you who he is -- I've got a guy who's willing to pay $10 for these things or he's willing to sell them for 10, are you interested?

THE COURT: Wait a minute. He's --

MR. JENSEN: 12, I'm sorry, I misspoke, your Honor.  In other words, it's a bid and an ask, and it's the prices at which the trader is willing to buy and sell this particular option.

THE COURT: So he says, I have somebody --

MR. JENSEN: Correct.

THE COURT: -- who's willing to buy at 10, he's also willing to sell at 12. Does that mean a short sale, in other words, selling something he doesn't have?

MR. JENSEN: Correct.

THE COURT: All right. So he's willing to go long at 10 and short at 12?

MR. JENSEN: Correct.

THE COURT: So the market out there can say – another broker says, well, I have a client who's willing to buy at 10 or I have a client who wants to sell at 12?

MR. JENSEN: Correct.

THE COURT: And then a transaction is entered into, right?

MR. JENSEN: Correct.

THE COURT: So what you're telling me is that Lee would give your client orders to trade, right?

MR. JENSEN: Correct. It's referred to as quotes --

THE COURT: Quotes, but --

MR. JENSEN: -- because he was a market maker. All day long David Lee was doing bid and offer for dozens of different instruments. This is how he made his money; he bought at 10 and he sold at 12. That's what they did all day long.

THE COURT: Lee did?

MR. JENSEN: Lee did. And that's what's referred to as a quote. Where are you on ABC option?

I'm at 9, buy 11. Where are you on LMN option? I'm at --

THE COURT: All right. So anyway, we're dealing with just one, XYZ. So he says to Mr. Cassidy, probably in language that is more technical than I'm trying to say it in, but, in other words, I've got this option, I wanted quotes on these options, this option, I'm willing to buy it at 10, I'm willing to sell it at 12. So then what does Mr. Cassidy do?

MR. JENSEN: He would then show it to other traders in the market.

THE COURT: And how would he show it?

MR. JENSEN: He would do it three ways – by telephone, voice brokerage; by instant message, in which most of these traders speak, by instant message, I don't know if you're familiar with it -- I wasn't familiar with it before this case -- but it's screens where people send messages to themselves back and forth all day long; and the third was on the OPEX platform, which was a new electronic trading platform that Optionable had developed during this time period, which is a platform which was new to this market, where a trader could simply post quotes on a screen and other traders who were subscribed to the service could see those quotes and decide whether or not they were interested. So those were the three principal ways in which they would be shown.

THE COURT: What were the three again?

MR. JENSEN: Voice, voice brokerage, telephone; number two, instant message; and number three, the OPEX electronic platform.

THE COURT: But the effect of this was to make these -- I use much more layman's language -- offers --

MR. JENSEN: Correct.

THE COURT: -- to see if anybody accepted?

MR. JENSEN: Correct.

THE COURT: Now, what would happen? He did this, and then what would happen?

MR. JENSEN: Sometimes offers were accepted. And in that instance a transaction would take place, and that's something Lee talks about in his 3500 material, which is that he was very careful in making these offers because he knew that they could be accepted. So sometimes they were accepted. I would say by and large they were not. They were shown to the market, and people shrugged their shoulders and saying, ah, not interested. That happened more often than people accepted, but both happened.

THE COURT: So Mr. Cassidy puts these quotes out in one of the ways you talked about or whatever, and let's say on a particular option, no acceptance. Now, what would he then do?

MR. JENSEN: He would then take the quotes that Lee had given him and he would write them down on the sheet that went back to Bank of Montreal at the end of the day. And there is no question, your Honor, that the numbers that went back to Bank of Montreal, the buy and offer, the "offer," to use your term, was the same one that Lee had given Cassidy at the beginning of the day, no question, same quotes, but the key point is, it only went back to the Bank of Montreal after it had first been shown to the market. It didn't happen always, it didn't happen with the religiosity that should have taken place, but --

THE COURT: What do you mean by that?

MR. JENSEN: I mean the system was in beta-testing mode during this period. This whole system that I was describing was just get started. September 2006 was the very first month, so they were feeling their way through this market. The government will stand up and say, look, this didn't happen every single time, and they're right about it, it didn't happen every single time. But an effort was made to do that.

