EDITOR NOTE: Dallas Fed President Robert Kaplan just resigned his post after an investigation into numerous ethics violations. Wall Street on Parade dives deeper into Kaplan’s financial moves and reports that he “wasn’t just trading like an aggressive hedge fund kingpin in 2020, he’s been doing the same thing for five years at the Dallas Fed while simultaneously having access to non-public, market moving information from the Federal Reserve’s interest-rate setting FOMC meetings and other confidential communications.” Despite numerous safeguards in place to stop people in this position, with this level of financial power, from making money off their position, none of the safeguards worked. Both the Dallas fed and the brokerages he used “failed to sound the alarms that should have gone off regarding this unprecedented speculative trading activity by a man regularly having access to non-public, market moving information.”
Dallas Fed President, Robert Kaplan, wasn’t just trading like an aggressive hedge fund kingpin in 2020, he’s been doing the same thing for five years at the Dallas Fed while simultaneously having access to non-public, market moving information from the Federal Reserve’s interest-rate setting FOMC meetings and other confidential communications.
In 2017 and 2020, Kaplan was a voting member of the FOMC. In the other years since he joined the Dallas Fed in 2015, he sat in on the confidential FOMC deliberations and was allowed to participate in the discussions.
Each of Kaplan’s financial disclosures forms dating back to when he first became Dallas Fed President on September 8, 2015 (which we obtained directly from the Dallas Fed), show that Kaplan was trading in and out of S&P 500 futures, a highly speculative form of trading used by hedge funds and day traders. Each of Kaplan’s S&P 500 transactions are listed at “over $1 million.” The phrase “over $1 million” could mean anything from $1,000,001 to tens of millions of dollars per transaction. The phrase is a form of opacity that leads to more loss of credibility at the Dallas Fed.
Unlike other regional Fed bank presidents and all Federal Reserve Board Governors, Kaplan did not list the dates of his transactions for any year of his financial disclosures. He simply placed the word “multiple” where the specific dates should have gone on his financial disclosure forms. For how the Schedule B/Transactions part of the form is supposed to be prepared, see the financial disclosure form filed by Tom Barkin, President of the Richmond Fed. Each purchase and each sale are supposed to be entered on a separate line, with the date next to each. Kaplan’s financial disclosure forms lump purchases and sales together on the same line, putting the word “Multiple” where the actual dates of the trade are supposed to be listed.
In the early part of Kaplan’s career, he was a CPA for Peat Marwick Mitchell. He should certainly know that how he listed his trading transactions is improper.
In addition to speculating in stock index futures, Kaplan has also made tens of millions of dollars in purchases and sales of a litany of individual stocks over the last five years, including Big Tech and fossil fuel companies, rather than adhering to the customary ethical standard by Fed officials of employing a buy and hold position in diversified mutual funds. In 2020, the vast majority of Kaplan’s individual stock trades were also for “over $1 million.”
The Federal Reserve had rules against this very type of speculative trading for decades, but those rules have now somehow managed to vanish into thin air.
On August 12, 1977, the Comptroller General of the U.S., Elmer Staats, filed a report with Congress in which he warned that the Federal Reserve’s financial disclosure system was woefully lacking. Staats specifically called out the Fed’s failure to define with specificity what constituted prohibited “speculative dealings” for its employees.
Staats notes in the report:
“Federal Reserve regulations on standards of conduct are issued to each Board employee. Specific Board prohibitions on financial interest state that an employee may not: Have a direct or indirect financial interest that conflicts substantially, or appears to conflict substantially, with his duties and responsibilities; Engage in speculative dealings (as distinguished from investments) in securities, commodities, real estate, exchange, or otherwise. Frequency of trading, the use of credit, and particularly transactions to take advantage of short-term price fluctuations would be significant indications that dealings were speculative.”
That last sentence in the above paragraph is the quintessential definition of trading in S&P 500 futures.
This Federal Reserve rule prohibiting speculative dealings was still in force at the Federal Reserve on December 19, 1995 because the following reference appears in the Federal Register for that date:
“A provision of the Board’s current ethics rules prohibits Board employees from engaging in speculative dealings. See 12 CFR 264.735–6(d)(iii).”
