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    Posted April 29, 2014 by
    Jersey City, New Jersey
    This iReport is part of an assignment:
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    More from TraderElvis

    Downe in Front (Part 2)


    Part 1 of this story is available here:


    Part 2:


    Even Optionable's investors who were left holding the bag are forced to acknowledge that the Bank’s actions were “well played”. The question remains: Did Optionable actually do anything wrong? Here again, Optionable investors are forced to acknowledge that when faced with the prospect of spending the rest of his life in jail if he lost at trial, Optionable’s CEO took a plea bargain in exchange for a lighter sentence.


    Stick a fork in it. We’re done here, right? For most people, absolutely. That’s why I know I’m asking a lot when I ask you to consider doing something that the Bank is counting on you not doing. Please look deeper.


    Here are some things that I believe cast doubt on the Bank’s version of the story.


    After detecting David Lee’s trading losses, the Bank hired Deloitte and Touche to audit their failed risk management process which the Bank called IPV (Independent Price Verification) The scope of Deloitte's audit excluded testing for fraud. Using a Red /Yellow /Green grading system, Deloitte identified 128 Green areas where the IPV met prevalent industry practices; 35 Yellow areas where the IPV deviated from prevalent industry practices and 6 Red areas where IPV significantly deviated from prevalent industry practices.
    When speaking to investors, Bill Downe used the brand name recognition of Deloitte and Touche as financial auditors and misrepresented Deloitte's process review as if it had been a financial audit. Downe used Deloitte's name and cited the report as the basis for financial allegations of fraud against Optionable. [Side note to drive this point home: In a June 2007 statement to the New York District Attorney, Murray McIntosh (BMO Director Credit Products Market Risk) said: “Deloitte was brought in to look at the valuation practices and to determine if they were market practices. They were not brought in to determine if there was fraud.”]


    The Bank alleged that financial gain, in the form of higher bonuses was the motivation for the alleged subversion of their IPV. Common sense suggests that any bonus paid based on David Lee’s estimates would routinely be trued-up when his assets left the world of estimated valuations and were traded for real money. I honestly have no way of knowing if Lee adjusted his estimated valuations or not. I do believe however that if Lee’s estimated valuations had to be routinely adjusted down when he traded, the Bank’s Risk Managers would have picked up on that trend. They didn’t. To me that either means that the Bank’s accountants were bad at their job, which I doubt, or that Lee fairly consistently sold the options in his book for pretty close to his estimated valuations of them.


    The Bank alleged that Optionable prevented them from using a reporting service deemed to be more reliable than Optionable's called Totem. Totem was sold by a company called Markit. I contend that the Bank was always in control of which reporting services they used, and that they used Optionable’s free service for years rather than paying for Markit’s Totem service.


    The Bank alleged that once they finally began using the Totem service they noticed “huge” discrepancies between the Totem reports and reports from Optionable. I don’t have access to the reports myself, but I do have access to a court transcript in which the reports are discussed. In the court transcript the reports are described (by the defense) as being consistent with each other.


    The Bank alleged that when David Lee's trades switched from being profitable to being unprofitable the reports from Optionable hid David Lee’s trading losses. Going back to the same court transcript, the defense claims that Optionable’s and Totem’s reports both accurately reflected the losses in David Lee’s book.


    The Bank alleged that when David Lee originated quotes in the IPV, it was a conspiracy “hidden” from the Risk Management department of the Bank. Additionally, Kevin Cassidy admitted in his plea bargain that he did not tell the Risk Management department that many of the quotes had originated with Lee. Sounds bad, right? Would it sound quite so bad if it happened the way that David Lee told FBI investigators it did – namely that it was the very people in the Risk Management department that instructed him to originate the quotes used in the IPV? I'm at loss as to why Kevin Cassidy was supposed to have informed the Risk Management department about the instructions that the Risk Management department itself issued to their own employee. [While this might seem like a minor point, this is the only wrongdoing that Cassidy admitted to. The Federal Prosecutors found this admission sufficient to send Cassidy to Federal Prison.]


    What does this timeline tell you? (It tells me that Bank did not want to risk having Bill Downe asked questions under oath)
    • 8/28/2009 Bank of Montreal sued Optionable for $680M in damages.
    • 10/23/13 Bank of Montreal CEO Bill Downe asked Magistrate Judge James L. Cott to be exempted from depositions in the case.
    • 10/30/13 Judge Cott replied that it was “highly likely” that he would order Bill Downe's deposition.
    • 12/3/13 After 4 years of litigation the Bank of Montreal and Optionable suddenly reached a $200,000 settlement on the Bank's $680,000,000 claim just 34 days after Judge Cott said it was 'highly likely' that he would order Downe's deposition.


    It is my opinion that there is sufficient evidence to suggest that the Bank of Montreal's actions caused damage to Optionable and inflicted personal hardship to Kevin Cassidy. I do not believe that Bank is justified in seeking 8 million dollars of damages from Kevin Cassidy. Instead, I believe that Optionable’s investors such as myself, as well as corporate investors NYMEX/ CMEG are due an apology and restitution from the Bank of Montreal. Additionally I believe the Bank is liable to the Federal court system for costs that US tax payers have had to bear in prosecuting the Bank's self serving and malicious allegations against Optionable.


    Trader Elvis – Jersey City, NJ – 4/28/2014


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

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