By Pam Martens and Russ Martens: September 28, 2021 ~
The biggest trading scandal in the Federal Reserve’s 108-year history took down two Federal Reserve Bank Presidents yesterday. Boston Fed President Eric Rosengren, who traded in and out of REITs last year in amounts of $1,000 to $50,000, will leave this Thursday; Dallas Fed President Robert Kaplan, whose trading made Rosengren look like a Boy Scout, will step down from his post at the end of next week. Kaplan was making repeated trades of “over $1 million” in S&P 500 futures (an instrument used during and after stock exchange hours by hedge funds) as well as making “over $1 million” trades in a litany of individual stocks.
Just as a poker player can give away his hand with a tell, financial disclosure statements can also provide a tell as to the name of the Wall Street firm that is placing the trades.
Dallas Fed President Robert Kaplan has a “tell” on his financial disclosure forms that suggests he was placing at least some of his trades at the Wall Street firm where he worked for 22 years, Goldman Sachs, the global trading behemoth.
Most trading accounts at the major firms have what is called a “sweep account.” When a trader sells a stock, instead of the proceeds sitting in cash without earning interest, the proceeds are “swept” into a designated money market fund. The only money market fund that Kaplan indicates he owns is listed as the “GS Financial Square Money Market Fund” on his financial disclosure form. GS stands for…wait for it…Goldman Sachs.
The Goldman Sachs Financial Square Money Market Fund was not listed on Kaplan’s financial disclosure form for calendar year 2015, the year he joined the Dallas Fed. But it was listed on his financial disclosure forms for years 2016 through 2020.
We have now reached out via email, over multiple days, to a total of five of Goldman Sachs’ media relations staff, including a Managing Director and Head of Media Relations, inquiring as follows:
“Wall Street On Parade has significant reasons to believe that Dallas Fed President, Robert Kaplan, was conducting at least some of his trades that have been in the news recently through an account at Goldman Sachs.
“(1) Can you tell me if Kaplan was trading his numerous ‘over $1 million’ S&P 500 futures trades through Goldman Sachs or (2) his ‘over $1 million’ individual stock trades at Goldman Sachs; or (3) if he was conducting both S&P 500 futures and individual stock trades at Goldman Sachs.”
We heard dead silence from all five media relations folks.
In the second email we reminded Goldman Sachs of the following:
“As you may know, Goldman Sachs remains under a Deferred Prosecution agreement for a criminal charge with the Department of Justice and an ongoing 3-year probation period. Given the serious issues we raise in an article today around the failed compliance obligations of the brokerage firm that conducted these trades for Kaplan, we would expect that Goldman Sachs would want to get it on the public record quickly if it did not conduct these trades for Kaplan.”
Again, all we heard was dead silence from Goldman Sachs.
Can we conclusively say that Kaplan was making his trades with the firm where he spent the bulk of his career, no we can’t. But we can conclusively state that two members of the Dallas Fed Board of Directors, speaking on behalf of the entire Board, released a materially false statement yesterday regarding Kaplan’s relationship with Goldman Sachs.
The statement released yesterday by Greg Armstrong, Chair of the Board of Directors of the Dallas Fed, and Thomas Falk, Deputy Chair “on behalf of and with the unanimous endorsement of” the entire Board, included these two sentences:
“Upon joining the Bank, Rob systematically sold all of his personal holdings related to financial institutions over which the Federal Reserve had regulatory oversight or were otherwise restricted. Rob also conducted his investment activities in accordance with the rules and policies of the Federal Reserve System.”
The first sentence is materially false. Kaplan held a position offered by Goldman Sachs, a “financial institution over which the Federal Reserve had regulatory oversight” at the time of his first financial disclosure at the Dallas Fed in 2015. He held multiple positions offered by Goldman Sachs after joining the Dallas Fed.
The second sentence is spurious; Kaplan violated at least two of the prohibitions in the Dallas Fed Code of Conduct.
Goldman Sachs is a Global Systemically Important Bank (GSIB) over which the Federal Reserve has had regulatory oversight since Goldman became a bank holding company on September 21, 2008. Moreover, we know for fact that the Federal Reserve stations its bank examiners at Goldman Sachs because one of them, Carmen Segarra, filed a lawsuit stating that she was fired by the New York Fed when she wanted to write up a negative examination of Goldman. Also, unfortunately, Goldman Sachs is actually a shareholder (owner) of the New York Fed – a fatal flaw in the governance structure of any regulator.
