15 May 2007

BMO Suspends Trading with Optionable Inc.

The Globe and Mail, Andrew Willis & Tara Perkins, 16 May 2007

Bank of Montreal has turned down several offers for its commodity trading portfolio, including the money-losing positions in natural gas derivatives.

It has fielded calls from at least 10 rivals interested in purchasing the portfolio. Sources close to the bank said overtures came from Chicago hedge fund Citadel Investment Group LLC and Goldman Sachs Group Inc.

"The expectation was BMO's new CEO might want to just dump the problem on someone else, just as CIBC did with its Enron exposure when Gerry McCaughey took the top job," said one financier at a rival Canadian bank.

But newly named BMO chief executive officer Bill Downe turned down all offers.

Sources say BMO management remains confident the bank can manage down the natural gas portfolio and keep losses below the range set out in late April, when the bank first revealed the problem. The bank is taking this stance despite the fact that rivals in the derivatives market are aware of BMO's positions, and may try to trade against them.

"BMO has taken the hit on this position. It's not like they face a capital crunch, the way that hedge funds like Amaranth and Long-Term Capital Management did when they started selling portfolios at fire-sale prices," said one source in the derivatives market.

The bank announced on April 27 that it expects to report paper trading losses of between $350-million and $450-million along with its second-quarter earnings, which will come out on May 23. It said it might experience further gains or losses as it repositioned its portfolio, but it expected those would be of a smaller magnitude.

BMO blamed an increasingly illiquid natural gas market in which volatility had dropped to historically low levels, in conjunction with a refinement in how it estimates the value of its portfolio.

In the weeks since, it has announced that it will stop doing business with the brokerage firm Optionable Inc. pending the results of an external review of the situation, and said that two of its employees, including natural gas trader David Lee, had been put on a leave of absence.

BMO had been working with Optionable for at least seven years, according to one person close to the brokerage. That same person said that David Lee was "very close" to Optionable CEO Kevin Cassidy. "They're close friends and they have a long-standing relationship," this person said.

Mr. Cassidy could not be reached for comment yesterday. On a May 1 conference call with analysts and investors, he was asked whether Mr. Lee was compensated by Optionable.

"Absolutely not," Mr. Cassidy said.

"He has no ownership in the company and no relationship, besides a broker-client relationship."
Reuters, 15 May 2007

The flurry of deals involving banks in the U.S. Midwest represents an opportunity for Bank of Montreal to sell its Chicago-based Harris Bank unit at a high price, an analyst said yesterday, estimating a sale could garner at least US$6-million.

CIBC World Markets analyst Darko Mihelic said the likelihood that Bank of Montreal will hive off Harris Bank is low but may be growing.

"As the trials and tribulations surrounding LaSalle's sale continue, we believe BMO has an opportunity to step up, invite a consortium of large U.S. banks into a data room and set off an auction process for Harris Bank," Mr. Mihelic said in a note to clients.

"The result could be a very high premium for an asset that is dragging down BMO's overall results," he said.

LaSalle Bank, the U.S. arm of ABN AMRO, is the target of two competing bids: a US$21-billion offer from Bank of America and a US$24.5-billion bid from a consortium led by Royal Bank of Scotland, also bidding for ABN.

National City Corp. said this month it will buy MAF Bancorp Inc. for US$1.9-billion in stock. Mr. Mihelic said these deals are likely to stiffen competition in Illinois's banking sector, which will affect Harris Bank. But he predicted the Canadian bank is most likely to keep Harris as is.
Dow Jones Newswires, 14 May 2007

It's only been three months since Genuity Capital Markets cut Bank of Montreal to sell, and in that time, there's been plenty of bad news. But the firm says stock has lagged peers enough that firm now moves to hold on relative valuation and limited downside risk. Notes that dividend yield is particularly appealing. As for recent commodity trading losses, Genuity says it now looks as if rogue trader rather than risk process at fault. And even with C$400M pre-tax charge, capital ratios strong.
Financial Post, Duncan Mavin, 11 May 2007

Executives at Optionable Inc., the New York commodities broker linked to Bank of Montreal's natural-gas trading fiasco, cashed in stock worth US$27-million days before the Canadian bank received a strongly worded auditor's report into the activities of its options trading desk.

Three senior executives at Optionable sold the stock to the New York Mercantile Exchange (Nymex) on April 10.

