The Optionable story minus the megaphone

A few weeks ago Optionable posted a press release on their website, which was the first public statement by the company in 6 years.  I thought I would take this opportunity to attempt to write a news article based on the press release.  My hope is that the end product will more closely resemble something an actual reporter would write, and less like the ramblings of a megaphone wielding community activist.  Here goes.

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New York – Back in 2007, Optionable was a fast track New York brokerage firm.  Optionable commanded a sizable voice brokerage presence and had rolled out a groundbreaking electronic options trading platform that was gaining acceptance in the market.  New York based, Bank of Montreal Commercial Markets (BMO CM) traded heavily through Optionable and had become their largest client.  The New York Mercantile Exchange (NYMEX) invested $27M to secure a minority interest in Optionable after releasing a string of press releases that announced expanded services NYMEX offered in partnership with the firm.
 
And in a New York minute, it was gone.

According to a July 2013 statement released on Optionable’s website, the company claims that their reversal of fortune was no accident.  Optionable asserts that each for their own reasons, their two most important partners profited by taking deliberate and destructive actions against them which has left Optionable permanently unable to generate revenue as a brokerage firm.

Why did they do it?

Optionable claims that the Bank of Montreal had been incurring trading losses while still reporting profits to the Securities and Exchange Commission.   When the losses could no longer be concealed, the Bank hired a crisis management agency that advised the Bank to publicly blame Optionable, as their CEO had an unrelated previous criminal record, which would serve as a smoke screen for the Bank’s failed risk management practices.

Optionable also claims that NYMEX “piled on” to the Bank of Montreal’s bad acts so that they could launch a competing product through the Chicago Mercantile Exchange (CME) and thereby laid the groundwork for their own ten billion purchase by CME the following year.

Optionable states that they have filed significant counterclaims against CME and that they will not cease to fight for their beleaguered shareholders until BMO and CME are held accountable.  October 2013 depositions of Bank of Montreal personnel have been scheduled.

Optionable's first public statement in six years can be found here.
Disclosure: I am an investor in Optionable.  This blog does not offer advice on buying or selling any security.

Optionable's first statement in six years

On July 28, 2013 the statement below appeared on Optionable's website. 
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Optionable Updates Litigation Strategy
July 28, 2013

 Optionable announced today that upon examination of evidence relating to
the collapse of its business and share price, clear evidence of actions by Bank of
Montreal (BMO) and The New York Mercantile Exchange (NYMEX) as being the
cause of such collapse has emerged.

 In May 2007, BMO, in the midst of significant market losses after previously
announced gains, executed clear strategy to do whatever necessary to steer
attention away from its risk management practices. In fact, internal
communications at BMO between BMO and its crisis public relations firm states
clearly "we feel the strategy of assigning blame to Optionable............ has been
effective to date". The communication then suggests "redirecting the spin by
suing Optionable" as a way to focus the media attention on Optionable.
Optionable had been high profile based on its position as a first mover in the
options technology space and based on the New York Mercantile Exchange
(NYMEX) having bought a minority interest in Optionable.

 Incredibly, BMO did in fact sue Optionable and litigation is now pending.
NYMEX then piled on based on the "supposed" bad actions of Optionable and
alleged breach of contract relating to their purchase of minority interest in
Optionable.

 NYMEX, which had taken a minority interest in Optionable, was
contractually required to be engaging in technology cooperation and joint
marketing. Instead, NYMEX launched a competing product to Optionable on the
platform of the Chicago Mercantile Exchange (CME) thereby setting up their own
ten billion dollar purchase by CME. Optionable has filed significant counterclaims
against NYMEX .

“Actions by BMO and NYMEX caused approximately 500 million in actual
market value destruction to Optionable shareholders, said Optionable CEO Dov
Rauchwerger. " In addition, the potential for billions more, based on Optionable's
clear lead as the first options platform able to handle complex options trade was
lost. We will not cease to fight until BMO and NYMEX (now CME ) are held
accountable for our beleaguered shareholders actual losses and lost
opportunities". Optionable will be providing timely updates to shareholders as
further investigations of the actions of BMO and NYMEX in this matter are undertaken and as management determines further steps to take in order to
recoup value for shareholders.

