According to a press release dated September 17, 2008, a federal judge has thrown out a shareholder class action accusing energy derivatives brokerage Optionable Inc. of hiding improper deals with its largest client, Bank of Montreal. Judge Lewis Kaplan, overseeing the consolidated securities fraud cases in the U.S. District Court for the Southern District of New York, granted Optionable's motion to dismiss the amended complaint on Monday, saying a case had not been made for fraud.
As summarized by the Company’s FORM 10-Q for the quarterly period ended June 30, 2008, on May 11, 2007, two lawsuits were filed in the United States District Court for the Southern District of New York. Subsequently, five additional lawsuits were filed in the United States District Court for the Southern District of New. Each of the lawsuits names the Company as a defendant and some of the lawsuits name as defendants all or certain of the directors and officers of the Company during the time period referenced. By Orders dated June 20, 2007 and July 3, 2007, several actions were consolidated under In re Optionable Securities Litigation, 07 CV 3753 (LAK). By Order November 20, 2007, Judge Kaplan granted the motion of KLD Investment Management, LLC to serve as Lead Plaintiff and approved its choice of counsel, Kahn Gauthier Swick, LLC. On January 17, 2008, Lead Plaintiff filed a Consolidated Amended Class Action Complaint. On February 15, 19, and 20, 2008 the Company and individual defendants filed motions to dismiss the Complaint. On April 1 and 4, 2008, Plaintiffs filed their oppositions to the Defendants' motions. On April 3, 2008 Judge Kaplan ordered the individual defendants to file only a single joint reply memorandum in response to Plaintiffs' oppositions. On April 22, 2008 the Company filed its reply memorandum of law in support of its motion to dismiss the Complaint, and the individual defendants filed their joint reply memorandum of the same.
The original Complaint alleges that the defendants Optionable Inc. and certain of its top executives failed to conduct an adequate due diligence investigation into the Company prior to the IPO, and failed to disclose at the time of the IPO that: (1) two of the Company's board members, including Chairman Mark Nordlicht, and its only purported independent director, Albert Helmig, were actually related parties and board members of a company called Platinum Energy; (2) the Company's customer base suffered from greater concentration than previously reported, with Bank of Montreal directly connected to over 80% of revenues, higher than the 20% to 30% reported; and (3) defendants had conspired with Bank of Montreal ("BMO") brokers to provide false trade data that was designed to avoid reporting hundreds of millions of dollars in trading losses.
It was only beginning in late April 2007 -- after defendants sold $28.94 million of their own shares to NYMEX Holdings in a private sale -- that investors learned the truth about the Company. On April 30, 2007, BMO's announcement of over $300 million in options-related losses shed light on the magnitude of Optionable's reliance on BMO for a large portion of its revenues. Days later on May 10, 2007, BMO suspended trading through Optionable and announced that its private forensic accountants had discovered that its own brokers -- who by then had been terminated -- had conspired to under-report trading losses, in order to maintain trading and avoid accountability to BMO.
On April 27, 2007, BMO announced that it had lost between $300 and $400 million on trades executed through Optionable. In response to this disclosure, the Company's stock dropped 33%. Then, on May 8, 2007, BMO announced it was suspending all of its business relationships with Optionable. Finally, on May 10, 2007, it was disclosed that Deloitte & Touche LLP had conducted an audit of the trades BMO had conducted with Optionable and found that there had been "serious mismarking of the book of natural gas options." On this news, the price of Optionable fell further to $0.84, representing a total drop of nearly 90%. During the Class Period, Optionable stock traded as high as $9.10 per share.