Securities Law Prosecution – Former Brokerage Firm CEO Charged In Gas Mismarking Scheme – Montreal Trader Pleads Guilty – US Legal Newswire

LawFuel – Law Firm Newswire – Brokerage Firm CEO Also Charged With Defrauding NYMEX, Intercontinental Exchange, and Shareholders
MICHAEL J. GARCIA, the United States Attorney for the
Southern District of New York, and MARK J. MERSHON, the Assistant
Director-in-Charge of the New York Office of the Federal Bureau
of Investigation (“FBI”), announced today the unsealing in
Manhattan federal court of a six-count Indictment charging KEVIN
CASSIDY, the former chief executive officer (“CEO”) of Optionable
Inc. (“Optionable”), a brokerage firm focusing on energy
derivatives, with conspiracy, wire fraud, aiding and abetting the
making of false bank entries, and securities fraud. These
charges stem from CASSIDY’s involvement in a scheme to deceive
the Bank of Montreal (“BMO”) about the value of its multi-million
dollar natural gas portfolio; his driving up the share price of
Optionable stock through false and misleading statements to the
investing public; his defrauding the New York Mercantile Exchange
(“NYMEX”) in connection with NYMEX’s 2007 purchase of an
ownership stake in Optionable; and his defrauding the
Intercontinental Exchange (“ICE”) in connection with ICE’s
contemplated purchase of a stake in Optionable in 2003. After
the scheme to deceive BMO was uncovered, BMO later announced
commodities trading losses of more than 800 million in Canadian

Mr. GARCIA also announced today that DAVID LEE, BMO’s
former lead natural gas trader, pleaded guilty on November 13,
2008, to a four-count criminal Information charging him with
inflating the value of his natural gas portfolio and conspiring
with others to deceive BMO into believing that this portfolio was
properly valued, or “marked.” LEE admitted to destroying
evidence is response to an investigative inquiry from the United
States Commodity Futures Trading Commission.
Manhattan District Attorney ROBERT M. MORGENTHAU
announced today that LEE also pleaded guilty to violating New
York State’s Banking Law by falsifying BMO’s trading records. The
Federal Reserve Board also separately announced the issuance of a
Consent Order of Prohibition against LEE.

According to the Indictment against CASSIDY:
BMO required its commodities traders to “mark their
books” by assigning the fair market value to each open financial
position in the trader’s portfolio. BMO used these marks, among
other things, to value its commodities trading positions, to
determine its daily commodities-related profit and/or loss, and
to assess BMO’s risk exposure related to its trading positions.
Through a process called “independent price verification,” BMO
sought to verify the accuracy of the marks that commodities
traders assigned to their positions by comparing those marks to
independent market quotes for similar positions.

Beginning in May 2003, LEE began overvaluing, or
“mismarking”, his natural gas book by overstating the fair market
value of some of his positions, which made his book look more
profitable to BMO than it was and which earned LEE larger
bonuses. As part of its independent price verification of LEE’s
marks, BMO compared LEE’s marks to price quotes for similar
positions that BMO obtained from third-party brokerage firms,
including Optionable, which presented price quotes to BMO as
independent and as accurately reflecting market prices.

As Optionable’s CEO and a consultant to Optionable,
CASSIDY helped LEE manipulate BMO’s independent price
verification process by deceiving BMO into believing that LEE’s
inflated marks accurately reflected the fair market value of
LEE’s positions. Under an agreement with CASSIDY, LEE sent to
Optionable price quotes for his positions that matched the selfserving,
inflated marks that LEE submitted directly to BMO, and
at CASSIDY’s direction, Optionable brokers later reiterated LEE’s
price quotes, virtually unchanged, to BMO’s price verification
personnel in “round trip” or “u-turn” emails. Optionable brokers
presented LEE’s pricing information to BMO as if it reflected
Optionable’s accurate view of prevailing market prices for LEE’s
positions and was independent of LEE. In coordinating these
“round trips,” CASSIDY knew that BMO was using this pricing
information from Optionable to evaluate the accuracy of LEE’s
marks while under the impression that it was accurate and
independent of Lee.

