It’s Been More than Seven Months and Still No Investigative Findings on the Fed’s Trading Scandal

By Pam Martens and Russ Martens: April 21, 2022

Robert Kaplan, President of the Dallas Fed

Robert Kaplan, Former President of the Dallas Fed

On September 7 of last year, Wall Street Journal reporter Mike Derby broke the story that “Federal Reserve Bank of Dallas President Robert Kaplan made multiple million-dollar-plus stock trades in 2020, according to a financial disclosure form provided by his bank….”

Kaplan was a sophisticated trader who previously worked at Goldman Sachs for 22 years, rising to the rank of Vice Chairman. His financial disclosure forms suggest that Kaplan maintained a trading relationship with Goldman Sachs, since he lists proprietary products created by “GS,” short for Goldman Sachs. It would be highly inappropriate for Kaplan to have a trading relationship with Goldman Sachs since it is a bank holding company supervised by the Fed.

The strange thing about Derby’s reporting on Kaplan is that it didn’t capture the most scandalous aspect of Kaplan’s trading. According to Kaplan’s financial disclosure forms, he was trading in and out of S&P 500 futures in lots of “over $1 million.”

S&P 500 futures trade around the clock from Sunday evening to Friday evening while the U.S. stock markets are open only from 9:30 a.m. to 4:00 p.m. ET on weekdays. The S&P 500 futures trades can be highly leveraged and used to make directional bets on which way the market will move. Someone sitting on inside information could make a fortune trading in and out of S&P 500 futures.

In 2020 Kaplan sat as a voting member of the Fed’s Federal Open Market Committee (FOMC) and had regular access to inside information. Through much of 2020, the Fed was making dramatic market-moving announcements of interest rate cuts and the creation of an ever-growing list of emergency lending facilities. From January 1, 2020 through April 30, 2020, based in no small part on these Fed announcements, the S&P 500 Index provided a roller-coaster ride from down 30 percent in late March to up 10 percent by the end of April.

The fact that Kaplan was making directional bets with S&P 500 futures in 2020 while simultaneously having access to inside information warranted a criminal referral by Fed Chair Jerome Powell to the U.S. Department of Justice. Instead, Powell said this when Kaplan abruptly announced his “retirement” as Dallas Fed President on September 27, 2021:

“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.”

Kaplan’s “retirement” announcement came on the same day that Wall Street On Parade filed an in-depth report, revealing that Kaplan had been making his S&P 500 bets for the entire five years he had been President of the Dallas Fed, including the pivotal year of 2020. See our September 27, 2021 report: Robert Kaplan Was Trading Like a Hedge Fund Kingpin for Five Years while President of the Dallas Fed; a Dozen Legal Safeguards Failed to Stop Him. See Kaplan’s financial disclosure forms from 2015 through 2020 here.

Numerous other Fed officials have been implicated in the trading scandal, including Fed Chairman Powell himself.

On January 6 of this year, Dennis Kelleher, the President and CEO of the watchdog Better Markets, said this is a statement regarding how Fed Chair Powell has handled the scandal:

“Rather than condemn that shameful conduct and come clean with the American people, the Fed has engaged in a cover up, refusing to disclose the facts or punish anyone. Indeed, the Fed Chairman himself has repeatedly minimized if not exonerated the trading, inaccurately and misleadingly blaming outdated Fed policies. Having taken those public positions, he then merely called for a self-investigation of the Fed by the Fed’s in-house Inspector General, who the Chair appointed and who reports to the Chair. The Fed’s IG investigating the trading, including his boss’s trading, and determining if his boss’s many public statements exonerating everyone at the Fed were inaccurate, false, or misleading will have little if any credibility.”

Kelleher’s assessment in January was spot on. And here we are today, more than seven months after the scandal broke in the press with no findings of fact from the Justice Department, the SEC or even the deeply-conflicted Fed Inspector General. What we have instead is a new Fed scandal involving a blanket news blackout on the trillions of dollars doled out by the Fed to Wall Street’s trading houses.