Kaplan lists on his financial disclosure form for 2015, when he joined the Dallas Fed, and for years 2016 through 2020, the following asset: “Exchange Place LP” in an amount of “over $1 million.”
According to an SEC filing dated October 28, 2019 for the Exchange Place LP, it is located at Goldman Sachs headquarters, 200 West St. in Manhattan, and the executives listed as its officers are also located at 200 West St. and, indeed, worked for Goldman Sachs at the time of this SEC filing. Scroll to the bottom of the SEC form and it is signed by David Kraut, who at the time was a Goldman Sachs Managing Director and worked as counsel in the legal department of Goldman Sachs in 2019.
The SEC filings for Exchange Place LP are cryptic. There is no prospectus filed to explain what this offering is all about. The filings that are located at the SEC carry this caveat about the public getting any transparency on the offering: “States cannot routinely require offering materials under this undertaking or otherwise and can require offering materials only to the extent NSMIA permits them to do so under NSMIA’s preservation of their anti-fraud authority.”
After Kaplan joined the Dallas Fed, he owned three proprietary products from Goldman Sachs: the previously mentioned Goldman Sachs Financial Square Money Market Fund; the Goldman Sachs Medium Term Managed Corporate Bond Account and the Goldman Sachs Private Equity Fund 2000. (See Kaplan’s 2015 through 2020 financial disclosure forms here.)
As for the Board of Directors’ statement that Kaplan “conducted his investment activities in accordance with the rules and policies of the Federal Reserve System,” we have previously explained that the Code of Conduct of the Dallas Fed contains an Appendix A on “Disqualifying Interests” which reads in part as follows:
“De minimis exemption for a matter of general applicability. An employee may participate in a particular matter of general applicability, such as rulemaking, where the disqualifying financial interest arises from ownership by the employee, his or her spouse or minor children of securities issued by one or more entities affected by the matter, if:
“(1) the securities are publicly traded, or are municipal securities, the market value of which does not exceed; (a) $25,000 in any one such entity; and (b) $50,000 in all affected entities;
“or (2) the securities are long-term federal government securities, the market value of which does not exceed $50,000.”
Kaplan was a voting member of the Federal Open Market Committee (FOMC) of the Federal Reserve in 2017 and 2020. His votes helped to set policies of major significance, including cutting the Fed Funds rate to the zero-bound range in 2020. At the time, there was nothing “de minimis” about his “over $1 million” trades.
In addition, the Code of Conduct of the Dallas Fed mandates the following:
“Each employee has a responsibility to the Bank and to the System to avoid conduct which places private gain above his or her duties to the Bank, which gives rise to an actual or apparent conflict of interest…”
The fact that Kaplan’s trading conduct has garnered negative press coverage in every major media outlet covering the Federal Reserve shows that he clearly failed to live up to the standard mandated above.
Federal Reserve Chairman Jerome Powell brought further ill repute on the Federal Reserve yesterday by lavishing praise on Kaplan as part of the press statement about his departure. Powell said this:
“We are grateful for Rob’s six years of service as President of the Federal Reserve Bank of Dallas and as a valued colleague in the FOMC. He has been a passionate and forceful public voice on a wide range of issues, including the critical value of early childhood education and literacy. In addition, he strengthened the Bank’s economic research and played a very constructive role in Systemwide management, budget and technology efforts. We wish him well.”
This is an Alice in Wonderland statement from the second most powerful man in the United States. Powell has no idea at this point what the SEC or the Justice Department will find if one or both investigates the grainy details of Kaplan’s trading. Thus far, Kaplan has failed to comply with the financial disclosure requirement that he list the dates of his purchases and sell transactions like the other Federal Reserve Bank presidents do, including Rosengren. That in itself is a screaming red flag, making it impossible to see if Kaplan was trading when he was privy to the Fed’s market-moving information.
In addition, an independent investigation has yet to determine if the brokerage firm that was placing Kaplan’s trades engaged in insider trading or duplicated his trades on the belief that Kaplan had insider information.
By lavishing praise on Kaplan, Powell has clearly prejudiced the outcome of any Justice Department or SEC investigation. For that reason, and many others concerning his own behavior with financial institutions, Powell needs to be replaced at the helm of the Fed.
The Dallas Fed Board needs to apologize to the American people for its lapses in allowing Kaplan’s trading to continue unimpeded for more than five years; to claw back any profits he made; and to apologize for, and publicly correct, yesterday’s materially false statements.