A Brief Description of the Case: USA vs. Kevin Cassidy

To date in this blog I have been offering my opinions about a wide range of topics involving the company called Optionable. My opinions are also influenced by my ownership of common stock of Optionable. Today I am going to share a brief description of the case as seen by Kevin Cassidy's Defense team. This description is what the Defense proposes be told to prospective jurors as a part of the Jury Selection process.

===============================================================

BRIEF DESCRIPTION OF THE CASE

Kevin Cassidy (the “Defendant”) is the former chief executive officer of a company called Optionable Inc. (“Optionable”), which was based in New York. Optionable was a commodities brokerage firm, which means that it brokered – or acted as the “middle man” – between traders who wanted to buy and sell commodities contracts. Commodities are goods like gold, coffee, natural gas and other forms of energy. Optionable focused on energy commodities, and received a commission for each transaction it brokered. Optionable often acted as a broker for a type of energy contract called an “option.” An option in the commodities market is a contract granting its owner the right to buy or sell a commodity at a certain price on a later date.

One of Optionable’s largest clients was the Bank of Montreal (“BMO”). BMO is a Canadian bank that has a division in New York which trades, among other things, natural gas options. BMO paid Optionable to act as “middle man” for these options. Until mid-2007, the head energy trader at BMO’s New York Office – that is, the person in charge of deciding which natural gas options to buy or sell – was a man named David Lee. As part of his job, David Lee was required to provide daily valuations for every investment he was making for BMO, including the options in his natural gas portfolio. At least once a month, a separate department at BMO conducted an independent verification of the valuations Lee provided. For part of this independent verification, BMO claims it relied on pricing data provided to it by Optionable.

The Government has charged the defendant, Mr. Cassidy with three things arising out of Optionable’s relationship with BMO. David Lee is not a defendant in this case. First, the Government has charged Mr. Cassidy with conspiring with David Lee to subvert BMO’s independent verification of Lee’s valuations. Under the Government’s theory, Lee and Mr. Cassidy agreed that Lee would send Mr. Cassidy pricing data for natural gas options, and that Mr. Cassidy’s company, Optionable, would then send this data back to BMO, without telling BMO that the data originated with its employee, David Lee.

Second, as the Chief Executive Officer of Optionable, Mr. Cassidy was responsible for signing each of Optionable’s public filings submitted to the U.S. Securities and Exchange Commission (the “S.E.C.”). The S.E.C. is the government regulatory agency whose job it is to regulate the securities industry, which includes commodities traders and brokers. The Government asserts that Optionable should have revealed in those public filings that Mr. Cassidy was conspiring with David Lee to defraud BMO. So the Government has also charged Mr. Cassidy for having failed to disclose his alleged conspiracy with Mr. Lee in the reports Optionable filed with the S.E.C.

And third, the Government alleges that Mr. Cassidy failed to reveal the alleged conspiracy with David Lee in negotiations with a company called NYMEX, when NYMEX purchased an ownership interest in Optionable.

Have any of you here heard about this case or know anything about it based on this short description? If so, please raise your hand now.

This trial is about to begin because Mr. Cassidy denies that he committed any crimes. Mr. Cassidy has pleaded not guilty to the charges against him and has asked for a trial by jury. He is presumed to be innocent of all these charges until and unless the government proves the charges beyond a reasonable doubt.

Nordlicht buys 3.3% of Optionable's Shares

Mark Nordlicht is once again an Optionable Insider.

On June 13th Mark Nordlicht issued a "Tender Offer" through which he agreed to purchase every share of Optionable that he did not already own. (He owned 9.5% of the company when he made the tender offer, and needed to get above 10% ownership in order to be considered an Insider)

On July 19th, the tender offer expired and Nordlicht purchased the 1,586,686 that had been offered for sale. The figure represented 3.3% of the company's shares bringing Nordlicht's ownership up to 12.8%

Nordlicht's interest in Optionable is pursuing legal actions against The Bank of Montreal, NYMEX (since purchased by CME) and undisclosed "others". It remains to be seen how (or if) Nordlicht's interest will gel with Optionable's current plans.