About Optionable
 Optionable was the developer of a groundbreaking options trading
platform for professional options traders. In May 2007, actions by Bank of
Montreal (BMO) and the New York Mercantile Exchange (NYMEX) destroyed five
hundred million in market value and billions more in lost opportunity costs. Its
business destroyed, the company is now actively investigating and pursuing all
avenues to hold NYMEX (now CME) and BMO accountable.

Bank of Montreal's Impossible Mission

In stories the "Mission: Impossible" teams all seem to accept that no one is going to stand up for them if their missions fail.  Chances are Bank of Montreal trader David Lee and his boss Robert Moore had similar expectations when Lee's multi-year winning streak had stalled and he actually started racking up losses.  After The Bank disavowed the duo, they were discreetly processed through the legal system as cooperating witnesses and jettisoned to safety. 

Things didn't go as smoothly for the folks at Optionable. Optionable's CEO Kevin Cassidy had an unrelated previous criminal record. Cassidy's past was publicly available old news which wasn't required to be disclosed in Optionable's SEC filings. Revealing Cassidy's public knowledge "secret" however provided The Bank with an opportunity to portray Lee's trading losses as a conspiracy between a rogue trader and his ex-con broker, rather than The Bank's failure to manage a known business risk associated with the type of trading they were heavily involved in.

Even though the Impossible Mission took place in 2007, it may still be too soon to tell if the Bank has gotten away with it.  Oh sure, there's me, an Optionable investor who calls himself Trader Elvis.  I've been blogging about this one case for over 6 years. I'm easy for the Bank to dismiss. There is however another player on the scene.  His name is Mark Nordlicht and he is the current majority shareholder of Optionable.  Nordlicht knows what really happened and has the resources to expose The Bank's skullduggery in a court of law.  Stay tuned.......

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

Bank of Montreal to Optionable: Caveat Emptor No More!

Legally mandated product warnings:  some people claim their only purpose is to save us from our own stupidity.  The warnings seem so obvious that anybody who claims to need to be told these things can come off looking pretty foolish…. or greedy when they sue for damages.

The McDonald’s Hot Coffee lawsuit is often credited as being the genesis of these 'unnecessary' product warnings.  You may wonder who needs to be cautioned that a cup of coffee is hot.  However as someone who drank McDonald’s coffee in the hot old days, I can tell you that sometimes these 'unnecessary' product warnings really do make sense.  McDonald’s coffee wasn’t just served hot, it was served so hot that the seemingly 'foolish' or 'greedy' coffee spill victim needed reconstructive skin grafts after a cup of McDonald's coffee landed in their lap.  McDonald's fought the claim and lost, and a new era of product warnings was born.  Caveat Emptor (Let the buyer beware) No More! (and sometimes - that's not such a bad thing)

You may be wondering how the warning on a coffee cup relates to the Bank of Montreal (the Bank) and Optionable.  Listen.  The Bank traded heavily in otherwise thinly traded, over-the-counter speculative markets.  Despite the amount of money involved, there was no readily available published market quotes for these markets, mostly because there were so few traders in them. For years, the Bank was successful in these tiny markets because they employed hyper competitive and ferociously aggressive traders.  The Bank's traders were tactical geniuses capable of playing a matrix of counter-intuitive interwoven strategies simultaneously.  Sure, there were hedge funds that lived and died this way, but the Bank was supposedly a conservative customer driven institution and here they had one of their traders (David Lee) walking a frayed tight rope over the Grand Canyon…  daily ….. blind folded... while juggling flaming chain saws….. and….. and….. and…. he fell.