And there is lot of backup for these -- it's really seven days, at the end of the case it's really the month-end days from September through March.

THE COURT: What's the significance of month-end days?

MR. JENSEN: That was when this verification process was supposed to take place. Lee assigned a value every single day, but he only had to get quotes to support his valuation at the end of each month. So we're talking about September 30, October 30, November 30, and those the month-end days between September and March. So this process happened about seven times, during which the system that I have described was in beta-testing mode. It only started in September and, in fact, Bank of Montreal didn't sign a contract for it until late February of 2007.

THE COURT: Now, look, let's go back to the example. Let's suppose that Lee says to Cassidy on XYZ option, I'm willing to buy at 10 and sell at 12, and let's suppose that Mr. Cassidy puts that out to the market, those quotes, and let's suppose nobody wants to buy 10 or sell at 12. Now, you've said this, but you've got to say it again.

Let me put it this way: In view of what Cassidy was supposed to do for the Bank of Montreal, what was supposed to happen then? I take it you're saying this was a legitimate way to check?

MR. JENSEN: Correct.

THE COURT: And there is no doubt that he was supposed to check, right?

MR. JENSEN: Well, what he was supposed to do was --

THE COURT: Didn't the Bank of Montreal retain Optionable to check?

MR. JENSEN: No, absolutely not. They retained Optionable as its brokerage service. They weren't even paying for this service, your Honor. This was a request.

THE COURT: Request by whom?

MR. JENSEN: Well, it was a request initially by David Lee, and then at some point Optionable came up with this service. And at that point it became a request by the Bank of Montreal. But they were not paying –

THE COURT: But there was a request by the Bank of Montreal -- if there wasn't, there would be no case, if there was no request by the Bank of Montreal, we wouldn't be sitting here, right?

MR. JENSEN: Well, they did request --

THE COURT: And what did they request?

MR. JENSEN: They wanted quotes and they wanted –

THE COURT: Did they request quotes? Is that what they requested?

MR. JENSEN: They requested independent quotes.

THE COURT: Independent quotes?

MR. JENSEN: Correct.

THE COURT: Now let's go back to our tried-and-true example. Lee had said, I'll buy at 10 and sell at 12. That had been put out to the market, and no response, nobody wanted to do that?

MR. JENSEN: Correct.

THE COURT: What was supposed to be done in response to the request of Bank of Montreal? What was supposed to be done?

MR. JENSEN: Well, Mr. Cassidy would give those quotes to the Bank of Montreal. It's the government's position –

THE COURT: Wait a minute. He would give what quotes? He had gotten quotes from Lee?

MR. JENSEN: He had gotten them from Lee.

THE COURT: And then what you're saying is, there had been no response, so there was nobody offering to buy it at 10 and nobody offering to sell at 12?

MR. JENSEN: Lee was offering to buy or sell at --

THE COURT: I know, but nobody else was willing to accept his so-called offer, right?

MR. JENSEN: No one else -- correct, no one else traded --

THE COURT: I thought our hypothetical ended up, there was simply no response.

MR. JENSEN: Correct.

THE COURT: And that could happen, right, particularly on those out-of-the-money?

MR. JENSEN: Absolutely.

THE COURT: Now, in response to what the Bank of Montreal is requesting, what was Cassidy supposed to do?

MR. JENSEN: Well, that was never defined by the Bank of Montreal, but what he did do was send those quotes --

THE COURT: Send what quotes?

MR. JENSEN: In other words -- I'm sorry, your Honor, it's very confusing, but let me see if I can break it down.

The quotes start with David Lee, the offer. He's willing to buy it at 10, sell it at 12. He gives that to Mr. Cassidy.  Mr. Cassidy then shows that to other traders in the market. Nobody's interested. Mr. Cassidy then writes that down on this grid --

THE COURT: He writes what down?

MR. JENSEN: 10 buy 12, 10 buy 12, Lee's quotes, and sends those numbers, 10 buy 12, to the Bank of Montreal. He does not say, by the way, Bank of Montreal, these numbers, 10 buy 12 that I'm showing you, those numbers started with David Lee. And that's why we are here today, your Honor. He did not say that, that they started with David Lee. He didn't tell that to the risk management department. And that's where the deception occurred.