CASSIDY helped LEE defraud BMO as a way to give LEE an
incentive to use Optionable to execute commission-generating
trades. From 2003 to 2007, Optionable received an increasing
amount of commission-generating trading business from BMO and
these commissions constituted a growing and material percentage
of Optionable’s revenues. By 2007, Optionable obtained more than
40 percent of its annual brokerage revenues from BMO. Optionable
included these BMO commissions in its revenue figures in its
public regulatory filings that were available to the investing
public without disclosing that (a) CASSIDY and other Optionable
personnel had been helping Lee deceive BMO about the value of
Lee’s positions; or (b) these commissions from BMO included
trades that Lee selected Optionable to execute on his behalf in
furtherance of the fraudulent scheme.

From September 2005 (when Optionable stock began
trading publicly) to April 2007 (when BMO first announced massive
commodities trading losses), Optionable’s stock price increased
from $1.00 to $7.20 per share. On May 8, 2008, after the
mismarking scheme had been uncovered, BMO publicly announced that
it had terminated all business relations with Optionable; on May
9, 2007, Optionable publicly announced that its loss of BMO’s
business would adversely impact its operations; and on May 10,
2007, Optionable stock closed at less than one dollar per share.
In early 2008, Optionable publicly reported no revenue.

In addition to the charges relating to the BMO
mismarking scheme, the Indictment charges CASSIDY with defrauding
NYMEX in connection with NYMEX’s April 2007 purchase of a 19
percent ownership interest in Optionable. NYMEX obtained this
interest by buying Optionable common stock, including $5.1
million of Optionable common stock that was beneficially owned by
CASSIDY. The price of Optionable stock at the time of NYMEX’s
purchase had been inflated by the false and misleading revenue
figures that Optionable had reported in public regulatory
filings. In addition, while negotiating this transaction,
CASSIDY provided NYMEX with similar false and misleading revenue
figures for Optionable.

Finally, CASSIDY is charged with wire fraud in
connection with the contemplated purchase of an ownership stake
in Optionable in November 2003 by the Intercontinental Exchange
(“ICE”), which operates global commodity and financial products
marketplaces. During negotiations with ICE, CASSIDY provided ICE
with a false name and social security number for himself in an
effort to conceal his prior criminal record. At the time,
CASSIDY had previously been convicted of wire fraud, tax fraud,
trafficking in a counterfeit device, and improper reporting of a
currency transaction. After learning CASSIDY’s true name and
social security number, and learning that he had federal criminal
convictions, ICE terminated negotiations with Optionable.
CASSIDY was arrested this morning and is expected to
appear this afternoon before United States Magistrate Judge
ANDREW J. PECK in Manhattan federal court.

CASSIDY is charged with 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.
CASSIDY, 49, lives in Bedford Hills, New York.

LEE, 37, lives in Rutherford, New Jersey. LEE pleaded
guilty to conspiracy, wire fraud, making false bank entries, and
obstructing a federal regulatory investigation. In addition to
the applicable maximum penalties discussed 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.

Mr. GARCIA commended the investigative work of the FBI
and expressed his appreciation to the Manhattan District
Attorney’s Office, the U.S. Securities and Exchange Commission,
the United States Commodity Futures Trading Commission, and the
Federal Reserve System. He said the investigation is continuing.
Assistant United States Attorneys REED MICHAEL BRODSKY
and NICHOLAS S. GOLDIN and Special Assistant United States
Attorney MATTHEW ROSEN from the Manhattan District Attorney’s
Office are in charge of the prosecution.
The charges against CASSIDY are merely accusations and
he is presumed innocent unless and until proven guilty.
08-292 ###

Scroll to Top