JP Morgan's Jamie Dimon's London Whale Fate Shows That Bill Downe's "Blame Optionable" Campaign Was Unnecessary

Imagine Bank of Montreal's (The Bank) Bill Downe's surprise at learning the fate of JP Morgan's Jamie Dimon in the wake of the London Whale losses.  Much like Dimon, Downe was faced with having to explain losses from over-sized bets in illiquid markets to regulators and investors. Sure, both men blamed their own traders and Risk Managers, but Downe took an additional step.  Downe sponsored a  campaign, code named "Blame Optionable" which fraudulently* looped in and destroyed the brokerage firm Optionable, of which I am an investor.

 I'd like to share the following story with you from The New Yorker's website:  Will Anyone Hold Jamie Dimon Responsible for the London Whale Scandal?   While the article isn't intended to be supportive of Dimon, it shows that Downe could have survived at BMO without destroying Optionable.

Instead The Bank is still in court 6+ years later attempting to squelch Downe's emails from reaching the public.  Downe and The Bank could have been miles past this by now; Optionable, the company I am invested in, could still be a profitable brokerage, and their reporting service "Real Marks" could still be improving visibility in these lucrative yet highly illiquid markets.

 While BMO has been successful to date selling their version of the story, the truth is known and documented.  More people know the truth than the Bank can possibly squelch, and this all could have been avoided if Downe had just taken the heat upfront and moved on.

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

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footnote:
* Why do I say that the "Blame Optionable" campaign FRAUDULENTLY looped Optionable in?
The Blame Optionable campaign claimed that there was a secret agreement between The Bank's Trader David Lee and Optionable's Kevin Cassidy.  Under this theory Lee would secretly provide price points to Cassidy and Cassidy would secretly report them back to The Bank.  REALITY: It is documented that The Bank indeed wanted and requested the reports to be independent of their own traders, including Lee.  That part is true.  It is also documented that: a) The Bank's Risk Managers asked Lee to send quotes to Cassidy  b) Kevin Cassidy met with The Bank's Upper Management and told them in person that Lee's input was included and that the reports could not be created without Lee's input.   These two facts when combined prove that The Bank knowingly made fraudulent statements when they claimed that Lee and Cassidy conspired to keep knowledge of Lee's participation away from them.

** Photo Caption: The London Whale Swam in Illiquid Markets

Optionable Press Release links Bank CEO to Fraud

I am reposting the Press Release that appeared Optionable's web site on 9/30/13 in its entirety, without edits or comments of my own. Optionable removed this press release on 10/2/13 per court order.
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Bank of Montreal CEO Downe Linked to Fraud and Cover Up
September 30, 2013
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New evidence obtained by Optionable links current Bank of Montreal CEO Bill Downe to a cover up in relation to trading losses in natural gas positions incurred by the bank in early 2007.

Emails by Mr. Downe clearly show he was aware that BMO took a large speculative position without proper risk oversight. In an internal email to staff, Downe commented “It happens to be a fact and you couldn’t lose this much money by taking one gigantic bet if you had risk controls in place.” BMO had numerous times disclosed to the public they were running a conservative client driven book. The fact that BMO was engaged in massive speculative trading was deliberately never disclosed to the public by BMO at the time and has still not been disclosed. Years of gains in their natural gas trading book had padded earnings at the Canadian bank and had resulted in increased bonuses for BMO executives.

When the natural gas positions run by head trader David Lee began to experience losses due to excessive speculation, BMO executives moved quickly to cover up the size of their positions. Investment Banking Head Yves Bordeaux implored David Lee “to come up with a plan because how are we going to explain things to people who thought we were just trading around customer business."  Further evidence uncovered by Optionable indicates that Mr. Downe has admitted that BMO executives who were charged with unwinding the positions had told him “the book was bigger than anything they had ever seen”.   Faced with an angry shareholder base, potential regulatory actions, and possible downgrades by rating agencies, BMO led by CEO Downe, settled on a plan to “blame Optionable” and “redirect the spin by suing Optionable.”   Mr. Downe chose to participate in the cover up rather than disclose the fact that BMO was running a book that was not tied to customer business at all but rather was engaged in massive speculation.

"The fact that this fraud reached the highest level of the executive suite at BMO is tragic”, said Dov Rauchwerger, Optionable CEO. “It is important to note that even at this point in time Mr. Downe shockingly continues to perpetuate the falsehood that BMO was running a client driven book in natural gas. The lack of remorse is shameful, especially given that their cover up landed an innocent man in prison.”

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.

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 )