But my point is, he believed 10 buy 12 was a real quote, an accurate quote because whether or not it came from David Lee, it had been shown to other traders in the market.  And if they thought it was wrong, if they thought it was off the market, they would have traded on it. And the fact that people did not trade on it was an indication that they thought those prices were pretty close, because otherwise, if they thought the value was 20, they'd buy it; or if they thought the value was 2, they'd sell it. So the fact that nobody traded on it was a verification that the quotes were good, and Lee was exposed on those. At least one trader in the market was going out to the market saying I'm willing to buy it for 10 or sell it for 12.  So the key factor is, were they exposed to the market.  But what Mr. Cassidy --

THE COURT: Wait a minute. What is the relationship -- ultimately the loss to the Bank of Montreal occurred because, as I understand it, the figure, or figures plural obviously, for the values of those options, they had been mismarked by Lee. Now, you're saying that Mr. Cassidy was not given those values and asked to check those values. I've asked you that several times, and you have said no, right?

MR. JENSEN: That is correct, your Honor.

THE COURT: Do you know -- maybe you don't -- do you know the relationship between these quotes that you say were given to Mr. Cassidy and the valuations?

MR. JENSEN: The answer is, yes, your Honor. And it's something we described in our supplemental sentencing submission yesterday. Because here's what happened at the end of this process: BMO received those quotes --

THE COURT: Who?

MR. JENSEN: Bank of Montreal, I'm sorry. - they received these quotes from Optionable. From those quotes -- let's use my example again -- let's say the quote was 10 buy 12, somebody is willing to buy it for 10, sell it for 12, the back office, the risk management department of Bank of Montreal, would take those quotes and they would apply some magic formula to it -- I don't know what the formula was and we didn't know what it was, Mr. Cassidy didn't know what it was -- they would apply a formula to those quotes to derive a value, and then -- again let's use my example -- let's say if the quote was 10 buy 12, the risk management department would derive a value of, let's say, 10.9 --

THE COURT: 11 or something.

MR. JENSEN: 11.

THE COURT: OK.

MR. JENSEN: -- they would take that value, 11 bucks, and they would compare it to the value that Lee himself had assigned to XYZ option. So, at the end of the month they would to a comparison, they would compare the value that they derived from Optionable's quotes to the value that Lee had assigned.

THE COURT: OK, let me just make sure. Lee assigned values?

MR. JENSEN: Correct.

THE COURT: Lee then gave quotes to Mr. Cassidy?

MR. JENSEN: Correct.

THE COURT: And he would respond. I guess if he actually -- he would say what was the response of the market to those quotes, and if nobody was interested in it, he would simply send the quotes back?

MR. JENSEN: Correct.

THE COURT: If something else happened, he'd send the something else back?

MR. JENSEN: Correct.

THE COURT: But he was dealing with the quotes?

MR. JENSEN: Correct.

THE COURT: And you're saying he was reporting the market response to the quotes?

MR. JENSEN: Correct.

THE COURT: And if there was silence, he would simply send back Lee's quotes?

MR. JENSEN: Correct.

THE COURT: And then that's what this department -- the risk department?

MR. JENSEN: The risk management department.

THE COURT: -- the risk management department at Bank of Montreal would use to prepare their assessment of the value?

MR. JENSEN: Correct.

THE COURT: As a check on Lee and so forth, right?

MR. JENSEN: Correct.

THE COURT: Now, the problem taking a guilty plea instead of going to trial is, you don't learn nearly as much from the guilty plea as you do from the trial, but that's why we're sitting here a long time this morning.

MR. JENSEN: You're absolutely right about that, your Honor.

THE COURT: I think I understand sort of the factual basis of what you're talking about. What is your conclusion from this, as far as the sentence?

MR. JENSEN: If I can just add one more fact to this last point, your Honor: As I said, the values that the Bank of Montreal derived from the quotes that Optionable provided, it compared them to the values that Lee had assigned.

THE COURT: I understand.

MR. JENSEN: Now, you would expect that if Mr. Cassidy was involved in a scheme, just to regurgitate Lee's values, you would expect those numbers would line up, right, they would be exactly the same.

THE COURT: I would expect what to line up with what?

