POLITICS

Top Fed Investigator Hid Probe Of Improper Leak From Congress And Public

03/10/2015 03:07 pm ET | Updated Mar 11, 2015
Bloomberg via Getty Images

WASHINGTON -- The independent investigator charged with policing the Federal Reserve conducted a secret inquiry into the 2012 leak of a sensitive central bank decision, according to a person who was interviewed in the probe. It wasn't disclosed to Congress.

The existence of the at least yearlong investigation has not previously been made public, according to government records.

The leaked information, revealed to a select group of investors in October 2012, would have allowed traders to make massive gains ahead of the Fed's public announcement in December 2012 of an open-ended stimulus program that, for the first time, tied the central bank’s future actions on short-term interest rates to specific economic conditions.

The disclosure itself -- a potential criminal violation -- was first reported in December 2014 by nonprofit news outlet ProPublica. Bloomberg News also reported on the incident. At the time, both outlets said that then-Fed Chairman Ben Bernanke had asked William English, secretary of the Federal Open Market Committee, and Scott Alvarez, the Fed’s powerful general counsel who is sometimes referred to as the “8th Governor” on the Fed’s seven-person board, to investigate the leak.

However, the separate probe by the Fed's inspector general has thus far been kept secret, both from the public and from Congress.

According to the person interviewed in the inspector general's investigation, who spoke on the condition of anonymity, the probe included rounds of interviews conducted in 2013 and 2014. The IG, which acts as an in-house auditor but is supposed to remain independent of the central bank, has reported neither the inquiry nor the results in any of its regular semi-annual reports to Congress, which are publicly available. These reports serve as the unit’s accounting of its activities and enable the legislative branch to perform its oversight of the Fed.

The Huffington Post asked the Federal Reserve whether its senior officials were aware of the inspector general’s investigation, whether it was briefed on the results and whether it took any action in response. Joe Pavel, a Fed spokesman, declined to comment and referred questions to the IG.

John Manibusan, a spokesman for the IG, declined to comment.

The news of the previously undisclosed investigation comes as the Fed faces criticism from congressional Democrats who believe the central bank is too beholden to Wall Street in its supervision of the nation’s financial system, and from Republicans who say it is overly secretive and intransigent in the way it controls the nation’s money supply through its influence over interest rates.

The shocking leak constituted a serious breach of protocol at the normally secretive FOMC, the central bank's main policymaking body. In October 2012, one day before the scheduled release of minutes from the Fed's September 2012 meeting, elite clients of Medley Global Advisors, a political and economic policy intelligence firm, received valuable information about a coming innovation to the Fed's long-established quantitative easing program. Quantitative easing attempts to stimulate the economy by keeping borrowing costs so low that businesses and households are induced to spend and invest.

Medley clients were sent a newsletter informing them of specific actions the Fed had contemplated at the meeting, such as tying the future direction of short-term interest rates to a 6.5 percent unemployment rate. The numeric thresholds of the Fed's new policy were not publicly revealed until December 2012.

The disclosure gave investors the potential opportunity to profit from the central bank's maneuvers ahead of the broader markets by trading stocks and bonds based on their advance knowledge of the Fed's plans. Such trades based on insider information could have been prohibited by law.

Unlike many investigations, the existence of actual wrongdoing was not in dispute at the outset of the probe: The inquiry was tasked only with determining who was responsible.

The source who participated in the investigation said the IG obtained phone and email records of certain Fed employees. Had the leaker used his or her government phone or email account, the investigation would likely have been wrapped up relatively soon: Since only a limited number of Fed officials had access to the leaked information, a review of phone and email records would likely have been possible over the course of just a few weeks. But the duration of the investigation suggests to some that the Fed may not have fully cooperated in the probe.

Sen. Elizabeth Warren (D-Mass.) excoriated Federal Reserve Chairwoman Janet Yellen last month over the central bank's failure to publicize the results of English and Alvarez's initial investigation, and demanded more information about the probe.

The Fed didn’t acknowledge that a leak had even occurred until ProPublica filed a Freedom of Information Act request with the central bank, the news outlet reported.

According to the initial reports, English and Alvarez's investigation involved little more than a questionnaire sent to various Fed staff who were present during the September meeting.

This inquiry stands in sharp contrast to previous Fed investigations into FOMC leaks: Former Fed Chairman Alan Greenspan once called in the FBI to investigate a leak at the committee.

Details about the probe of the 2012 disclosure remain unclear; there is no public evidence that either Bernanke, Yellen or another Fed official asked the inspector general, the Securities and Exchange Commission or the Department of Justice to investigate the leak.

Bernanke was leading the Fed when the leak occurred, and Yellen took over while the IG was investigating it.

One reason the investigation could have been kept out of public view is that it may still be ongoing. The auditor generally conducts two types of investigations: criminal -- it has the power to arrest individuals -- and administrative. While the IG publicly details its pending audits, it normally doesn’t disclose pending investigations until some sort of judicial action, such as an arrest or indictment, takes place.

A review of recent IG reports to Congress reveals that the auditor discloses the number of investigations that are pending, but not much else.

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