After 16 Months, There Are Still No Arrests in the Fed’s Trading Scandal

Gunnar Larson g at
Thu Jan 5 07:10:02 PST 2023

By Pam Martens and Russ Martens: January 5, 2023 ~

Robert Kaplan, President of the Dallas Fed
Robert Kaplan, Former President of the Dallas Fed

This coming Saturday will mark the 16-month anniversary of former Wall
Street Journal reporter Mike Derby setting off a media firestorm with his
reporting that the then President of the Dallas Fed, Robert Kaplan, had
“made multiple million-dollar-plus stock trades in 2020,” a year in which
Kaplan was a voting member of the Fed’s Federal Open Market Committee
(FOMC) with access to inside information.

While the trading scandal spread to numerous other Fed officials, including
Fed Chairman Jerome Powell, the case against Kaplan seemed like a prime
candidate for a criminal investigation by the U.S. Department of Justice.

Not only was Kaplan sitting on inside information gleaned from the Fed, but
he was making market-moving statements himself on television.

When Wall Street On Parade obtained Kaplan’s trading records from the
Dallas Fed shortly after Derby’s article appeared, it became clear that the
stock trading was the least of the problem. Kaplan had also engaged in a
far more brazen type of trading for a man sitting on inside information.

With the apparent approval of the then General Counsel/Ethics Officer of
the Dallas Fed, Sharon Sweeney, who had signed her name to Kaplan’s trading
records for years, Kaplan had repeatedly placed million-dollar-plus trades
in S&P 500 futures and had been doing so for the entire five years he had
been at the Dallas Fed. (See Kaplan’s financial disclosure forms from 2015
through 2020 here.)

S&P 500 futures allow an individual to trade almost around the clock from
Sunday evening to Friday evening, while stock exchanges in the U.S. are
open only on weekdays from 9:30 a.m. to 4:00 p.m. ET. S&P 500 futures gave
Kaplan access to making directional bets on where the market would go after
the stock market closed, which is typically when the Fed makes
market-moving announcements. The most popular and liquid S&P 500 futures
contract is the E-mini. A trader can obtain as much as 95 percent leverage
on this contract – far more than the 50 percent leverage that is available
for stock trades.

There was also the strong stench that Kaplan had intended to defy the
public disclosure requirements of the Federal Reserve that mandated that he
disclose the specific dates of his trades. Kaplan simply typed the word
“multiple” where the specific date of each trade should have been entered
on the disclosure form. (In the early part of Kaplan’s career, he was a CPA
for Peat Marwick Mitchell. He should have known that how he listed his
trading transactions violated the very clear instructions that came with
the reporting form.) Wall Street On Parade, other members of the press, as
well as Senator Elizabeth Warren demanded that the Federal Reserve turn
over Kaplan’s trading dates. The Fed refused. (For how cavalierly Wall
Street On Parade’s Freedom of Information Act request was handled by the
Fed, see here.)

Kaplan was a sophisticated Wall Street veteran who worked at Goldman Sachs
for 22 years, rising to the rank of Vice Chairman. As such, he would have
certainly understood that the type of trading he was doing could subject
him to an investigation for insider trading. (Goldman Sachs has refused to
tell Wall Street On Parade if Kaplan did his trading at Goldman Sachs while
serving as President of the Dallas Fed. The fact that Kaplan lists
proprietary products from Goldman Sachs as “GS” on his financial disclosure
forms suggests that he did at least some of his trading there.)

The year 2020 presented an ideal opportunity for a sophisticated trader
(with inside information on actions the Fed planned to take) to make large
profits in the stock futures market from short-term trading, going both
short and long. As a result of the lockdowns from the pandemic, GDP fell by
31.4 percent in the second quarter of 2020 – the largest decline on record.
At numerous times during 2020, the Fed was making dramatic market-moving
announcements of interest rate cuts and the creation of a multitude of
emergency lending facilities and emergency measures that caused the stock
market to soar.

Since it does not appear that any brokerage firm that was executing trades
for Kaplan blew the whistle on him, the obvious question is, why not? Was
there a quid pro quo going on between Kaplan and a Wall Street trading

Every licensed broker that would have been placing Kaplan’s “over $1
million” trades is required under regulatory rules to “Know Your Customer.”
The rule states that “Every member shall use reasonable diligence, in
regard to the opening and maintenance of every account, to know (and
retain) the essential facts concerning every customer and concerning the
authority of each person acting on behalf of such customer.”