MR. JENSEN: You would expect the values derived from Optionable's quotes to line up perfectly with the values assigned by Lee, because after all, wasn't that what Lee was trying to do? He was trying to get quotes that lined up perfectly with his values. But that's not what happened, and it's quite striking what happened. And we set forth the numbers on page 2 of our supplemental sentencing memorandum. And, in fact, the numbers -- it's the chart there on page 2, Judge.

THE COURT: Right, I see it.

MR. JENSEN: -- the numbers differ by an average of $32.7 million each month. That's the discrepancy between the values derived from Optionable's quotes and the values assigned by Lee.

And for each month, you can see there, your Honor, the numbers are strikingly different. For the very first month, September 2006, which was when this service was just launched, the difference was 23 million, and in the last month, March 2007, the difference between the values derived from Optionable's quotes and from Lee's values, is $83 million. And the total discrepancy for these seven months is over $229 million.

Now, you asked me a moment ago, your Honor, what does all this mean in terms of sentencing.

THE COURT: I did indeed.

MR. JENSEN: My point is -- and it's the point I started with -- this is unusual conduct. It is not a cookie-cutter case of the type that your Honor ordinarily sees. The facts are very complicated. But as you can see, Mr. Cassidy believed that the information that was going back to the Bank of Montreal, he believed it was legitimate and accurate; and you can see from this chart, your Honor, that it doesn't line up with Lee's values. This option, Optionable's information, itself was indicating a huge discrepancy, a huge discrepancy from Lee's values. That is an extraordinary fact pattern, your Honor. And my conclusion, as far as sentencing: Look, we didn't have a trial, your Honor is right, and in some respects it would have been more helpful to have a trial because we all could have spent more time on this, but I think the point for sentencing is that it's a very unusual fact pattern, and that that is something your Honor should take into consideration in imposing the sentence. Along with all the other factors that I have discussed -- and I want to bring it back to Mr. Cassidy's current role --

THE COURT: No, no, I want to stick to the case.

MR. JENSEN: Fine, Judge.

THE COURT: When you say an unusual fact pattern, what I am obviously interested in is the degree of culpability. And there is a difference between having some valuation passed to Mr. Cassidy for a check of that valuation and then having Mr. Cassidy return that number with some representation this has been checked when it hasn't. And if that valuation turns out to be wrong, well, then you've got a problem. But you're saying -- and you have developed it in detail -- that something Quite different happened?

MR. JENSEN: Correct, your Honor.

THE COURT: Can I hear from the government on this?

MR. LEVY: Yes, your Honor.

It's a little difficult to know where to begin. I've tried to bolt myself to the chair during the past 45 minutes and not pop up at every opportunity where I disagree with the defense's explanation of what happened. I think I have about a half a dozen different reasons why these valuations were very easily rigged in favor of Mr. Lee, but let me see if I can cut to the chase in a better way that will be a little bit faster than that.

The Bank of Montreal has a bank. At the end of the day, it's their money and it's their responsibility for ensuring that their trader doesn't go rogue on them. Rogue traders bring down banks. It's happened before, and we have seen it. They have systems in place for double-checking the valuation that their traders put on their assets. These are huge amounts of money, and it's the bank's job to mind the store. The bank had a system that it wanted performed in order to double-check these values. What they wanted were independent quotes, independent information from the marketplace.

THE COURT: Go ahead.

MR. LEVY: What the bank wanted, what the bank needed was independent information from the marketplace, information that did not originate with David Lee. They made that perfectly clear to Mr. Cassidy, that that's what they were looking for, that that's what they needed in order to double-check Mr. Lee's numbers. We can go back and forth -- and I am prepared to if your Honor wants to hear it -- through all the reasons why what Mr. Cassidy supplied to the Bank of Montreal was not accurate and was easily manipulable by Mr. Lee and by Mr. Cassidy in order to make sure that the numbers corresponded to what Mr. Lee wanted them to correspond to. But the fact of the matter is, Bank of Montreal said, information you get directly from Mr. Lee is useless to us, we don't want that, don't use his quotes, if you give us his quotes, that is not of any value to us in double-checking.

THE COURT: Well, what did the Bank of Montreal think would be given to Mr. Cassidy?