After David Lee lost a lot of money (0.64 billion) doing the job the Bank employed him to do, the Bank's strategy was to play dumb about the risks Lee had been taking and their lax risk management of him. To date the Bank has been successful in blaming Optionable, a company I am invested in, for the flaws in the Bank's undocumented risk management reporting workflow.  The reporting workflow was dependent on Lee's participation and the Bank's Risk Management division has admitted (in interviews with the FBI) that they instructed Lee to send quotes to Optionable, even though they knew that the Bank's upper management wanted a process that was independent of the Bank's own traders.  Even though Optionable's Kevin Cassidy (rather than the Bank's Risk Managers) explained to the Bank's upper management that Optionable's reports included input from David Lee, (who Cassidy told and when he told them is all documented) he still accepted a plea bargain when threatened with spending the rest of his life in jail, (if found guilty at trial). In his plea deal, Cassidy admitted that he knew the Bank's upper management wanted the reports to be independent of David Lee and that they were not.  If you're wondering what part of Cassidy's admission was the admission of a crime, then you and I are on the same page.  As near as I've been able to figure out, the 'crime' was that the "product warning" Cassidy had delivered in person to the Bank's managers was not repeated strongly enough in the reports themselves. 

Given Cassidy's plea, he and Optionable bear some responsibility for the Bank’s cleverly positioned, self-proclaimed "stupidity".  But how much responsibility is fair for Cassidy and Optionable to bear given the Bank's market dominance, best-of-breed talent and 20-plus years of experience in this game? 

In the criminal case against him, the court is holding Kevin Cassidy personally responsible for: a) 100% of the salary and bonuses paid to the Bank’s star trader, David Lee over an 8 month period (3.6 million dollars) and b) 100% of the money the Bank paid Optionable for brokerage services over the same 8 months (5 million).  

Wait.  WHAT !!!???

How does that make any sense?  3.6 million over an 8 month period is about $22,500 per day.  (3.6 M / 160 trading days) Kevin Cassidy certainly didn’t get a penny of Lee's 'rock star' salary, so if anybody is going to be asked to pay THAT money back – why don’t they talk to the person who received it?  (see Note #2 below)

OK, so we can all agree that the first number is bogus, but what about the money the Bank paid to Optionable for brokerage services?  Surely Cassidy has to be on the hook for at least a percentage of that, right?  Well……maybe, maybe not.  There might have been a case for that if there had been anything faulty or inadequate about the brokerage services Optionable provided…. but there wasn’t.  


Y'know... when this story first broke there were accusations that Optionable had processed trades at imaginary prices and pocketed the difference.  However those accusations quickly vanished, and everyone from the SEC, the CFTC, the FBI and the IRS, (and yes, even the Bank itself) everyone, EVERYONE… now admits that Optionable serviced the Bank’s trades 100% legitimately.  100% legitimate trades might not sound like anything special at first, since most people expect 100% legitimate transactions from their brokerages.  You may wonder where I get off making providing legitimate trades sound like some kind of heroism.  Well, I’d like to ask for a little slack here and ask you to keep in mind that at the time this story broke, Optionable was being kicked around like a pack of corporate thieves.  For them to come out the other side with 100% clean financials is pretty damn impressive, at least it is to me.  So why.... why in the world the court feels that Cassidy should repay those brokerage fees when EVERYONE (including the Bank) admits that the trades were 100% legitimate is beyond my limited comprehension…. but hey…. I’m just some nutcase who calls himself Trader Elvis, and nobody asked me what a reasonable restitution amount might be. 

