The Commodity Futures Trading Commission (CFTC) said Friday it has entered into a consent order settling charges brought against David P. Lee, a former trader for the Bank of Montreal (BMO), for mis-marking and mis-valuing of BMO's natural gas options book and deception of the bank (see NGI, Nov. 24, 2008).

The CFTC's action was part of a case that also involved the Manhattan District Attorney's Office and the U.S. Attorney for the Southern District of New York, the Securities and Exchange Commission (SEC) and the Federal Reserve Board.

Judge George B. Daniels of the U.S. District Court for the Southern District of New York entered an order on Thursday that requires Lee to pay a $500,000 civil monetary penalty to settle the CFTC charges. The order also permanently bans Lee from any commodity-related trading.

The order stems from a CFTC complaint filed on Nov. 18, 2008 that charged Lee with unlawfully mis-marking his natural gas options positions between at least May 2003 and May 2007 and with mis-valuing other natural gas options positions from October 2006 until May 2007. Further, the complaint charged that Lee and various brokers deceived BMO by fabricating purportedly independent broker quotes delivered to BMO's back office for price verification.

The order found that this conduct violates anti-fraud and false reporting provisions of the Commodity Exchange Act and CFTC regulations.

The CFTC charged that Lee's actions inflated the value of his book so it would appear to BMO that his trading was more profitable than it really was. As a result of Lee's activities, the BMO gas book was unlawfully inflated by approximately C$221.87 million as of Jan. 31, 2007 and C$257.8 million as of March 30, 2007, the CFTC said.

After the scheme was discovered, BMO restated its financial results by reducing net income for the first quarter of its 2007 fiscal year by approximately C$237 million (US$204 million), which reflected a 68% overstatement of BMO's net income for that quarter

The CFTC's litigation continues against other named defendants, including Lee's former supervisor at BMO, Robert B. Moore, and three executives at Valhalla, NY-based Optionable Inc. a brokerage firm dealing with the bank.

A grand jury for the U.S. District Court for the Southern District of New York had returned a multi-count indictment charging former Optionable CEO Kevin Cassidy with criminal counts of wire fraud, making false statements to a bank, making false and misleading statements to the SEC and securities fraud.

The SEC said Lee colluded with the Optionable executives and traders to have Optionable simply "rubber-stamp" whatever inflated values Lee recorded.

The SEC further alleged that Cassidy defrauded Optionable's public shareholders by concealing Optionable's role in the scheme. It also said he and another Optionable executive defrauded the New York Mercantile Exchange (Nymex) by selling more than $10 million of their own Optionable stock to Nymex in April 2007. Both men represented to Nymex that Optionable's periodic reports were materially accurate, but they never disclosed anything about their scheme with Lee to defraud shareholders of BMO, the SEC said.

Optionable's stock price dropped from $4.64 before the charges were filed to less than three cents at the end of last month. A recent 10-Q report said the company has not generated any revenues since the third quarter of 2007 as a result of the suspension of the business relationship with its largest customer, the Montreal bank.

Lee already has pleaded guilty to parallel criminal charges brought by the U.S. Attorney's Office for the Southern District of New York and the New York County District Attorney's Office. He has agreed to settle the SEC charges by consenting, without admitting or denying the SEC's allegations, to the entry of a permanent injunction against future violations of various provisions of the federal securities law. The SEC's claims for disgorgement and civil penalties against Lee remain pending.

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