Mark Nordlicht updates his offer

Mark Nordlicht has updated his tender offer and filed it with the SEC. You can view the updated tender offer here: http://sec.gov/Archives/edgar/data/1303433/000114420411038180/v227390_sctota.htm

I am an Optionable shareholder, so I'm just going to re-post the "Good Part" here, and bold the "Best Parts" and not offer any comments for now.

==== start Quote of Nordlicht's updated tender offer =============

The Purchaser is making the Offer because he wants to increase his ownership of Optionable’s outstanding Shares to the maximum extent possible pursuant to the Offer. The Purchaser understands that Optionable has a valuable legal claim for damages against Bank of Montreal (“BMO”), NYMEX Holdings, Inc. (now CME Group NYMEX, Inc.) (“NYMEX”) and others, and that time is of the essence to initiate and preserve the claims. The Purchaser understands that initiating legal actions against BMO, NYMEX and others would involve significant legal costs and that Optionable may not have the ability to fully support the claims without capital investment from its significant stockholders such as the Purchaser. The Purchaser understands he has sufficient resources to finance vigorous legal actions by Optionable against BMO, NYMEX and others but seeks to increase his ownership percentage of Optionable to justify any such investment he may make.

The Purchaser believes that BMO repeatedly in its public filings and on analyst conference calls represented that it was running a "client driven" book of business. In fact, the Purchaser believes BMO was running a book engaged heavily in market making and proprietary trading. As part of what the Purchaser believes to be a cover-up of this fraud, the Purchaser believes BMO knowingly blamed Optionable for trading losses in order to divert attention from this fraud and BMO’s general lack of risk management controls. The Purchaser believes Optionable should seek monetary damages from BMO of no less than $500 million representing the market valuation of Optionable at the outset of what the Purcahser believes to constitute BMO’s fraudulent activities.

As part of its agreement with Optionable, NYMEX agreed to joint marketing and technology cooperation. The Purchaser believes that not only did NYMEX knowingly breach its agreement with Optionable, but it deliberately listed a competitive product on the CME trading platform, thereby preparing for its own $10 billion or more merger with the competing company. The Purchaser believes that Optionable should seek monetary damages from NYMEX of no less than $500 million representing the market valuation of Optionable at the time of what Purchaser believes to constitute NYMEX’s misconduct.

==== end Quote of Nordlicht's updated tender offer =================

Mark Nordlicht makes an offer

Mark Nordlicht has filed an offer with the SEC to buy all the outstanding shares of Optionable for 3.5 cents a share. Optionable management has 10 days from June 13th to reply to the offer.

You can read more about this on the SEC website: here

Options are not a Buy & Hold investment

BMO claims that David Lee mismarked (lied about the value of) their portfolio under his management for 4 years - and that this deception was successful in fooling them.

One of the things that bothers me about BMO's statement though is that Options are not a "Buy & Hold" investment. Options expire. David Lee wasn't able to just hold the options he bought for BMO and then lie about their value. He had to trade them. David Lee's marks were his estimation of the portfolio's value, but his trades were for real money.

Note: Neither the Government nor BMO is claiming that Lee's trades were ever falsely reported.

David Lee was either able to monetize the portfolio from 2003 until 2007 for roughly what he marked it at - or he wasn't. If he was monetizing the portfolio for roughly what he marked it at, then ummmmmm.... the books weren't really mismarked in the first place?? (am I right? Do you follow this?) And, if he could not monetize the portfolio for what he marked it at, consistently, over a period of four years, and nobody said anything to him about the discrepancy, then was there really anyone monitoring this guy?

How can BMO claim that they were truly fooled by Lee's daily valuations, or Cassidy's twice-monthly reports, which were at best an estimation of the portfolio's worth, when they had the cold hard numbers generated by Lee's actual trades?

Can Everything The Government Says Be True, and Cassidy Still Be Innocent?

Let’s face it. The Government Prosecutors have something like 350 gigabytes of electronic data related to this case, some of which was collected by the FBI. So, I’m going to say it is pretty likely that the Government can back up the accusations in the “Overt Acts” section of their Complaint. The question we’re faced with then is: If we assume that Lee and Cassidy did all of the things listed as “overt acts” in the complaint, can it still be possible that Kevin Cassidy is innocent of helping Lee deceive his employer?

