Forum Post: 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 control 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 and the Bank's losses, 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.

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