Really?  You want to know what I think the restitution amount should be?  Thanks for asking.  I will admit that Cassidy owes the Bank some amount of restitution for not including a stronger "idiot-proof" product warning in his reports.  I'm not completely sure what a fair settlement would be - but around $100,000 sounds generous and yet fair to me.  Another approach would be for Cassidy to only repay the money the Bank paid for the 'product warning deficient' reports.  (That's a little inside joke - because although the Bank paid Optionable about $31,250 daily for brokerage services (5M / 160 trading days), the Bank never paid Optionable a penny of the $2,500 per month that they agreed to pay for the reports - so restitution of that amount would be Zero. haha)  In the meantime, I think the Bank owes Cassidy and Optionable restitution for the willful destruction of Optionable's existing business resulting from the "Blame Optionable" campaign and additional restitution for the potential revenue that Optionable would have enjoyed through its partnership with NYMEX.  Mark Nordlicht is leading that legal battle and has placed the combined value of those losses at 1 billion dollars.  (500 million each from the Bank and from NYMEX)  

Respectfully submitted for your review:
Trader Elvis: 

Note #1: Kevin Cassidy is appealing the restitution amount.

Note #2: added 7/17/13: On February 12, 2009 David Lee paid his criminal case judgement of $830,000 which according the the Order of Restitution represented 'all proceeds traceable to the commission of the offenses alleged'. Since Lee has already made this payment, it makes me wonder why Cassidy is also being asked to pay restitution of Lee's income, and why Cassidy is being asked for 3.6 million when 0.83 million was considered full restitution, by the person whose trading actually lost the Bank's money. 


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

Our Collective Misdiagnosis of Kevin Cassidy

I'd like to share a link to an article with you that I believe explains how an innocent man came to find himself in prison and pinged for a ludicrous amount of restitution money, payable to the perpetrator of the hoax against him.

While you read the article I would like you to think of Kevin Cassidy with his previous, unrelated criminal record in the same light as the "pseudopatients" in the article.  Despite all the good intentioned and well meaning people involved in the legal system Cassidy met a similar fate as the pseudopatients who encountered the good intentioned and well meaning folks in the mental health system. Unfortunately for Cassidy, his story has no psychologist, no David Rosenhan to pull him out of the asylum.

By the way, I include myself in with the people who misdiagnosed Kevin Cassidy, at least in the beginning.  Having had the experience of misdiagnosing Cassidy myself helps me understand how other well meaning, good intentioned and intelligent people can still be under the same misconception. I think this article does a good job of explaining how that can happen.

The article is named "Psyched Out" and its author is Dan Lewis.  (you can read it here )

Discovery Schedule Conference

(Seen on my way to the courthouse)

Question: What has one Judge and fifteen lawyers?
Answer: An Optionable Conference.

The Judge's Agenda:  Set discovery schedules for the following cases: SEC, CME/NYMEX (NYMEX) and Bank of Montreal (The Bank) 
Case excluded: CFTC (per Lawrence Gelber's statement to Judge Cott)  

My personal agenda: Sniff out if The Bank has any other mediation sessions going on given that they just had a 2 day mediation earlier this week with Joe Saab of MF Global *1

Here's what I learned: Joe Saab's lawyer (Owen Pell) described the 2 day mediation session between his client and The Bank as "unsuccessful". At the very tail end of the 3 hour conference, The Bank's lawyer (Tim Haggerty) made a general statement that The Bank was interested in entering mediation with any of the other defendants.  I got the impression that no other defendant is currently in mediation with The Bank.

As for the official agenda, here's how that went:

Ed O'Connor (Optionable) is now the lone defendant who has not settled with the SEC, so a discovery schedule was needed for the SEC case. Judge Cott hammered O'Connor's lawyer Scott Smith 8-ways-till-Sunday over Smith's assertion of O'Connor's right to depose David Lee before going to trial with the SEC. The sticking point is that Lee is entitled to only be deposed once and several of the other defense lawyers don't want to depose Lee until The Bank has delivered more 'privileged' information. Owen Pell 'stuck his head into the lion's mouth' more than once on Smith's behalf, although to his credit, Smith stood his ground and got what he was asking for - the ability to depose Lee. (by July 1).  The other defense lawyers will still be able to depose Lee later by using the definition of "once" to mean "several times" as long as Lee isn't asked the same questions over and over.  Smith also mentioned wanting to depose both Bob Moore (Lee's former boss) and Murray McIntosh (one of The Bank's Risk Managers who was key in painting a picture of fraud in the minds of The Bank's upper management - in my opinion)  My personal reaction to hearing that Lee, Moore and McIntosh would all be deposed = Hell Yeah!!!!)
Schedule:  Settlement conference: May 15th - letters to the Judge due by May 8
Expert Disclosure by May 31 - Rebuttal by June 18
Depositions conclude by July 1.