Looking at the current Federal Reserve Board of Governors’ ethics rules and those that have been published for each of the 12 regional Federal Reserve banks, we found zero references to “speculative dealings.”
What we did find, however, was the following sentence in 11 of the 12 regional Federal Reserve banks’ codes of conduct: (The Atlanta Fed words the statement differently but with the same overall meaning.)
“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, or which might result in a question being raised regarding the independence of the employee’s judgment or the employee’s ability to perform the duties of his or her position satisfactorily.”
Clearly, Kaplan violated the above mandate when he started trading in and out of S&P 500 futures.
There are three typical reasons for an individual to trade in speculative, short-term S&P 500 futures: (1) the individual thinks he or she can time the market’s moves; (2) the individual wants to trade before or after stock exchange hours; (3) the individual wants to make highly leveraged bets on the market’s direction, going both long and short. (We asked the Dallas Fed to confirm or deny that Kaplan was shorting the market during the pandemic crisis year of 2020. They declined an answer.)
The E-mini S&P 500 futures contract is the most popular and liquid S&P 500 futures contract. It can be leveraged by as much as 95 percent. The stock exchanges are only open in the U.S. from 9:30 a.m. to 4 p.m. (EDT) weekdays, but the E-mini trades continuously from 6 p.m. Sunday night through 5 p.m. on Friday evening (EDT), allowing someone who might wish to trade on inside information a gateway to do so.
One of the most striking, and disturbing, facets to Kaplan’s trading is how many safeguards that are built into the system, both at the Dallas Fed and at the brokerage firm that placed his trades, failed to sound the alarms that should have gone off regarding this unprecedented speculative trading activity by a man regularly having access to non-public, market moving information.
The Dallas Fed has its own Board of Directors, with an Audit Committee. According to the Audit Committee’s charter, it is empowered to do the following, among many other things:
“Obtain updates from the Bank’s General Counsel on any legal matters or code of conduct or ethical concerns that could have a significant impact on the financial statements or compliance matters.
“Authorize special investigations and reviews, and engage independent counsel and other advisors as it determines necessary to carry out its duties and responsibilities.”
According to the Dallas Fed’s website, Sharon Sweeney is the General Counsel and has been with the Dallas Fed for 35 years. According to the Internet Archives’ Wayback Machine, Sweeney has served in the dual role as General Counsel and Ethics Officer since at least 2017.
It is the Ethics Officer’s signature that appears directly under Kaplan’s on each of his financial disclosure forms for 2015 through 2020, along with the following statement for the Ethics Officer: “I CERTIFY that I have reviewed the information contained in this report.”
It is probably not a benefit to good governance at the Dallas Fed that Kaplan has the power to fire Sweeney “at his pleasure.” The Dallas Fed Board of Directors’ bylaws indicate this: “Subject to applicable law and rules of the Board of Governors, the President, and any officer(s) authorized by the President, has the power to suspend or dismiss at pleasure any employee or officer of the Bank, other than the First Vice President.”
The Dallas Fed also has an internal General Auditor, Glenda Balfantz. She has been at the Dallas Fed since 1989. (Kaplan has the power to fire her “at his pleasure” as well.) The Dallas Fed’s bylaws describe the General Auditor’s duties as: “supervision and charge of all auditing work of the Bank and Branches.”
Then there is the External Auditor of the Dallas Fed. The Federal Reserve Board of Governors in Washington D.C. annually selects the external auditor for the regional Fed banks. From 2015 through 2020, the Federal Reserve Board has annually chosen the same auditor, KPMG, to perform the external audit for all 12 of the regional Fed Banks. KPMG is one of the Big Four Accounting firms. How it missed Kaplan’s aggressive, speculative trading is one more black eye for the firm.
The name of the brokerage firm that conducted the trades for Kaplan has yet to be made public. (We believe we know the name of the firm and reached out to their designated media relations person over the weekend to confirm or deny. The media relations person did not respond. A simple denial would have removed the firm from further speculation about their role in this scandal, so the failure to respond is something of a statement in itself.)