In this case, knowing your customer should have meant frantically calling
your compliance department when an officer of the U.S. central bank, who
sits on some of the most sensitive, non-public market intelligence in the
world, instructs you to make “over $1 million” trades, multiple times, in
S&P 500 futures contracts. The S&P 500 futures trades by Kaplan should have
resulted in an immediate, all-hands-on-deck meeting of the entire
compliance department of the brokerage firm. Instead, the trading went on
unimpeded for more than five years, according to Kaplan’s financial

Every brokerage firm is required to have a compliance department that
monitors the trades being placed by its brokers. The compliance department
has access to the personal data for each client that indicates who their
employer is, along with significant other personal information. Clients
whose jobs involve having access to confidential market information, like
an investment banker or a central banker, should have their trades closely
monitored in a properly functioning compliance department.

In addition to the Know Your Customer Rule, the U.S. Treasury Department’s
FinCEN (Financial Crimes Enforcement Network) has its own Customer Due
Diligence Rule (CDD Rule). One of the requirements under the rule is that
financial institutions “use a specific method or categorization to risk
rate customers; or automatically categorize as ‘high risk’ products and
customer types that are identified in government publications as having
characteristics that could potentially expose the institution to risks.”

Every single safeguard that is built into the U.S. trading system to detect
improper trading appears to have failed when it came to Kaplan. That
suggests there were plenty of aiders and abettors – the very kind of case
that belongs at the Justice Department, not at the Fed’s Inspector
General’s Office, which reports to the Fed’s own Board of Governors. And
yet, as far as the public knows, the Kaplan case remains in the hands of
this conflicted investigator.

Senator Elizabeth Warren called out a “culture of corruption” among
high-ranking Fed officials and called for an independent insider trading
investigation. But for the past 16 months, only silence has emanated from
the Department of Justice on this critical matter of vital public interest.

Yes, the Department of Justice has been deluged with fraud and corruption
matters to investigate over the past 16 months. But this is not some minor
issue. This is the central bank of the United States where a loss of
confidence in its integrity impacts confidence in the U.S. financial system

On January 6 of last year, Dennis Kelleher, the President and CEO of the
financial watchdog, Better Markets, said this regarding how Fed Chair
Jerome 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.”

In an effort to quiet the public uproar over the Fed’s trading scandal, on
February 18 of last year, the Fed formally adopted new trading rules for
its officials. But there is startling evidence that Fed officials are back
to business as usual.

On October 20 of last year, Jeanna Smialek, who reports on the Fed for the
New York Times, broke the news that the President of the St. Louis Fed,
James Bullard, gave a private, invitation-only briefing on October 14 to
clients of Citigroup – a Wall Street megabank that is supervised by the Fed
and which received the largest bailout from the Fed from 2007 to 2010 in
global banking history – a cumulative sum of $2.5 trillion in secret loans
according to a government audit.

Smialek noted in her article that “About 40 people attended the event,
which had a formal agenda and was advertised to Citi clients.” Bullard
answered questions from attendees, according to Smialek’s reporting.
Bullard was at the time a voting member of the FOMC and had access to
insider information on the Fed’s market-moving monetary policy actions.

On the very day that Bullard was giving his private briefing to Citigroup
clients, the President of the Atlanta Fed, Raphael Bostic, released a
seven-page statement in which he admitted to failing to list a multitude of
trades that were conducted on his behalf by trading firms on Wall Street
over a period of five years; failing to properly report income on his
assets on his financial disclosure forms; trading during blackout periods
when trading was barred by the Federal Reserve; and providing inaccurate
values on his financial disclosure forms.

Despite these jaw-dropping disclosures, the Board of Directors of the
Atlanta Fed did not ask Bostic to step down. (See our report: Atlanta Fed
President Bought Low and Sold High in 2020 as the Fed Bailed Out Wall
Street; Then He Failed to Report those Trades.) And, thus far, Bullard also
appears to be keeping his job.

On August 11, the Attorney General of the U.S. Department of Justice,
Merrick Garland, told the American people at a press conference that:
“Faithful adherence to the rule of law is the bedrock principle of the
Justice Department and of our democracy. Upholding the rule of law means
applying the rule of law evenly, without fear or favor.”

Until the Department of Justice provides some sunshine on the Robert Kaplan
case, those words will ring hollow to millions of Americans.

Related Article:

After Funneling Trillions of Dollars in Repo Loans to Serial Bank
Offenders, Lorie Logan Gets a $440,000 Job Running the Dallas Fed.
-------------- next part --------------
A non-text attachment was scrubbed...
Name: not available
Type: text/html
Size: 12812 bytes
Desc: not available
URL: <>

More information about the cypherpunks mailing list