Ex-BMO gas options trader co-operates, avoids jail

MANHATTAN • A former Bank of Montreal trader avoided jail by helping U.S. prosecutors investigate a fraud that resulted in a record trading loss for a Canadian bank and a guilty plea by Kevin Cassidy, the former CEO of Optionable Inc.

David P. Lee, a natural-gas trader at the bank from 2001 to 2007, was ordered to pay almost US$14.2 million in restitution on Monday by U.S. District Judge Loretta Preska in Manhattan.

According to the U.S., Mr. Lee helped federal prosecutors as well as several regulatory agencies in litigation stemming from $680-million of pre-tax commodity-trading losses the bank announced in April 2007. Those losses grew to $853 million for the fiscal year — a record at the time — paring profit by $440 million.

When he pleaded guilty in 2008 to conspiracy, wire fraud and making false entries in a bank’s books and records, Mr. Lee admitted overvaluing the bank’s natural-gas options portfolio by inflating values of trading positions for which market prices were unavailable. Optionable helped Mr. Lee by vouching for his marks, prosecutors said.

“Lee provided early and significant co-operation guiding the government through an extremely complicated financial investigation, enabling the conviction of a co-conspirator and assisting several regulatory agencies in related litigation,” Assistant U.S. Attorney Michael Levy said in a letter to the court.

The U.S. attorney and district attorney in Manhattan, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission all conducted investigations.

The scheme began in 2003 and continued until at least 2006, as Mr. Lee attempted to enhance his job performance and boosted his bonuses from about US$722,000 in 2003 to about US$5.35 million in 2006, according to the U.S.

In 2006, the market turned against Mr. Lee and he used the scheme to hide trading losses, prosecutors said.

The bank believed that Mr. Lee’s portfolio was substantially more profitable than it actually was, according to the government. As a result, Mr. Lee gained greater trading authority, which enabled him to increase the overall size of the natural gas options book he traded on Bank of Montreal’s behalf, the U.S. said.

After gaining Mr. Lee’s cooperation, the U.S. said it was able to indict Mr. Cassidy for his role in the mismarking scheme. Mr. Cassidy pleaded guilty in 2011 to wire fraud just before a trial was to start. He was sentenced to 2 1/2 years in prison.

Amy Walsh, a lawyer for Mr. Lee, didn’t respond to phone and email requests for comment on the case.