(Updates with comments from lawyers for Lee and Cassidy and comments from Bank of Montreal, beginning in third paragraph.)
By Chad Bray and Sarah N. Lynch Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- The former chief executive of commodities broker Optionable Inc. (OPBL) was charged Tuesday in a six-count indictment with helping a former Bank of Montreal (BMO) senior trader inflate the value of the bank's commodity derivatives trading portfolio.
Kevin P. Cassidy, the one-time CEO of Optionable in Valhalla, N.Y., was charged with conspiracy, two counts of wire fraud, aiding and abetting the making of false bank entries, and securities fraud.
The trader, David Lee, has pleaded guilty to federal and state charges in the matter, prosecutors said. Lee is cooperating with prosecutors and other regulators, said Amy L. Walsh, one of Lee's lawyers.
Cassidy, 49 years old, of Bedford Hills, N.Y., pleaded not guilty to the charges at a hearing before a federal magistrate judge in Manhattan on Tuesday. He was ordered detained pending a bail hearing Thursday.
"Kevin Cassidy vigorously disputes the charges and looks forward to being vindicated in court," said Douglas R. Jensen, Cassidy's lawyer.
Cassidy, one of Optionable's founders and its vice chairman until he resigned in May 2007, faces up to 30 years in prison on the false bank entry charges and 20 years in prison each on the wire fraud and securities fraud charges.
Prosecutors have alleged that Cassidy helped David Lee, a former senior commodities trader at BMO Capital Markets Corp., inflate the value of natural gas options positions on Bank of Montreal's books by overstating the fair market value of some of his positions.
The government said Lee began mismarking his trading positions in 2003 in order to enhance his apparent job performance and to receive larger bonuses. However, market conditions worsened in 2006 and Lee increased his mismarking in order to minimize his losing positions, prosecutors said.
Optionable, under Cassidy's direction, rubber-stamped the valuations and sent them back to Bank of Montreal's risk-management department, the government said. Optionable held itself out as a provider of independent derivatives valuation services.
The company would send price quotes for Lee's positions to Bank of Montreal that matched his inflated markets, prosecutors said. Cassidy agreed to do so in order to incentivize Lee to use Optionable for commission-generating trades, the government said.
Prosecutors also alleged Cassidy defrauded the New York Mercantile Exchange through Nymex's purchase of an ownership stake in Optionable in April 2007 and committed wire fraud in connection with a contemplated purchase of an ownership stake in Optionable by the Intercontinental Exchange in November 2003.
On Tuesday, the U.S. Securities and Exchange Commission brought civil charges against Lee; Cassidy; Scott Connor, a former Optionable commodities broker; and Edward O'Connor, Optionable's president.
Connor resigned from Optionable in May 2007, while O'Connor remains its president and a director.
The U.S. Commodity Futures Trading Commission also filed a civil complaint in federal court Tuesday against Lee, Cassidy, O'Connor, Optionable Inc. and Robert B. Moore, who served as Lee's supervisor.
Lee "has accepted responsibility for his actions," said Walsh, one of Lee's lawyers. "He has been fully cooperative with all governmental authorities since the beginning of their investigation."
Lawyers for O'Connor and Moore didn't return phone calls seeking comment, while a lawyer for Connor declined to comment Tuesday. A call to Optionable wasn't immediately returned Tuesday.
The Federal Reserve Board has filed related actions against Lee in the case.
"We are pleased with the actions taken today by the authorities to bring proceedings against those involved with the commodities trading losses," said Ralph Marranca, a Bank of Montreal spokesman. "We have cooperated fully with the authorities and we will continue to do so."
Lee, the former BMO Capital trader, pleaded guilty to federal charges last week of allegedly inflating the value of the bank's natural gas option portfolio and conspiring with others to convince the bank it was properly valued. Lee also has pleaded guilty to a state charge of violating New York's banking law by falsifying the bank's trading records.
Lee, 37, of Rutherford, N.J., resigned from the bank in 2007 shortly after he and his supervisor, Moore, were placed on unpaid leave and Bank of Montreal suspended its business relationship with Optionable.
In its complaint, the CFTC claims Lee submitted fabricated price quotes and claimed they came from legitimate independent brokers. He was assisted by Cassidy and O'Connor, the CFTC said. By inflating the value of his positions, the CFTC claims that both Lee and Moore generated larger bonuses.
Later, when the CFTC sought to investigate, it alleges that Lee tried to destroy incriminating emails.
In May 2007, Bank of Montreal restated its fiscal 2007 first-quarter results by about C$237 million after learning Lee had overvalued the bank's natural gas options portfolio, the SEC said. The bank, at the time, determined that Lee's trading book was overvalued by C$680 million since the beginning of fiscal year 2006, the regulator said.
Bank of Montreal reported a further loss of C$149 million in its fiscal 2007 third quarter from unwinding Lee's overvalued position, the SEC said.
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com; and Sarah N. Lynch, 202-862-6634; sarah.lynch@dowjones.com
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(END) Dow Jones Newswires
November 18, 2008 17:32 ET (22:32 GMT)

Publié le 18 novembre 2008 Copyright © 2008 Dowjones