A former Bank of Montreal trader has pleaded guilty to conspiring to deceive the bank about the value of his natural gas portfolio and falsifying its trading records.
David Lee, a 37-year-old New Jersey resident, is facing up to 60 years in prison and the possibility of more than $1.75-million in fines after pleading guilty to conspiracy, fraud, making false bank entries and obstructing a federal regulatory investigation.
The U.S. Attorney for the Southern District of New York and the FBI have also laid charges against Kevin Cassidy, the former CEO of brokerage Optionable Inc., which received a growing amount of trading business from BMO between 2003 and 2007.
Mr. Cassidy, 49, has been charged with conspiracy, fraud and aiding and abetting the making of false bank entries. He was arrested yesterday morning and pleaded not guilty to the charges. A bail hearing is scheduled for tomorrow. Mr. Cassidy was charged with credit card fraud and money laundering in 1993, and has spent time in prison.
"Mr. Cassidy vigorously and unequivocally disputes the allegations and looks forward to vindication at trial," said his lawyer, Lawrence R. Gelber.
Mr. Lee's lawyer, Amy Walsh, said he "has accepted responsibility for his actions and he has been fully co-operating with all relevant governmental authorities since their investigation began."
Bank of Montreal became one of Optionable's largest customers before the bank discovered problems in its natural gas trading operations that eventually led to more than $850-million in losses.
The criminal charges against the two men stem from the alleged "mismarking" of Mr. Lee's natural gas book.
BMO required commodity traders to "mark" their books by ascribing a fair market value to positions in their portfolio each day, so that the bank knew the value of its trading positions and the related profits or losses. It tried to confirm the traders' marks by periodically comparing them to independent market quotes.
The U.S. Attorney alleges Mr. Lee began overstating the value of some of his positions in May, 2003, leading BMO to believe they were very profitable when they were not.
As a result, the bank gave him greater trading authority, allowing him to substantially increase his natural gas options positions, according to the indictment against him.
He also earned larger bonuses. From 2003 to 2006, his compensation rose from about $722,000 to $5.35-million.
To verify the value of his portfolio, BMO was comparing Mr. Lee's marks to quotes obtained from brokerage firms.
The U.S. Attorney alleges Mr. Cassidy helped Mr. Lee manipulate the process by having Optionable's brokers give BMO price verification quotes that matched Mr. Lee's marks.
"At all relevant times, BMO's price verification personnel usually compared Lee's marks to price quotes obtained from only one brokerage firm: Optionable," says the indictment against Mr. Lee.
Additionally, the U.S. Commodity Futures Trading Commission laid civil charges against Mr. Lee, Mr. Cassidy, Optionable, and another of its former employees. Mr. Lee's former boss at BMO, Robert Moore, is also named as a defendant.
An individual who answered the phone at Mr. Moore's house declined to comment. A spokesman for Optionable could not be reached.
The CFTC alleges Mr. Moore received gifts, travel, meals and money from Mr. Cassidy that were not business-related.
The value of BMO's natural gas book was inflated by about $221,875,297 (Canadian) as of Jan. 31, 2007, as a result of Mr. Lee's alleged mismarking, according to the CFTC.
In 2006, fluctuating natural gas markets caused a sharp decline in the value of Mr. Lee's positions, and prompted him to step up his mismarking, the U.S. Attorney alleged.
That September, risk personnel at BMO talked about trying to verify Mr. Lee's marks by comparing them with prices from a so-called "multicontributor pricing service," which gathers values from multiple independent natural gas traders, rather than using price quotes from Optionable.
Fearing that he might get caught, Mr. Lee is alleged to have spoken to Mr. Cassidy, who came up with the idea of having Optionable introduce a new pricing product, called "RealMarks."
From September, 2006, to about March, 2007, Mr. Lee is alleged to have filled out RealMarks grids with false pricing information.
In October, 2006, BMO's risk personnel started comparing Optionable's RealMarks grids to information from a multicontributor service. The results suggested Mr. Lee's natural gas book was overvalued, and the bank hired an outside consultant.
By the end of 2007, BMO had announced commodity trading losses of more than $850-million.