Less than three weeks later, BMO -- Optionable's biggest customer -- was handed a report by Deloitte and Touche LLP that prompted the bank to announce it had uncovered natural- gas trading losses valued at between $350-million and $450-million -- a record for a Canadian bank.

Optionable's stock has tumbled 88% since BMO's losses surfaced. The broker's share price closed yesterday at US85?, compared with US$7.01 before the bank revealed its losses.

Since receiving the Deloitte report, BMO has suspended its business relationship with Optionable.

The bank has also said David Lee, the trader believed to be responsible for the losses, is on leave, along with Bob Moore, the bank's executive head of commodity products.

Sources say Mr. Lee has a close personal relationship with executives at Optionable, including Kevin Cassidy, the chief executive, who made US$5-million out of the April 10 share transaction.

In the same deal, Mark Nordlicht, Optionable's former chairman, picked up almost US$19-million for seven million shares sold to Nymex.

Mr. Nordlicht resigned from his position at Optionable last week, to be replaced by Albert Helmig, a former vice-chairman of Nymex. Both men are also on the board of directors of Platinum Energy Resources Inc., a Montvale, N.J.-based oil-and-gas trading business.

Optionable first said the executives would sell a 19% stake in the company to Nymex on Jan. 22 in a deal that made Nymex the company's single biggest shareholder. The broker's stock soared to a high of US$8.63 in February after the announcement.

In addition to losing the business of its biggest customer, the broker revealed on Wednesday that Nymex has a technology that rivals Optionable's key OPEX electronic trading platform. In a filing with the U.S. Securities and Exchange Commission, Optionable said it "is unable to quantify the impact of this potential competition on its business, including its future results of operations and financial condition."

And there was more bad news for Optionable yesterday when a New Orleans-based law firm said it has "initiated an investigation into Optionable to determine whether it has violated federal securities laws." Lewis Kahn of Kahn Gauthier Swick, LLC said the outcome of the investigation could be a class-action lawsuit against Optionable on behalf of shareholders.

The law firm said it will look into Optionable's relationship with Bank of Montreal and Nymex, among other issues.

BMO has said its own "external investigation" is ongoing.

Meanwhile, calls to Optionable were not returned.
Financial Post, Duncan Mavin, 11 May 2007

A class-action lawsuit launched against New York-based commodities broker Optionable Inc. alleges the company was "engaged in improper deals" with Bank of Montreal and helped the bank's star options trader cover up massive losses.

The lawsuit, from Hartford, Ct.-based law firm Schatz Nobel Izard, P.C., claims Optionable helped a BMO natural-gas trader mismark his book of trades and falsify trading prices in connection with losses of between $350-million and $450-million.

Since announcing the losses - the biggest ever for a Canadian bank - BMO has said natural-gas options trader David Lee is on leave. The bank has also suspended its business relationship with Optionable, which made 30% of its revenue directly from business with BMO.

"Defendants were able to retain BMO [as a client] only because they helped its star options trader mismark options, falsify the trading price at which BMO traded those options, and hide massive losses incurred by BMO as a result of those trades," the suit alleges.

"While the stock [of Optionable] was trading at artificially inflated prices, as a result of this fraudulent scheme, Defendants sold roughly 10,758,886 shares of Optionable, for proceeds of approximately US$28,941,403," the suit claims.

Calls to Schatz Nobel Izard were not returned. A spokesman for BMO declined to comment. Attempts to reach a spokesperson for Optionable were unsuccessful.

As first reported in the Financial Post, BMO revealed the losses after the results of an investigation by auditors Deloitte and Touche LLP into the trading practices of Optionable and Mr. Lee. Executives at Optionable cashed in more than US$27-million worth of shares just days before the Deloitte report on its investigation was handed to the bank.

The brokerage's stock has plunged 85% since BMO's losses surfaced, from US$7.01 on April 27 to US$1.01 at the close of trading on Friday. More than 9.5 million Optionable shares changed hands on Friday, compared to an average over the past six months of a little more than 1 million transactions.
The Globe and Mail, Tara Perkins, 9 May 2007

BMO is suspending its business relationship with Optionable Inc., a New York-area brokerage, pending the results of an external review.

The review comes after the bank surprised investors with the announcement that it expects to record $350-million to $450-million in paper losses this quarter stemming from commodity trades, particularly in natural gas.