I think it’s possible, although I have doubts. As an Optionable shareholder it's not a comfortable feeling. I’m reminded of the freeze frame at the end of the movie "Butch Cassidy and the Sundance Kid". The two outlaws are holed up in a doorway, about to attempt to shoot their way out. Unfortunately for them, the entire Bolivian Army is waiting outside. The odds are so heavily stacked against them, and the outcome is so obvious that the director must have figured that the audience didn’t actually need to see the carnage to understand what happens next. Two banditos? Two? Against the whole Army? And y’know, my amigos, I’m thinking that this is pretty much how the Government and the Bank of Montreal are looking at this case too. They’re seeing Kevin ‘Butch’ Cassidy (who has a previous criminal record) and David ‘Sundance’ Lee as BANK ROBBERS and they’re seeing themselves as the Army. They certainly have more spreadsheets and emails than the Bolivian Army had bullets. (Also, in this version of the story David “Sundance” Lee has taken a plea.)*

But are they right?

For one thing, I’ve yet to see the Bank of Montreal (BMO) own up to the fact that they hired David Lee, and they are responsible for his actions. BMO may now want to see Lee as a criminal, but he is a criminal who was on their payroll. His crimes were committed in the performance of the job that they paid him to do. David Lee was a fully vested agent of the Bank of Montreal when he showed up at Kevin Cassidy's door. There was no difference between orders from Lee and orders from BMO – they were one and the same entity.

So far BMO has been successful in getting people to only look at the Lee and Cassidy partnership as it appeared in 2007, after Lee’s crimes had been exposed as well as Cassidy’s criminal past. But in order to understand what really happened here, I think you need to look at David Lee as Kevin Cassidy saw him in 2003. Landing the Bank of Montreal’s account was a huge win for Cassidy’s small startup brokerage. Rather than looking at the significance of the BMO account as 'proof' that Cassidy must have been a partner to Lee's deception (as the Government and BMO claim) - I think it is just as likely that Cassidy must have provided the best customer service to BMO as was humanly possible, and that he followed the Bank's instructions honestly, ethically and to the letter.

When BMO tells us that they had an Independent Price Verification process (IPV) and that Cassidy ‘fully knew’ what it was, that just doesn't ring true. Was there an IPV contract? Was there an IPV process guide with rules that participating brokerages agreed to follow? No, there were no such things, because the IPV process was an in-house BMO process that Kevin Cassidy had no role in. The process that Kevin Cassidy followed was the instructions that Lee, as a fully vested agent of the Bank gave him. [see Side Note below]

Now, what exactly is it that Lee, as an agent of BMO told Cassidy to do? I’m going to have to go with the accusations in the Government’s Complaint here, and say that most likely Lee sent Cassidy some numbers to verify (marks) and that as long as the brokers at Optionable who had been placing trades for Lee thought the numbers (marks) looked reasonable, (looked similar to the numbers Lee had been making trades through Optionable at) Cassidy sent them back to BMO unchanged. The Government has proof that Lee and Cassidy did communicate to eliminate any typos in Cassidy’s report. But even the Government admits that Cassidy did change one or two of the values (marks) in at least some of the reports they presented as evidence – and in that sense, even though the numbers came from Lee the reports were still independent of Lee.

So, that’s how I see the “overt actions” in the Government’s complaint being true and Cassidy still being innocent. It’s not the strongest theory in the world, but I think it is plausible. Lee was a rogue trader who was deceiving his employer. Kevin Cassidy was running a brokerage which wanted BMO’s business. Lee as an agent of BMO instructed Cassidy to perform certain perfectly legal tasks, (as far as I know it is perfectly legal to review numbers for reasonableness and then to pass them on for further analysis by Bank experts) and these tasks were not in contradiction to any other documented set of instructions from any other member of BMO. Basically, Kevin Cassidy and other members of Optionable acted in good faith, and that good faith was taken advantage of by a criminal employed by BMO.

Disclaimer: I own shares of Optionable. The statements in the blog are my own opinion based on the information currently available.



