Friday, May 25, 2007

Optionable's Many Red Flags

The Globe and Mail, Tara Perkins & Sinclair Stewart, 25 May 2007

Optionable Inc., the tiny energy brokerage that is at the centre of a spiralling trading scandal, sits in a non-descript building in the small town of Valhalla, N.Y. But before its troubles began this year, before it was linked to a $680-million loss at Bank of Montreal, and slapped with a half-dozen class-action lawsuits, the energy firm occupied an office with Sleepy Hollow Coffee Roasters in nearby Briarhill Manor.

Had anyone bothered to look, they might have noticed something more unusual than the shared address. They might have noticed that Optionable was charging the coffee maker thousands of dollars a year for administrative services; that the coffee maker was owned by two of the firm's most senior employees, including its chief executive officer; and that these two officials ran another firm, Capital Energy Services, that charged Optionable $50,000 (U.S.) a year, plus expenses, to help carry out derivatives trades on the New York Mercantile Exchange.

Had they looked a little deeper, they might have even discovered that one of these officials, Kevin Cassidy, served time in prison for fraud, and was released just two years before he was named Optionable's CEO.

But this would have been merely one red flag that should have triggered more and earlier investigation into a dizzying network of related-party transactions and insider dealings. The fact that it didn't has raised serious questions about the quality of the diligence process at BMO, which was by far Optionable's biggest client (and which relied heavily on the firm to verify its trading positions each month), as well as Nymex, which made a major investment in Optionable, and even nominated one of its executives to the company's board.

Spokespersons for BMO and Nymex have declined to say how much their companies knew about Optionable before they built close business relationships with the firm. Both have launched internal reviews of the matter.

Yesterday, unconfirmed news reports surfaced that the U.S. Securities and Exchange Commission has initiated its own investigation into the Optionable fiasco, and is looking both at its business practice of offering energy traders stock warrants in exchange for their trading business (again, something that was fully revealed in filings, had anyone checked) as well as its relationship with affiliated companies, like Sleepy Hollow.

Some firms have confirmed that Optionable offered them shares for their business, but it's not clear whether anyone at BMO's New York commodities trading desk received any.

Optionable, whose stock price has plummeted in the wake of these revelations, is urgently trying to sever some of its related ties and revive its slumping business amid this uproar. BMO has already stopped doing business with the firm, as has Sempra Energy and Coral Energy, which once accounted for 10 per cent of Optionable's business.

BMO trader David Lee, and his boss, Bob Moore, were suspended last month and officially left the bank a week ago. Both men were said to be friends with Optionable's Mr. Cassidy, according to sources.

The embattled energy brokerage revealed yesterday that its newly minted CEO, Albert Helmig, who replaced Mr. Cassidy when he abruptly resigned this month, has left the board of Platinum Energy Resources Inc. Another Optionable director, James Bashaw, also quit the board of Platinum Energy, the firm said.

Platinum, like Sleepy Hollow, is one of a handful of related companies that investigators are expected to look into as they try to figure out how BMO managed to rack up hundreds of millions of dollars in trading losses in the span of mere months.

While both men said the departures had no reflection on Platinum Energy's business, it's clear Optionable is trying to strike a pose of independence.

New Jersery-based Platinum Energy was founded by its chairman Mark Nordlicht, who is also a co-founder and former chairman of Optionable (he resigned from the company earlier this month, after BMO revealed its trading losses).

Optionable neglected to mention Mr. Helmig's ties to Platinum when they announced he would take over as chairman and CEO. It also failed to note that Mr. Cassidy, who stepped down as CEO before the company went public in 2004, and then regained the role not long after, had spent time in prison.

The lack of disclosure is one thing that irked lawyers like Michael Swick of the class-action firm Kahn Gauthier Swick LLC who filed the lawsuits.

"If you look back at the registration statement and prospectus, you'll see that they take pains to provide paragraphs about each of these guys," Mr. Swick said in a recent interview. "In the paragraph on this guy Nordlicht, they indicate he is a chairman of a company called Platinum Energy. If you look at this statement about Helmig, they don't tell you anything about his relationship to Platinum Energy. That, to me, is particularly disturbing."

Mr. Bashaw did not return a request for comment yesterday. Optionable has repeatedly declined requests to interview Mr. Helmig, who served as vice-chairman of the New York Mercantile Exchange in the late 1990s. Mr. Cassidy's lawyer says he cannot comment due to several class-action lawsuits that have been filed.

Mr. Nordlicht, meanwhile, has also had several related-party dealings with Optionable over the years. Before taking Platinum Energy public in 2005, one of the several companies he operated was Platinum Value Arbitrage Fund LP. That fund agreed to lend Optionable up to $500,000 in 2003. Optionable also struck an agreement with Mr. Nordlicht that gave him a 20-per-cent reduction in trading fees in exchange for a lump-sum payment of $1.2-million.

Meanwhile, Optionable funded a 2003 operating loss by issuing notes payable to Mr. Nordlicht and Platinum Partners LP "amounting to $1,880,000 which accrued interest of $240,000," the company said in May, 2005, regulatory disclosures.

Mr. Nordlicht's father, Jules Nordlicht, was a major Optionable shareholder, and owned nearly 2.2 million shares of the company as of March, 2006. The elder Mr. Nordlicht pleaded guilty to price rigging in the crude oil market in 1978, when he was president of Pressner Trading Corp. He and four other defendants were indicted for creating more than $27-million in fraudulent tax losses through prearranged trading of commodity futures and price manipulation in the crude oil markets.

When reached at his home by phone recently, Jules Nordlicht declined to comment.

Optionable also had unusual business dealings with Mr. Cassidy. When he temporarily stepped down as CEO in 2004, he continued to work at Optionable as a consultant. Optionable awarded him 1.2 million warrants, paid to a private holding company called Pierpoint Capital, that were "intended to induce Mr. Cassidy to introduce additional customers to the company," according to a 2005 8-K filing with U.S. regulators.

Edward O'Connor, who co-owns the coffee roaster with Mr. Cassidy and is also a managing partner of Capital Energy, the firm that charged Optionable for trading services, replaced Mr. Cassidy as CEO between March, 2004, and October, 2005. Mr. O'Connor has been the public face of the company, appearing on CNBC earlier this year and heading up investor road shows last fall.

Optionable's shares soared over the past several months, after it announced Nymex would pick up a 19-per-cent stake in the company. That deal was finalized in April, when Mr. Cassidy, Mr. Nordlicht, and Mr. O'Connor cashed out approximately $29-million worth of stock in the company, according to a lawsuit filed against the company and the three men.

Nymex placed a representative, Ben Chesir, on Optionable's board as part of the deal. It announced it was pulling him off on May 14. This week, Nymex's CEO said the company might take legal action against Optionable.