The U.S. Commodity Futures Trading Commission (CFTC) announced today its filing of a five-count complaint in the U.S. District Court for the Southern District of New York, charging David P. Lee, a former trader for the Bank of Montreal (BMO), with mis-marking and mis-valuing the bank’s natural gas options book and deceiving the bank. The complaint also charges Optionable, Inc., and its former senior executives Kevin Cassidy and Edward O’Connor, with deceiving BMO. Robert B. Moore Jr., Lee’s former supervisor, is also named as a defendant with the CFTC seeking to hold him liable for Lee’s violations as Lee’s supervisor and controlling person.
“Today’s enforcement action by the CFTC demonstrates that we will root out corrupt traders and deceptive valuation practices because accurate valuations are of critical importance to the proper functioning of our nation’s economy. We will continue to partner with fellow enforcement agencies to prosecute those who attempt to infect the commodity markets with false information or valuations,“ said CFTC Acting Director of Enforcement Stephen J. Obie.
The CFTC complaint alleges that Lee unlawfully mis-marked his natural gas options positions between at least May 2003 and May 2007 and mis-valued other natural gas options positions from October 2006 until May 2007. Further, Lee and various brokers allegedly deceived BMO by fabricating purportedly independent broker quotes delivered to BMO’s back office for price verification. Such conduct violates the anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC regulations.
Allegations of Lee’s Mis-Marking and Mis-Valuation
One of Lee’s responsibilities as a natural gas trader was to assign a value to his open trading positions or “mark his book” each day. The CFTC complaint alleges that Lee knowingly mis-marked natural gas options positions thereby overestimating the value of his open natural gas options. The complaint alleges that Lee inflated the value of his book so that it would appear to BMO that his trading was more profitable than it was in reality. As a result of Lee’s mis-marking, the BMO natural gas book was unlawfully inflated by approximately $221,875,297 Canadian dollars as of January 31, 2007 and $257,801,706 Canadian dollars as of March 30, 2007.
By inflating the value of his book through both his mis-marking and mis-valuation activities, Lee generated a larger bonus for himself and his supervisor, Moore, while hiding losses he had incurred as a result of his unprofitable trading, the complaint alleges.
Lee and Other Defendants Allegedly Deceived BMO
Lee’s fraud occurred even though BMO employed a process to ensure that trader prices used to value BMO’s trading books were reasonably in line with market prices quoted by external sources. Part of that process involved the collection of price quotes from market brokers.
As alleged, beginning in at least 2003, Lee and several BMO brokers, including Cassidy and O’Connor— all of whom worked for Optionable —knowingly deceived and defrauded BMO employees who verified the value of Lee’s natural gas book.
Specifically, before BMO employees performed the mid-month or month-end verification process, Lee created a series of fabricated bid/offer quotes for various natural gas option positions that BMO’s back office used to verify the value of his natural gas options positions. Lee transmitted the fabricated quotes to brokers who then transmitted Lee’s bid/offer quotes to BMO employees involved in the price verification process, thus portraying Lee’s bid/offer quotes as their own independent professional view of the current bid/offer spread they observed in the market. Since BMO personnel relied upon the independence of such broker quotes, they used these quotes to verify Lee’s valuation of his natural gas book and therefore believed Lee’s trading to be profitable.
Robert Moore’s Involvement
From approximately April 2000 until April 2007, Moore was BMO’s Commodity Products Group Executive Managing Director and was Lee’s direct supervisor. The complaint alleges that Moore knowingly allowed Lee and others to violate BMO’s ethical standards. Further, Moore, a former trader who touted himself as an expert in energy trading, disregarded salient facts that, if they had been investigated, could have led to the detection of Lee’s fraud earlier. The complaint specifically alleges that Moore violated the CEA by failing to implement an adequate level of supervision over Lee and failing to act in good faith as Lee’s controlling person.
Criminal Charges
The Manhattan District Attorney Office and the United States Attorney for the Southern District of New York also today filed a criminal indictment against Cassidy. The Federal Reserve Board and the Securities and Exchange Commission also filed related actions against several individuals based upon their conduct underlying the CFTC’s complaint.
The CFTC would like to thank the Manhattan District Attorney’s Office, the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Southern District of New York, the Federal Reserve Board, the Securities and Exchange Commission, and the New York Mercantile Exchange for their assistance.
