A Federal Reserve Bank Ignored Insider Trading Investigation When Re-Appointing Its President

Federal Reserve Bank of Richmond President Jeffrey Lacker did not initially divulge his conversation with a Medley Global Advisors analyst.

Jeffrey Lacker, president and chief executive officer of the Federal Reserve Bank of Richmond, arrives to a House Financial Services Committee hearing in Washington, D.C., U.S., on Wednesday, June 26, 2013. Two Federal Reserve district bank presidents said the 2010 Dodd-Frank Act hasn't eliminated creditor expectations for federal bailouts of financial firms, perpetuating the idea that large banks are "too big to fail." Photographer: Andrew Harrer/Bloomberg via Getty Images
Jeffrey Lacker, president and chief executive officer of the Federal Reserve Bank of Richmond, arrives to a House Financial Services Committee hearing in Washington in June 2013. Photo: Andrew Harrer/Bloomberg News/Getty Images

New documents obtained by a Federal Reserve watchdog group suggest that the Federal Reserve Bank of Richmond’s board of directors may have known that its president was under federal investigation when the board re-appointed him to a new term.

That president, Jeffrey Lacker, resigned his position this week after acknowledging his role in a leak of nonpublic information about Fed policy to an analyst for hedge fund and asset manager clients. The situation highlights the often cozy relationship between central bankers and Wall Street.

In a carefully worded announcement submitted by his attorney Tuesday, Lacker admitted to an October 2012 phone conversation with Medley Global Advisors analyst Regina Schleiger, where she described Fed deliberations over purchasing $45 billion of U.S. Treasury bonds per month as part of their quantitative easing program. Lacker did not deny this, or report Schleiger’s possession of confidential information to Fed staff. In his statement Lacker said, “I realized that my failure to decline comment on the information could have been taken … as an acknowledgment or confirmation of the information.”

On October 3, 2012, Schleiger published a report, “Fed: December Bound,” that included details about the Treasury purchases, a day before they would be revealed in the September 2012 minutes of the Federal Open Market Committee. This information was lucrative for investors to know before their counterparts, as they could have made money trading on Treasury bonds prior to the minutes release.

Nobody knows who leaked the information about the September 2012 minutes to Schleiger; Lacker only admitted to hearing about it in advance.

The Medley report led the Fed to commission an internal investigation into the leak. Fed General Counsel Scott Alvarez interviewed Lacker in conjunction with the investigation in December 2012, but Lacker admitted that he did not tell Alvarez that he knew Schleiger had the material before its release.

The Fed said in 2013 they could not uncover the leaker, and did not refer the matter to securities officials or law enforcement, even though the leak could be seen as part of an insider trading scheme. After Sen. Elizabeth Warren and Rep. Elijah Cummings raised questions in 2015 about why the Fed hadn’t disclosed the results of their investigation, the FBI and the Justice Department opened a criminal inquiry, upon a referral from the Commodity Futures Trading Commission. Federal authorities interviewed Lacker that year as part of that probe, at which point he claims he did divulge his conversation with Schleiger.

The new information comes from the activist group Fed Up, which has sought more democratic accountability at the central bank. In documents obtained through the Freedom of Information Act, Fed Up found that the Richmond Federal Reserve Bank unanimously re-appointed Lacker on December 16, 2015, giving him a glowing review. “The Fifth District board of directors not only is pleased with the performance of President Lacker,” Board of Directors Chair Russell Lindner wrote, “but feels it would be a disservice both to the Bank and the System were [he] not to be reappointed.”

However, on January 7, 2016, Lindner wrote a supplementary letter, which “provides a fuller description of the evaluation of Mr. Jeffrey M. Lacker as this Reserve Bank’s President.” The rest of that letter is completely redacted.

None of the 10 other regional Fed banks re-appointing presidents in 2016 submitted a supplemental letter like this. But by February, the Federal Reserve board of governors approved Lacker’s re-appointment, for a term that would have ended in September 2020. (Lacker announced an early retirement in October 2016; the sudden resignation moved up the timeline by six months.)

Fed Up believes the supplemental letter suggests “circumstances regarding Lacker’s reappointment were unique, or that new information had come to light.” The group is demanding that the rest of the letter be unredacted, so the public can understand what information the Richmond Fed had about Lacker’s role in the leak investigation.

“What did the Richmond Fed and the board of governors know? And when did they know it?” asked Jordan Haedtler, campaign manager for Fed Up. “If the Richmond Fed’s board of directors was aware that President Lacker was under federal investigation, how could they have unanimously recommended his re-appointment?”

Each of the 12 regional Federal Reserve banks like that of Richmond is literally owned by private banks in the reserve bank’s district. These member banks choose six of the nine members of a reserve bank’s board of directors, so the boards tend to be dominated by local businessmen and bankers. The board appoints the reserve bank’s president, whose agency then supervises local financial institutions in the region.

In a statement released Tuesday, the Richmond Fed said that “once our bank’s board of directors learned of the outcome of the government investigations, they took appropriate actions,” without elaborating on what those actions were.

The FBI has not completed its investigation of the leak, but Lacker’s attorney said that no charges would be brought against his client, making the early resignation a kind of plea bargain. Government employees who leak confidential information can face up to a year in prison, and could be held accountable for fraud if the information was part of an insider trading scheme.

The criminal investigation has been hampered because Medley Advisors considers itself a news organization, raising First Amendment concerns. As a subscription service for investors, Medley operates more like a market intelligence organization, and the Fed has clear restrictions on contact between top officials and firms of this type.

But just the action of a Federal Reserve bank president chatting up what by all accounts appears to be an analyst for hedge fund clients raises red flags. “Our communities can’t afford to have Fed officials who are so cozy with the financial industry that they leak valuable information to their friends,” said Michael De Los Santos, deputy director of Action NC, a community organizing group in North Carolina.

The Federal Reserve’s inspector general said it “will be concluding its investigation” on the matter, but they are unlikely to make it public. Republicans on the House Financial Services Committee have also been looking into the leak. However, Lacker, a monetary policy hawk who favors lower inflation, “has a lot of friends among the Republicans,” Fed historian Peter Conti-Brown of the University of Pennsylvania told Bloomberg.

Intercept contributor Matt Stoller wrote in January about how Fed transcripts revealed that Lacker mocked workers struggling during the recession, saying they “preferred to collect unemployment benefits or can’t pass drug tests.”

Top photo: Jeffrey Lacker, president and chief executive officer of the Federal Reserve Bank of Richmond, arrives to a House Financial Services Committee hearing in Washington in June 2013.

Join The Conversation