Optionable is an 18-employee firm that moved into a new 5,500-square-foot office in Valhalla, N.Y., in January. Its over-the-counter brokerage operations are there and it also has floor operations at the New York Mercantile Exchange.

About one-quarter of Optionable's $16.1-million (U.S.) in revenues last year came straight from BMO.

Optionable charges up to $5 for each contract of 10,000 million British thermal units of natural gas.

Optionable executives huddled together late Tuesday evening upon learning the news. One person with knowledge of the situation said it came as a shock as the Bank of Montreal had done business with Optionable earlier Tuesday.

In a statement read over the phone, Optionable said: "We saw the news release that was put out by BMO Financial Group. It was the first we had heard of this action. We have not been contacted by BMO Financial Group or by anyone working with them with regards to an external review. We have every confidence that a fair and objective review will show that we've acted appropriately, professionally and correctly for BMO Financial Group, as we have done for all our clients. Optionable is a broker and not a financial advisor."

BMO was becoming more and more important to Optionable's bottom line.

In 2005, only 18 per cent of Optionable's $5.8-million in revenues came from the bank.

BMO announced that it would suspend its dealings with Optionable, including all derivatives trading through that firm.

BMO made the announcement after putting David Lee, a natural gas trader, and Bob Moore, executive managing director of commodity products, on leaves of absence.

Mr. Lee was recruited to the bank in 1997, as it assembled its own dream team to run its nascent commodity derivatives group.

The bank was starting the group from scratch to build up its competency in derivatives.

In his mid-20s at the time, Mr. Lee was one of the key hires in an initial group of 10. He joined as an analyst after leaving Bank of New York, where he had been in the accounting group.

As the BMO group evolved, Mr. Lee was promoted from analyst to trader.

He later became the bank's point man dealing with Optionable.

Optionable's stock suffered after BMO announced its trading losses.

On a recent conference call, Optionable's executives assured investors that "we still have all our customers."

Since the review began, BMO has also changed the operating structure of BMO Capital Markets to add more oversight to the commodities business.

While BMO made up about one-quarter of its revenue last year, Optionable boasts in regulatory filings that it has "a number of blue-chip clients which actively and regularly trade in this market which facilitates our search of counterparties and allows us to trade quickly on behalf of our clients."

But the brokerage also cautions that "substantially all of our competitors have more capital, longer operating histories, greater brand recognition, larger client bases and significantly greater financial, technical and marketing resources than we do."
Financial Post, Duncan Mavin, 9 May 2007

Bank of Montreal says it will stop trading with U.S. commodities broker Optionable Inc. pending the results of its investigation into $450-million of natural-gas trading losses.

The brokerage firm makes 30% of its earnings from its business with BMO. Many traders and brokers said Optionable's executives had a close relationship with BMO trader David Lee, who is believed to be responsible for placing the bank's bad natural-gas option trades.

"BMO is suspending all of its business relationships with the brokerage firm, Optionable, Inc., as well as all derivatives trading through that firm, pending the results of a full external review which is ongoing," the bank said in a statement.

BMO confirmed on Monday that trader David Lee and Bob Moore, the bank's executive head of commodity products, had both been put on leave pending the results of its review.

Optionable's stock has fallen by a third since BMO announced the trading losses -- the biggest ever for a Canadian bank.

However, Albert Helmig, Optionable Inc.'s chairman, said losing BMO's business is not a disaster for the brokerage.

"In the extreme scenario, that they go away tomorrow, someone else comes in and fills BMO's place," said Mr. Helmig, a former vice-chairman of the New York Mercantile Exchange who took over as chairman of Optionable last week following the resignation of Mark Nordlicht.

Mr. Helmig, who spoke in an interview yesterday, also questioned BMO's explanation for its trading losses.

Bill Downe, BMO's chief executive, has blamed the losses on a sharp decline in the volatility of natural-gas prices, as well as a drying up of the demand, or liquidity, for natural-gas options.

But Mr. Helmig said liquidity was not to blame.

He also said BMO could be making its trading position worse by openly acknowledging its losses rather than trying to work them out privately.

Companies trading in natural-gas options get into trouble "when there's a loss of confidence that creates a liquidity scare," Mr. Helmig said.

"For instance, I might say that Bank of Montreal handled this poorly, in that they gave notice to the market that there was an issue," he said.
• Click here to read more about BMO's commodity losses.