[Side Note: BMO had an internal Independent Price Verification (IPV) process. The process was meant to keep its Trader's honest. BMO accuses Cassidy of Fraud, because Cassidy's company Optionable was frequently the sole source of data used in the verification. BMO admits that the reason Optionable's data was the sole source was because David Lee insisted on it. I am confused as to why BMO thinks this is proof that Cassidy participated in Lee's scheme. To me it looks like proof that David Lee was calling the shots within the BMO department that was supposed to be policing him. Why in the world did BMO allow Lee to choose the source of verification data? Lee had so much influence over the IPV process that he even got the department to CONTINUE using Optionable AFTER other people at BMO started to complain about the valuations Optionable was providing. At Lee's insistence, BMO started using a brand new valuation service from Optionable (which was still in beta test development) rather than adding an additional valuation service. Why was Lee given this much leeway to run the IPV process Lee's way?

* In its Motion to Dismiss, Defense estimated the volume of electronic data collected by the Government to be approximately:
+ 1.5 Million Excel pages

+ 100,000 word processing documents

+ 150,000 non-transcribed audio recordings

+ 375,000 emails

Will David Lee throw Kevin Cassidy under the Bus?

When David Lee was accused of being a “rogue trader” who lied to his employer about the value of their portfolio under his management, he took a plea deal and began cooperating with the Government. As part of his deal, Lee was required to be honest with the Government, and remain silent to everyone else. So, we find ourselves in a situation where we’re headed to court and the Government knows a lot about what Lee really did, and we don’t. In particular the Government should know whether Lee considered Cassidy to be a partner in crime – or just one more person that Lee needed to fool in order to pull off the deception of his employer.

The Government wrote its complaint as if it was certain that Kevin Cassidy was in on Lee’s deception. Additionally, they wrote the complaint as if no one in BMO’s Commodities Group was also in on the deception. (The Commodities Group was responsible for policing BMO’s greed-filled, Red Bull guzzling traders) To listen to the Government’s complaint, BMO’s “Police force” was blissfully and totally unaware of Lee’s deception and was completely hoodwinked by Cassidy’s reports.

So the picture we’re presented with is of David Lee, a sophisticated trader of mind-bendingly complex financial products who has a Devil on one shoulder (Kevin Cassidy) and an Angel on the other shoulder (BMO’s Commodities group). Can you imagine the dialog?
Cassidy: C’Mon Do it Do It Do it! Fake the Numbers! The jackasses in your Commodities Group will never be able to figure this complex crap out! It’s just you and me Baby! BwaHaHaHaHa……..
BMO Commodities Group: La-Di-Da.... David Lee told me to look at reports from Kevin Cassidy and not to look at reports from anybody else and that’s just what I’m gonna do, that’s just what I’m gonna do. Yup-yup-yup.

I don’t know if you have a problem with that picture, but I do. For example, the Government makes it seem like it was impossible for Cassidy *not to have known* what Lee was doing – yet at the same time – they ask us to believe that the reports from a single source, a single source selected by the very person the reports were intended to keep honest, fooled an entire “police” department for over 4 years. Now, you know why banks insist on getting reports like this, don’t you? They do it because traders of these highly complex and lucrative products often get mega-stressed out and they start making shit up. They Lie and they’re Good At It! The banks, as the people who employ these stressed out tactical geniuses, have controls in place to rein these guys in when they start running amuck. You just don’t ever, EVER, let a FOX select your Chicken Counter - and that's what we're being asked to believe BMO did.

So it goes. Despite my sarcasm above, the Government has more lethal precision in their own matters than what they are crediting the BMO Commodities Group with having. All of which has got me thinking: the Government must be pretty sure that David Lee is going to throw Kevin Cassidy under the bus when he testifies.

As far as I can see, Lee’s testimony is the best weapon the Government has. I don't think the examples provided in the Government’s complaint are enough to convict Cassidy – but Lee is an admitted liar - and has proven that when the stakes are high, and the pressure is on, he can come through with a believable story that the people with power over him want to hear.

Disclosure: Yes, I am an Optionable shareholder, and yes, during the course of this blog post I also attempted to throw both BMO's Commodities Group as well as David Lee under the Bus. Consider the source :-)