Nearly two years after Kevin Cassidy, former CEO of Valhalla, NY-based brokerage firm Optionable Inc., pleaded guilty to one count of conspiracy to commit wire fraud in connection with a 2003-2007 natural gas commodities trading scandal at Bank of Montreal (BMO), the Commodity Futures Trading Commission (CFTC) late last week reported that it has obtained a federal court order requiring Cassidy to pay a $1 million civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC regulations.

The Order stems from a CFTC Complaint filed on Nov. 18, 2008 charging David P. Lee, a former trader for BMO, for mis-marking and mis-valuing BMO’s natural gas options book and deceiving BMO and charged Lee and Cassidy for deceiving BMO, from 2003 through April 2007, by fabricating purportedly independent broker quotes delivered to BMO’s back office for price and skew verification (see NGI, Nov. 24, 2008).

A multi-count indictment originally charged Cassidy with criminal counts of wire fraud, making false statements to a bank, making false and misleading statements to the Securities and Exchange Commission and securities fraud. In August 2011 Cassidy entered a plea of guilty in the U.S. District Court for the Southern District of New York to one criminal count of conspiracy (see NGI, Aug. 29, 2011). In April 2012 Cassidy was sentenced to 30 months imprisonment followed by three years of supervised release.

The indictment accused Cassidy of providing a fake name and Social Security number to conceal his criminal record during negotiations with Atlanta-based IntercontinentalExchange to purchase an interest in Optionable, which operated an electronic trading system. BMO was Optionable’s biggest customer until the bank suffered more than $400 million in trading losses and pulled the plug on doing any more business with Optionable. Cassidy left the company in May 2007, shortly after the trading losses were discovered.

The $1 million civil penalty was entered last week by Southern District Judge George B. Daniels. In April 2012, Daniels had issued a permanent injunction that imposed permanent trading and registration bans on Cassidy and that prohibited him from violating the CEA.

Lee settled the CFTC action against him in November 2009 by accepting a $500,000 penalty and a permanent ban from any commodity-related trading. (see NGI, Nov. 9, 2009). In November 2008 in New York’s Southern District Court, Lee entered a plea of guilty to four criminal counts: Conspiracy to Commit Wire Fraud and to Make False Bank Entries, Wire Fraud, False Statements to a Bank, and Obstruction of Justice. Lee has not yet been sentenced.

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.

Defendant Robert Moore, Lee’s former supervisor at BMO, settled the CFTC’s litigation on March 8, 2010 by agreeing to a $150,000 civil penalty.

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