According to federal prosecutors, beginning in May 2003, prosecutors alleged that the Bank of Montreal’s (“BMO’s) former lead natural gas derivatives trader, David Lee, deliberately overstated the fair market value of some of his positions, thus presenting his book as more profitable than it actually was.  Since Lee’s bonus was computed, in part, upon his profitability, his mismarking of positions earned him more compensation than was warranted. 

Mark to Market

The Bank of Montreal (BMO) required its commodities traders to daily “mark their books” by assigning the fair market value to each open position in their portfolios – thus allowing BMO to determine its daily commodities-related profits and/or losses, and to analyze its risk exposure. As part of its oversight of the valuation process, BMO verified the accuracy of the marks by comparing those marks to independent market quotes for similar positions (“independent price verification”).

As part of BMO’s independent price verification of Lee’s positions, quotes were obtained from third-party brokerage firms for similar positions.  Among the third parties referenced was the brokerage firm Optionable. 

You Scratch My Back And . . .

According to the allegations in a federal criminal Information, beginning in December 2004, Kevin Cassidy, 52, the CEO of Optionable, and Lee conspired to subvert BMO’s independent price verification process by having Lee supply Cassidy with price quotes for positions in BMO’s natural gas book, which Cassidy would then report to BMO without revealing that the quotes had originated with Lee.  Allegedly, Cassidy was aware that BMO relied upon the integrity of Optionable’s submitted quotes as part of its independent price verification of Lee’s book; however, those quotes were not bona fide because they were not derived independently of Lee.

Allegedly, Cassidy accommodated Lee in order to motivate the BMO trader to use Optionable to execute commission-generating trades. In fact, from 2004 to 2007, Optionable received an increasing amount of commission-generating trading business from BOM, which constituted in excess of 40% of the brokerage firm’s revenues by 2007.

Indictment

On November 28, 2010, Cassidy was indicted on:

• one count of conspiracy to commit wire fraud and to make false bank entries;
• two counts of wire fraud;
• one count of aiding and abetting the making of false bank entries; and
• two counts of securities fraud.

The conspiracy charge carries a maximum sentence of 5 years’ imprisonment and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss from the offense.

The wire fraud counts each carry a maximum sentence of 20 years’ imprisonment and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss from the offense.

The false bank entries count carries a maximum sentence of 30 years’ imprisonment and a maximum fine of the greater of $1,000,000, or twice the gross gain or gross loss from the offense.

The securities fraud counts each carry a maximum sentence of 20 years’ imprisonment and a maximum fine of $5 million, or twice the gross gain or gross loss from the offense.

Guilty Pleas

On August 15, 2011, Cassidy pled guilty in federal court in Manhattan to one count of conspiring to commit wire fraud, for which he faces a statutory maximum of five years in prison, a maximum fine of $250,000, or twice the gross gain or loss from the offense, and a maximum period of three years of supervised release. As part of his plea agreement, Cassidy has agreed to forfeit the proceeds of his crime. He is scheduled to be sentenced in December 2011.

Lee previously pled guilty in November 2008 to four counts: conspiracy, wire fraud, making false bank entries, and obstructing a federal regulatory investigation. In addition to the penalties noted above:

the obstruction count carries a maximum sentence of 5 years’ imprisonment and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss from the offense.