MR. LEVY: They thought that quotes would come from other places in the market -- tell us what people other than Mr. Lee think these things are worth, tell us what these other market participants think these options are worth, and then give that to us so we can see if our own trader is valuing them correctly. That's what the Bank of Montreal wanted.

THE COURT: Well, what information was supposed to go to Mr. Cassidy?

MR. LEVY: Market quotes, the information -- to take a concrete example: For a specific option, Mr. Cassidy was supposed to find out from other –

THE COURT: Yes, but he was simply given some nomenclature to describe the option?

MR. LEVY: Yes, he was given a grid that said essentially, for these various different options, and they were specified -- for this option, this option and this option, Mr. Cassidy, please go out into the market and find out what other traders would buy and sell these for because that's of interest to us as the Bank of Montreal.

THE COURT: Just slow down.

MR. LEVY: Sure.

THE COURT: In other words, Mr. Cassidy was given the identity of the option?

MR. LEVY: Yes.

THE COURT: And the form doesn't make a lot of difference to me, but that's all he was supposed to be given?

MR. LEVY: Yes.

THE COURT: And that's he was officially given by the Bank of Montreal. Did the Bank of Montreal send this to him or what?

MR. LEVY: Yes. It was a blank page essentially. If you imagine a chart with a vertical axis and a horizontal axis and the rest was blank and it identified a hundred options, let's say, and he was supposed to go out there and -- it was blank and he was supposed to go out there and fill it in the from the market.

THE COURT: Which means he was supposed to do what?

MR. LEVY: He was supposed to, in the course of his day, trading options, see what other market participants, not Mr. Lee, were prepared to buy and sell these options for. And he was supposed to fill in his grid as he was doing that throughout the day -- here's what people are prepared to buy and sell these options for -- and then he's supposed to report that back to the Bank of Montreal, and the Bank of Montreal will take that chart and say, here's what everybody else thinks they're worth, we already know what our own trader, David Lee, thinks they're worth, how do those match up, is our trader, David Lee, valuing these the way these other market participants are valuing them? That's what was supposed to happen.

The Bank of Montreal made perfectly clear to Mr. Cassidy, don't go get these quotes from our own broker, we know what our own broker or what our own trader thinks these things are worth, don't go to him, go to the other market participants, find out what they think it's worth.

The whole last 45 minutes has been spent trying to justify Mr. Cassidy's belief that there was nothing wrong with him completely disregarding what Bank of Montreal had told him to do and, instead, taking the quotes directly from Mr. Lee, that doing it that way wasn't so different from going to the other market participants. I disagree with that for a host of reasons that we can get into, though it would take a little bit of time, but I think the upshot is, the Bank of Montreal made clear to him what they wanted. The Bank of Montreal said, we don't want Mr. Lee's numbers. There may be arguments for why those numbers are OK. I think they're bad arguments, but the Bank of Montreal said, don't give us those, those are not of use to us, it's our bank, it's our money, it's our job to police Mr. Lee and here's the way we want to do it, we want to do it with numbers coming from other market participants. Mr. Cassidy said, understood, OK, I'm with you, and then turned around and did exactly what the Bank of Montreal told him not to do -- took the numbers from David Lee, put them out into the market, where again there are a bunch of ways to manipulate that process to make it work out for Mr. Lee, and then turned around and gave them back to Bank of Montreal while lying to them about where the numbers came from. That's what happened here. Did Mr. Cassidy know that David Lee was mismarking his book, that this was all an effort to cover up David Lee's mismarking? It's hard to know. There's an inference that can be drawn that there's no other real reason to do this, other than to protect Mr. Lee's mismarking. But at a minimum, he had to have known it was a possibility. The whole point of this process was for the Bank of Montreal to double-check Mr. Lee's numbers. And why would you engage in all of this if it weren't for the purpose of making sure --

THE COURT: Now, I'm sure this is in the record before me, but I don't have it at my fingertips now: What did Mr. Cassidy admit to in the plea? Do you have a copy of that?

MR. LEVY: It's here. I can read it to you. I think the summary -- well, why don't I just read it to you as opposed to summarizing it.

MR. JENSEN: It's laid out -- I'm sorry, your Honor, it's laid out chapter and verse at page 15 of our sentencing memorandum. It's quoted in its entirety.

THE COURT: I'll get it. Let me just read that for a minute.