Judge Cott used a variety of strategies to motivate the legal teams to consider settling.  Ed McDermott (for NYMEX) wasn't interested in waiting around for The Bank to reveal their 'priviledged' information that defense lawyers claim will show that Optionable's reports were accurate.  McDermott's agrument is his only burden is to show that there was an agreement between Lee and Cassidy to hide Lee's losses, and that it is irrelevant if Cassidy's reports were accurate.  Judge Cott told him that he would have to wait.  Solomon Klein (for Mark Nordlicht) and Owen Pell both wanted more time to examine The Bank's 'privileged' data. Pell went as far as to drop the "E-bomb" (Enron) and let the Judge know that in his work representing 2 banks in a class action against Enron, discovery took up to 7 years, and that what he was seeing in The Banks transactions were even more complicated. That appeared to get the Judge's attention, but he still told Pell that he needed to hurry up.
Schedule:  Fact finding and expert testimony needs to wrap up in a year - 4/1/14.  Earlier in the session, the Judge had been suggesting the end of this year, but pushed it to 4/1/14 with the warning that he was pre-baking in the requests for an extension.  (Personal note: I try this approach with my son sometimes, and am still disappointed when crunch time comes and he doesn't get the concept)


Bottom Line:

Mark Nordlicht just pumped enough cash into Optionable yesterday (4/10/13) to keep the cash-strapped company afloat for about a year.  (Nordlicht was repaid with newly minted OPBL shares) I think that speaks to his readiness to take this to trial rather than settling.  If BMO's or NYMEX's strategy was to stall until Optionable ran out of cash, that plan was just thwarted.

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footnote:

* 1: I think of Joe Saab at MFG as being a peer or counterpart to Kevin Cassidy at Optionable. However, even though both men performed similar tasks per The Bank's instructions, I think it's only fair to Saab that I acknowledge that The Bank's 'Blame Optionable' campaign portrayed Cassidy as being 'much more guilty' than Saab given Cassidy's unrelated previous criminal record which made him such an opportune and indelibly delicious scapegoat.

How the Judge Got it Wrong

What Cassidy Admitted To, How the Judge Saw It, And What The Bank Wanted

One of the benefits of being an American is that any crackpot with an internet connection can write a blog and criticize the decision of a highly respected Federal Judge.  Ready? here we go....

I believe Judge Daniels got it wrong when he described what Kevin Cassidy admitted to in the Federal Criminal case against him.  That said - I can see how the Judge came to the decision he reached.  It turns out that the Judge was writing his decision around the same time as Kevin Cassidy was giving his deposition testimony - and the deposition is where a lot of interesting details came out.   What's more - it wasn't until several months after Cassidy's deposition that Ed O'Connor gave his deposition testimony during which four separate processes emerged describing the instructions Optionable followed over the 2003 to 2007 time frame.

Simply put, when the Judge wrote his decision all of the facts had not been presented in court, so he wrote his decision based on the information that actually had been presented.

What do I believe the Judge got wrong?  The Judge wrote his decision as if Optionable took quotes from The Bank of Montreal's (The Bank) trader David Lee and simply sent those quotes back to The Bank verbatim, without any analysis whatsoever. According to both Cassidy's and O'Connor's sworn testimony, that's not what happened, but it is a reasonable interpretation of The Bank's complaint. 

What do I believe the difference is between what Cassidy admitted to and the Judge's interpretation?

I believe Cassidy admitted that he accepted quotes from The Bank's trader as the origination point of the quotes (something that Cassidy knew The Bank's Back Office did not want to happen) and did not explicitly tell The Bank's Back Office who originated the quotes when he delivered his report.

