Former CEO of Commodities Brokerage Firm Sentenced in Manhattan Federal Court to 30 Months in Prison for Natural Gas Options Fraud Scheme

Preet Bharara, the United States Attorney for the Southern District of New York, announced that Kevin Cassidy, the CEO of the commercial brokerage firm Optionable, was sentenced today to 30 months in prison for his participation in a scheme to defraud the Bank of Montreal (BMO) by deliberately misstating the value of the bank’s multi-million-dollar natural gas derivatives portfolio. As part of the scheme, Cassidy conspired with David Lee, BMO’s former lead natural gas derivatives trader, to fraudulently subvert the process by which BMO attempted to independently verify the value of its natural gas derivatives portfolio. Their conspiracy allowed Lee’s own mismarking scheme to go undetected. Cassidy, who previously pled guilty in August 2011 to one count of conspiracy to commit wire fraud, was sentenced earlier today by U.S. District Judge Thomas P. Griesa.

According to the one-count Information and other documents previously filed in Manhattan federal court:

As a regular practice, BMO required its commodities traders to “mark their books” on a daily basis by assigning the fair market value to each open financial position in the trader’s portfolio. BMO used these marks to value its commodities trading positions, to determine its daily commodities-related profits and/or losses, and to assess BMO’s risk exposure related to its trading positions. Through a process called “independent price verification,” BMO sought to verify the accuracy of the marks that commodities traders assigned to their positions by comparing those marks to independent market quotes for similar positions.

Beginning in May 2003, Lee began overvaluing, or “mismarking,” his natural gas book by deliberately overstating the fair market value of some of his positions. This made his book look more profitable to BMO than it was and earned him larger bonuses. As part of its independent price verification of Lee’s marks, BMO regularly compared them to price quotes for similar positions that BMO obtained from third-party brokerage firms, including Optionable.

Beginning in December 2004, Cassidy and Lee conspired to subvert BMO’s independent price verification process by having Lee supply Cassidy with price quotes for positions in BMO’s natural gas book. Cassidy then reported these quotes to BMO without revealing that they had actually originated with Lee himself. Even though Cassidy was aware that BMO was using the quotes he supplied for the purpose of evaluating and double-checking the accuracy of how Lee was marking his book, Cassidy and Optionable fraudulently presented the quotes as having come from a source independent of Lee while concealing that, in fact, they had been supplied directly by Lee.

Cassidy helped Lee subvert BMO’s independent price verification process to incentivize Lee to use Optionable to execute commission-generating trades on behalf of BMO. From 2004 to 2007, Optionable received an increasing amount of commission-generating trading business from BMO, and these commissions constituted a growing and material percentage of the company’s revenues. By 2007, Optionable obtained more than 40 percent of its annual brokerage revenues from BMO.

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In addition to his prison term, Judge Griesa sentenced Cassidy, 52, of Bedford Hills, New York, to three years of supervised release and ordered him to pay forfeiture in the amount of $200,000.

Lee pled guilty in November 2008 and is awaiting sentencing.

Mr. Bharara praised the investigative work of the Federal Bureau of Investigation. He also thanked the U.S. Commodity Futures Trading Commission, the U.S. Securities and Exchange Commission, and Manhattan District Attorney’s Office for their assistance.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Michael A. Levy and Jillian B. Berman are in charge of the prosecution.