After Its President Created the Biggest Trading Scandal in Fed History, Dallas Fed Chair Calls Robert Kaplan’s Tenure “Great Leadership”
By Pam Martens and Russ Martens: January 18, 2022 ~
Thomas J. Falk, New Chair of the Dallas Fed Board of Directors
Last Thursday evening, at 5:00 p.m. Dallas time and 6:00 p.m. Eastern Standard Time, when millions of folks on the East Coast are sitting down for dinner, the Dallas Fed held a virtual Town Hall.
Given the fact that the President of the Dallas Fed, Robert Kaplan, had to step down in disgrace in September, after trading like a hedge fund kingpin in 2020 while simultaneously having access to confidential market-moving information as a voting member of the Fed’s Federal Open Market Committee (FOMC), there was a very good reason for the Dallas Fed to hold a Town Hall.
But stunningly, the tone-deaf Dallas Fed did not focus the Town Hall on how its Board and management had negligently supervised Robert Kaplan, allowing him to trade in and out of S&P 500 futures in over $1 million trades during a year of a national pandemic crisis. Instead, the Dallas Fed attempted a public relations stunt, and focused the Town Hall on how it wanted the public to engage in its search for a new President. It was clearly a Town Hall ginned up in an effort to quiet the pitchforks.
The Dallas Fed did not take one question on former President Robert Kaplan’s outrageous trading. It did not take one question on why its General Counsel and Ethics Officer, Sharon Sweeney, signed off on these trades. It did not take one question as to why the former and current Board Chairs, Greg Armstrong and Thomas Falk, respectively, lied to the American people in their official statement regarding Robert Kaplan severing his ties to the banks supervised by the Fed.
Instead, the newly appointed Chair of the Dallas Fed Board, Thomas Falk, called the tenure of Robert Kaplan at the Dallas Fed “great leadership.” We could hardly believe our ears. Fortunately, the Dallas Fed put up a video of the Town Hall so that we could double check what we heard. We’ve set the video clip below to the question from the moderator that triggered the “great leadership” response from Thomas Falk.
Falk had come under our radar previously. At the time the scandal hit last September, Falk was serving as Vice Chair of the Dallas Fed Board. He and the Chair at that time, Greg Armstrong, included the following false statements in their official announcement of Kaplan’s “retirement.”
“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.”
Both of those sentences are blatantly false. Kaplan was a sophisticated Wall Street veteran who previously worked at Goldman Sachs for 22 years, rising to the rank of Vice Chairman. He clearly knew that making directional bets on the market using S&P 500 futures, while simultaneously making market moving statements on television and sitting on inside information from the FOMC meetings, could subject him to criminal charges of insider trading.
On October 5, we sent an overnight letter to the home of Falk in Dallas. We advised him as follows:
“On Monday, September 27, under your name and that of the Chair, Greg Armstrong, the Board of Directors of the Dallas Fed released a statement to the press that included this sentence:
‘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.’
“This was a materially false statement since Mr. Kaplan’s financial disclosure forms indicate that he owned four proprietary products from Goldman Sachs long after he joined the Dallas Fed on September 8, 2015. (Goldman Sachs has been supervised by the Federal Reserve since September 21, 2008.)
“One of those Goldman Sachs products, the Exchange Place LP, appears on Mr. Kaplan’s financial disclosure form for years 2015 through 2020. The address of Exchange Place LP is Goldman Sachs’ headquarters at 200 West St. in Manhattan; the officers of Exchange Place LP are employees of Goldman Sachs; and the phone number for Exchange Place LP is Goldman Sach’s phone number.
“In addition, Mr. Kaplan uses the term ‘GS’ on his various financial disclosure forms next to three other proprietary products that were created and sold by Goldman Sachs: the Goldman Sachs Financial Square Money Market Fund; the Goldman Sachs Medium Term Managed Corporate Bond Account, and the Goldman Sachs Private Equity Fund 2000 (which does not publicly trade).
“First, I am asking for you to issue a retraction of the materially false statement that has been issued under your name.
“Second, I am asking that you have a staff member at the Dallas Fed email me the precise dates of each purchase and sell transaction that Mr. Kaplan transacted in 2020. The public is owed that information. As a former auditor, you can easily see that the Dallas Fed financial disclosure form requires that information and Mr. Kaplan simply replaced that required information with the word ‘Multiple.’
“All other regional Federal Reserve Bank Presidents complied with the requirement to provide the dates of their purchases and sells in 2020. Only Mr. Kaplan ignored this requirement.
“I have previously requested those dates from James Hoard of the Dallas Fed via email and received no forthcoming information.
“I look forward to your timely attention to these serious matters.”
We heard nothing further from Falk and the grossly false statement remains today on the website of the Dallas Fed. James Hoard, part of the Communications team at the Dallas Fed, continues to deny the media the dates of Kaplan’s trades, thus preventing the press from doing its job. At present, the public does not know if Kaplan was making millions of dollars of trades in S&P 500 futures, or tens of millions or hundreds of millions of dollars, in a year when the President of the United States had declared a National Emergency.
The Dallas Fed has also refused to say if Kaplan was shorting the market in 2020 (betting it would go down) in a year when 352,000 of his fellow Americans died from COVID-19 according to Johns Hopkins University.
The year 2020 presented a unique opportunity for a nimble trader to make huge gains (or losses) trading S&P 500 futures, which unlike the stock market, do not close at 4:00 p.m. EST but trade continuously from Sunday evening to Friday evening. 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 taking other emergency measures. From January 1, 2020 through April 30, 2020, based in no small part on these Fed announcements, the S&P 500 Index gyrated from down 30 percent in late March to up 10 percent by the end of April.
As of last Thursday, Falk had no way to know if Kaplan will be charged with insider trading. Senator Elizabeth Warren has called on the SEC to open an insider trading investigation. Others have called on the Justice Department to open a criminal investigation. Neither the SEC nor the Justice Department disclose when an investigation has been opened. What is known is that the Inspector General of the Federal Reserve (who, unfortunately, reports to the Board of the Fed) has an ongoing investigation of the Fed trading scandal, which includes additional Fed officials besides Kaplan.
For Falk to attempt to prejudice these investigations by calling Kaplan’s tenure at the Dallas Fed “great leadership,” raises suspicions as to what his real motive is to be shilling for Kaplan.
Kaplan triggered the worst trading scandal in the 108-year history of the Fed. Newspapers around the world carried the story, bringing reputational damage to the U.S. central bank. Editorial boards of newspapers across the U.S. chastised the Fed for having such loose trading restrictions on its officials.
The Chair of the Federal Reserve Board of Governors, Jerome Powell, responded by releasing a draft set of new trading rules to be implemented. But at his confirmation hearing before the Senate Banking Committee on January 11, Powell told the Chair of the Committee, Senator Sherrod Brown, that the final rules had not yet been adopted.
Powell, himself, has come under questions about his trading activity, but the Senate is likely to confirm him for another four years as Chair of the Fed before the details of any government investigation into the trading scandal are released. This could set the Federal Reserve up for more distrust at a time when confidence in the institution has seriously eroded, according to polls.
The obvious conclusion to draw from all this is that it’s not just the trading rules for officials at the Fed that need to be radically restructured, but the institution itself is due for a serious restructuring by Congressional legislation.
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