Bloomberg News reporter Craig Torres attempted to extract an answer about Kaplan’s trades from Fed Chairman Powell at his press conference on January 26 of this year. The exchange went like this:

Torres: “Chair Powell, I have a quick administrative question. You know, Robert Kaplan’s disclosure of his securities transactions: In a couple of months, Chair Powell, or maybe sooner, you and I will file our tax returns. And we’ll list transactions and all kinds of things. And next to those transactions we’ll put dates. And Bloomberg asked for the dates of Mr. Kaplan’s transactions. The Dallas Fed is not giving us the dates. And I don’t see why this is a matter for the Inspector General or anybody else. I mean, why can’t he give us the dates? Will you help us get the dates of those transactions? Thanks.”

Powell: “I know you’ve been all over this issue with my colleagues, Craig, on the issue of information. We don’t have that information at the Board. And, you know, I had — I asked the Inspector General to do an investigation, and that is out of my hands. I’m playing no role in it. I seek to play no role in it. And I don’t — I really — I can’t help you here today on this issue. And I’m sorry I can’t.”

Powell’s response is either a lie or an example of Powell’s gross incompetence as the leader of the Fed. The law required Kaplan to list the dates of his trades on his financial disclosure form. Every other Fed President listed the dates of their trades. Only Kaplan placed the word “multiple” in the space where the date should have been, thus making it impossible to see if he traded ahead of or during key Fed announcements. The general counsel and/or ethics officers at the Fed who were reviewing these financial disclosure forms should have certainly spotted and flagged Kaplan’s S&P 500 trades. The fact that the conduct continued for five years shows gross mismanagement at the Fed.

On October 12 of last year we filed a Freedom of Information Act request (FOIA) with the Federal Reserve, asking for the dates of Kaplan’s trades and expedited processing of our request since the public had been improperly denied this information from Kaplan for five years.

On October 22, we received the following response from Margaret McCloskey Shanks, the Deputy Secretary of the Federal Reserve Board of Governors who serves in the dual role of Chief FOIA Officer for the Fed:

“I have determined to grant your request for expedited processing in light of the fact that the topic of your request concerns a matter that has recently been the subject of news reporting. Accordingly, your request will be accorded priority treatment and processed as soon as practicable. By granting expedited treatment, your request will be processed ahead of other FOIA requests.”

But then on November 9, via email, we received a very strange communication, not from Margaret McCloskey Shanks, the Chief FOIA Officer for the Fed, but from the “Information Disclosure Section” of the “Board of Governors of the Federal Reserve System.” The letter informed us that:

“Pursuant to section (a)(6)(B)(i) of the FOIA, we are extending the period for our response until November 24, 2021, in order to consult with two or more components of the Board having a substantial interest in the determination of the request.”

Why should “two or more components of the Board” of Governors of the Fed be allowed to insert themselves into the public’s right to information?

On December 8, 2021, via email, we received the following notice from the Fed regarding our FOIA:

“Staff searched Board records and consulted with knowledgeable staff but did not locate any documents responsive to your request.”

Reuters newswires reported in February that it had also come away empty-handed when it filed its own FOIA request with the Fed. Reuters had requested “any 2020 communication ‘regarding the propriety of individual financial transactions’ exchanged between the Fed’s general counsel or ethics staff and members of the Board of Governors, then Dallas Fed president Robert Kaplan, or then Boston Fed president Eric Rosengren.”

The Fed told Reuters that it had “about 60 pages of correspondence between its ethics officials and policymakers regarding financial transactions conducted during the pandemic year 2020” but it “denied in full” the request by Reuters to gain access to the documents.

This is how a central bank of a banana republic operates. It’s a national disgrace to a country that calls itself a democracy. A full Senate vote on Powell for a second four-year term as Fed Chairman is expected at any time now.

Every engaged and concerned American should pick up the phone today and let their Senators know how they feel about another four years with Powell at the helm of the Fed.

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