(Pause)

THE COURT: If you have the whole allocution, I'd appreciate it. Do you have that?

MR. LEVY: We do not, your Honor.

MR. JENSEN: The entire transcript, your Honor?

THE COURT: Yes.

MR. JENSEN: I may have a copy of it with my scrawlings on it.

MR. LEVY: Ah, I think we may, your Honor. I'm sorry. I'll hand it up, your Honor.

(Pause)

THE COURT: I'd also like to have the superseding information, please.

MR. LEVY: I'll hand that up, your Honor. (Pause)

THE COURT: There are surely allegations in the information which were not specifically admitted to by the defendant. For instance, paragraph 20: "In or about September 2006, through and including in or about March 2007, at the end of the month, Lee filled out Real Marks grids with pricing information for some of these positions using his personal email account from his home in New Jersey. Lee sent these completed grids to Cassidy. Cassidy instructed an Optionable employee to return these grids to Bank of Montreal with Lee's own pricing information, without disclosing that, as Cassidy knew, the pricing information reflected on the Real Marks grids originated with Lee himself." I take it that pricing information, you're talking about what the market showed and so forth?

MR. LEVY: The bid and the ask. That would be the pricing information, what he what he was prepared to buy it for and what he was prepared to sell it for.

THE COURT: The grid had just a name of the option, right?

MR. LEVY: It identified the option, correct.

THE COURT: And then on the other side, what was supposed to be on the other side in the financial information?

MR. LEVY: What other market participants were prepared to buy and sell that particular option for.

THE COURT: Would that end up being one figure or a pair of figures or several figures or what?

MR. LEVY: I think if a deal had actually gotten done, meaning that there had been a transaction in that option on that day, it would be a single figure. This option sold at 11 today, and it would be one number.

If the best available information was simply that there were other traders out there who were prepared to buy it for 10 and sell it for 12, then that's the information that would have been reported.

But in any event, it was made perfectly clear by Bank of Montreal: Don't give us what David Lee is prepared to buy it and sell it for, we don't care about that, we already know what our own trader is prepared to buy it and sell it for.

So my point, your Honor, is: It is not as though Mr. Cassidy was engaged in something harmless here, that these were the exact equivalent of what Bank of Montreal had asked for and he just chose to do it a different way. They were in fact quite different. But at its core, the Bank of Montreal was responsible for knowing what it was doing. It wasn't Mr. Cassidy's bank, and it wasn't his money. The Bank of Montreal said, we don't want David Lee's own marks because we don't find those useful.

It would have been perfectly easy for Mr. Cassidy to do this the right way. He did it the wrong way because he recognized that there was something David Lee wanted out of it. And I think it's a fair inference that that something was to ensure that David Lee's own valuations were never seriously scrutinized. I think your Honor had it exactly right, that there was no allegation that Mr. Cassidy participated in the mismarking, but I think the defense takes it too far to suggest that this is an exceptional case in which there was essentially no harm and no harm contemplated. That's just wrong. The con that was contemplated here was for Mr. Lee and Mr. Cassidy to make sure that the Bank of Montreal couldn't exercise its double-checking, its obligation to police Mr. Lee. And as it turned out, Mr. Lee ran with that, with fairly disastrous consequences for the Bank of Montreal.

THE COURT: In the admission that Mr. Cassidy made at the plea allocution, he said: "While I believed that the Real Marks quotes" -- those are from his system -- "provided to BMO were legitimate, most of the quotes that Real Marks provided to Bank of Montreal originated with David Lee. I agreed with Lee that on month-end he would provide Optionable with the quotes, Optionable would make an effort to show the quotes to other traders in the market, and then, at the end of the day, Optionable would send quotes to Bank of Montreal's risk management department."  Let me go over that again: "I agreed with Lee that on month-end, he would provide Optionable with the quotes. Optionable would make an effort to show the quotes to other traders in the market, and then, at the end of the day, Optionable would send quotes to Bank of Montreal's risk management department. Although I understood that Bank of Montreal's risk management department wanted quotes that were not contributed to Real Marks by Lee, it felt it was an important factor. I did not tell the risk management department that many of the quotes had originated with Lee."

Well, we've got to draw this to a close. Do you have anything else?