- Posted April 29, 2014 by
Jersey City, New Jersey
This iReport is part of an assignment:
- Victim's Statement to Culpable Ex-BMO Trader Who Beat Mandatory Prison Sentence
- Downe in Front (Part 2)
- Bank of Montreal Sees Square Peg - Round Hole Mismatch as Fraud
- J’Accuse: BMO CEO Misrepresented Auditor’s Report to Federal Regulators and Shareholders
- JP Morgan's Jamie Dimon's London Whale Fate Shows That Bill Downe's "Blame Optionable" Campaign Was Unnecessary
Downe in Front (Part 1)
I’d like to ask you to consider doing something that the Bank of Montreal gambled most people will never do. I’d like to ask you to look past the criminal record of one individual, and then, consider the possibility that a large multinational bank used this person's criminal record as a smokescreen for their own CEO to hide behind. I’ll even tell you up front how the story ends. The Bank’s CEO gets away with it.
David Lee was a Natural Gas trader for the Bank of Montreal whose book (his portfolio) mostly consisted of thinly traded, long dated, out-of-the-money options. Lee traded in the same markets associated with the Enron collapse. Lee’s high risk trading wasn’t a secret, or illegal, but it didn’t mesh well with the conservative image the Bank projected to its investors.
The Bank skillfully tracked every penny that came in and out of David Lee’s book. The Bank’s Accountants expertly tallied the profitability of each trade he made. The Bank’s weak spot was tracking the current value of the thinly traded, long dated, out of the money options while they were held in David Lee's book.
(a little background) An Option is an investment that loses value over time. If an option can’t be exercised, it expires and becomes worthless. “Near term, in the money” options are relatively easy to exercise and so they are widely traded. Long term, out of the money options like the ones in David Lee’s book are thinly traded because the likelihood that they’ll become worthless is so much greater. Assigning a current value to such an asset is an industry wide challenge, and not a weakness that is unique to the Bank of Montreal.
Long dated, out of the money options have a bad reputation. Historically they’ve been the first place investigators look when institutions suffer a “blow-up”. Fraudulently valued long dated, out of the money options were blamed for the Bank of Montreal’s previous blow-ups, just as they’ve been blamed for hedge fund blow-ups such as Amaranth, and most famously, Enron.
Bill Downe was still the “new CEO” at the Bank of Montreal when their 2007 blow-up happened. The Bank announced that David Lee had lost a lot of money trading long dated, out of the money options. More interesting to this story however is that for years before becoming the Bank’s new CEO, Downe was acknowledged throughout the industry as the Bank of Montreal’s Risk Management expert. So, Downe wasn’t just the new CEO, he was the guy most singularly identifiable as being responsible for allowing the 2007 blow-up to happen - and now he was running the whole bank! How was the Bank supposed to use the standard excuse of blaming some rogue trader with fraudulently misstating the value of his/her long dated, out of the money options when their new CEO, their Risk Management expert, had failed to detect and stop the blow-up???!!!
The Bank hired a crisis management firm and developed a strategy. In an effort to deflect attention away from Bill Downe’s Risk Management failure, Bill Downe agreed to publicly redirect the blame for his own failure to a company called Optionable. Within hours news outlets reported that Optionable’s CEO had a criminal record. And that my friends, is all it took. A firestorm of litigation rained over Optionable from which they have never recovered.
Please Read Part 2 of this story on CNN iReport
Disclosure: I am an investor in Optionable. This blog does not offer advice on buying or selling any security.