Wednesday, May 30, 2007

BMO Trading Woes Began Earlier Than First Revealed

The Globe and Mail, Tara Perkins, 30 May 2007

Bank of Montreal's problems in its commodity trading division began before November of last year, the company has revealed in its restated first-quarter results.

BMO disclosed commodity trading losses of $680-million earlier this month and said "an investigation determined that the losses relate to both the first and second quarters of 2007."

It allocated $509-million of the losses to its first quarter, which runs from November to the end of January. That chopped $237-million off the bottom line, after accounting for lower taxes and lower bonuses for employees.

But a note, filed with regulators late Monday evening, said they include "a reduction of $203-million in trading revenue and a reduction of $94-million in net income related to periods prior to the first quarter of 2007."

The same note says the bank restated its results to reflect a more appropriate market-based methodology for its commodities trading portfolio. It also cited "concerns regarding the reliability of quotes received from the bank's principal commodities broker used in the original January 31, 2007 valuation."

Several weeks after the end of that quarter, a former bank employee signed a deal with Optionable Inc., the commodity trading group's principal broker, under which the bank would obtain market information to help it value its portfolio, according to a copy of a document obtained by The Globe and Mail.

A Bank of Montreal spokesman declined to comment on, and could not confirm, the authenticity of the document. A spokesman for Optionable did not return a request for comment.

The document is signed Feb. 23, 2007, and carries a signature that says Robert B. Moore Jr.

BMO has recently said that two former employees in its New York trading group are no longer employed by the bank, including executive managing director Bob Moore. His lawyer did not respond to requests for comment this week.

BMO has also said its "portfolio had been marked to market each day by traders and the valuations confirmed independently, primarily by our principal external broker on a monthly basis."

Sources in the industry say it is standard practice to have multiple independent sources verify the value of a trading portfolio.

The document was signed with Opex Analytics, an Optionable service that "provides specific market information based on actual market quotes obtained by Optionable."

Optionable announced in September that it would begin offering Opex Analytics, "a real time mark-to-market valuation service for natural gas and crude oil options," starting Nov. 15.

Last week, BMO said that "as our natural gas portfolio grew in the first few months of fiscal 2007, we sought additional verification of the valuations from other independent sources. Management subsequently initiated an external investigation of the trading activity which resulted in concerns with the reliability of quotes received from the principal external broker.

"At that time, we suspended our business relationship with the broker, pending the results of the external review," BMO said.