The role of the brokerage firm that executed these trades is a very serious matter and every American should be demanding that Fed Chairman Jerome Powell release this information immediately. Since it does not appear that this brokerage firm blew the whistle on Kaplan, the obvious question is, was it cloning his trades on the belief that he was trading on inside information. This aspect deserves a serious investigation by the Securities and Exchange Commission as well as the Department of Justice, as does the date and times of Kaplan’s 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 trade request by Kaplan should have convened an immediate, all-hands-on-deck meeting of the entire compliance department of the brokerage firm. Instead, the trading has gone on unimpeded for more than five years, according to Kaplan’s financial disclosures.
Every brokerage firm has a compliance department that monitors the trades being placed by their 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, would have their trades closely monitored in a properly functioning compliance department.
This compliance department was clearly not functioning and the American public deserves to know why.
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.”
Kaplan previously worked for 22 years at one of the most sophisticated trading firms on the globe, Goldman Sachs. He rose to the rank of Vice Chairman at Goldman Sachs and had “global responsibility for the firm’s Investment Banking and Investment Management Divisions,” according to his official bio at the Dallas Fed.
There is no question that a former Vice Chairman of Goldman Sachs and a former CPA for Peat Marwick Mitchell understood that trading in and out of S&P 500 futures in “over $1 million” transactions when the President of the United States has declared a National Emergency and Kaplan was sitting on non-public information from the central bank of the United States was scandalous, if not illegal, behavior.
Another safeguard that failed was the vetting of Kaplan for the position of Dallas Fed President by the Federal Reserve Board of Governors in Washington D.C. While the Class B and C Directors of the Dallas Fed Board appoint their President, he is also subject to the approval of the Federal Reserve Board of Governors, who should have done extensive due diligence on Kaplan because of his 22 years at Goldman Sachs, including the immediate years leading up to the greatest financial crash since the Great Depression – a crisis in which Goldman Sachs played a toxic role.
On April 11, 2016, the U.S. Department of Justice issued a notice indicating that Goldman Sachs was fined “more than $5 billion” by various regulators. A statement in the notice from Acting Associate Attorney General Stuart Delery said that “This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail.”
An in-depth investigation of Goldman Sach’s role in the subprime crisis that crashed Wall Street in 2008 was released by Greg Gordon of McClatchy Newspapers in 2015. Gordon writes:
“From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance…
“It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.”
From 2001 through most of 2005, the majority of the period referenced above, Kaplan was a key member of management of Goldman Sachs. That should have been an immediate disqualifier for moving up to the position of President of a Federal Reserve Bank.
At the time of Kaplan’s appointment to the Dallas Fed in 2015, an activist group saw the writing on the wall. Had the Federal Reserve actually listened to public sentiment, it would not be facing the worst trading scandal in its 108-year history.
Ady Barkan, Director of the Center for Popular Democracy’s Fed Up campaign, released this statement in 2015 on the day the Dallas Fed announced it had chosen Kapan as its next President:
“…the Dallas Fed selected a veteran of Goldman Sachs who is currently a director at the headhunting firm that was hired to fill this position. Neither the process nor the result serves the public interest. The Fed should do much better…
“The revolving door in the Federal Reserve continues to spin, with Richard Fisher leaving the Dallas Fed to work at Barclay’s Bank (which pleaded guilty to serious financial crimes), and a Goldman Sachs banker coming in.”
The Federal Reserve Board of Governors not only signed off on Kaplan’s appointment to the Dallas Fed once, but they reconfirmed his appointment in January of this year to serve for another five years as President of the Dallas Fed. On January 21, the Fed released a press statement indicating that after “a rigorous process to inform their reappointment decisions” it was reappointing all 12 regional Fed Bank presidents “to serve a new five-year term beginning March 1, 2021.”
This “rigorous” process apparently did not think trading like a hedge fund kingpin was a disqualifier for Kaplan.
Originally posted on Wall Street on Parade