Here is my interpretation of Cassidy's explanation of why he did this:  When Cassidy presented The Bank's quotes to other traders in the market he had to be prepared to "put up or shut up" and make actual trades for real money right then and there based on those quotes.  As a brokerage firm, Optionable had no ability to "put up or shut up" on their own - they needed to be representing a client who stood ready to trade on those quotes.  Cassidy's deposition testimony makes clear that he explained this to The Bank and that they acknowledged understanding what he told them. 

I've got no gripe with The Bank for wanting Optionable to prepare the reports with quotes that were 'independent' of The Bank's own traders.  My gripe is that The Bank's Risk Managers did not communicate with Optionable independently of the Bank's own traders. In David Lee's interview with the FBI, Lee said that he fought with The Bank's Back Office over this very point - and that the Bank Office grudgingly conceded that Lee had to be the one to originate the quotes.

That's what I find so frustrating about this case.  I know that as a reader of this blog, you may see me as just some crackpot trying to breathe life back into my worthless Optionable shares - but what I'm really hoping to get across here is that The Bank's claim - that they didn't know that Lee originated the quotes - is a claim that just isn't supportable by the facts. And that the view expressed in the Judge's Decision Order, which is written as if Optionable performed no service at all, completely dismisses the work that Cassidy and O'Connor described in their sworn depositions. 

Here is the transcript of what Cassidy admitted to:

August 15, 2011

THE COURT (HON. THOMAS P. GRIESA): Now, if you still wish to plead guilty, would you tell me in your own words, and certainly you can give it in summary form without every detail, but would you tell me what you did to commit the offense that is charged here?

THE DEFENDANT (Kevin Cassidy): In the fall of 2006, I arranged for my company Optionable to develop a service called RealMarks, which was designed to provide market quotes concerning natural gas option contracts. From September 2006 to April 2007, this service provided market quotes to the risk management department of Bank of Montreal.

While I believed that the RealMarks quotes provided to BMO were legitimate, most of the quotes that RealMarks provided to Bank of Montreal's risk management department originated with Bank of Montreal's own trader David Lee. I agreed with Lee that on month end days 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 BMO's risk management department wanted quotes that were not contributed to RealMarks by Lee and felt it was an important factor, I did not tell the risk management department that many of the quotes had originated with Lee.

Here is how Judge Daniels interpreted Cassidy's admission in his Decision Order: Do you see the disconnect here?  It's written as if Optionable did no analysis at all.

August 24 2012: Memorandum Decision and Order

Judge George B. Daniels: On August 15, 2011, Cassidy pled guilty to conspiracy to commit wire fraud.  In his allocution, Cassidy admitted to forwarding Lee's quotes directly to BMO, even though he knew that BMO management wanted him to verify the accuracy of those quotes by independently testing them against the market to ensure Lee's accuracy.  

I know this probably overkill - but one more time - here are differences between 1) What Cassidy Admitted to  2) How the Judge Saw It and 3) What I think The Bank Was Hoping For - in chart form:

What Cassidy Admitted to: Cassidy admits that David Lee originated the quotes

What the Judge Saw:

In the Judge's view, Optionable just sent the quotes to The Bank's Back Office without any review of them whatsoever.  In this view, David Lee's origination of the quotes isn't the problem, but a perceived failure on Optionable's part to actually do anything with them before sending them to The Bank's Back Office.

 































What I Think The Bank Was Hoping For: (assumed)
Now, The Bank has failed to document how this process was supposed to work, so I can't provide you with an exact quote where they state what they wanted.  As far as I can determine, what The Bank wanted was for someone other than one of The Bank's traders to originate the quotes, yet they decline to say who that someone was supposed to be.  

I believe that my investment in the company called Optionable was destroyed by The Bank of Montreal's actions - and that an innocent man (Kevin Cassidy) is sitting in jail, separated from his loving family, while being pinged for millions in restitution payments to The Bank whose flawed processes caused this whole mess. 


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