Robert Kaplan Was Heavily Trading on May 1, 2020; One Day After a Fed Blackout Period and the Same Day He Made a Shocking Prediction on TV
In short, the Fed Inspector General didn’t do anything that a real investigator at the Securities and Exchange Commission would have done and its report is silent on whether it made a referral to the
By Pam Martens and Russ Martens
To read main stream media headlines, one would think that the Federal Reserve Inspector General’s Office has exonerated former Dallas Fed President Robert Kaplan of any legal action for trading like a hedge fund kingpin while he was privy to insider information at the Fed.
In fact, all that the Inspector General’s report has cleared Kaplan of is this: “we did not find that his trading activities violated laws, rules, regulations, or policies related to trading activities as investigated by our office.”
What the Inspector General did not investigate is everything that a real insider trading investigation would have encompassed. It did not investigate if Kaplan was shorting the market with his $1 million plus trades in and out of S&P futures contracts during a declared National Emergency over the COVID pandemic while making market diving predictions on TV; it did not investigate how big ticket trading by a Fed insider got past the compliance department of the brokerage firm Kaplan was using to transact his trades, which may have been the notorious Goldman Sachs; it did not investigate if that brokerage firm was cloning Kaplan’s trades (because he was a Fed insider) for its own profit and benefit.
In short, the Fed Inspector General didn’t do anything that a real investigator at the Securities and Exchange Commission would have done and its report is silent on whether it made a referral to the SEC or the Justice Department in this matter. What the Inspector General did do was to sit on this investigation for more than two years and then deliver a report so hopelessly inept that it provided the long missing dates that Kaplan traded but not the essential information as to whether those trades were purchases or sales. (Kaplan had been allowed by the Fed to evade the required reporting of specific dates for each sale and each purchase of a security for the entire five years he filed his financial disclosure forms at the Dallas Fed. See Kaplan’s financial disclosure forms from 2015 through 2020 here.)
As a former CPA and Goldman Sachs veteran, Kaplan knew or should have known that his financial disclosure forms were breaking Fed rules as well as common sense rules for financial disclosure of trading activities.
In 2020, during the worst health crisis in more than a hundred years in the United States, Dallas Fed President Robert Kaplan, then a voting member of the FOMC, was frequently throwing trading fuel on a deepening economic meltdown in his print media interviews. Also in 2020, Kaplan was trading in and out of S&P 500 futures, according to his own financial disclosure forms. (Trading in S&P 500 futures is a market-timing device used by hedge funds and day traders. No individual with market-moving information at the Federal Reserve should ever be allowed to use such a device.)
Kaplan gave a total of 68 interviews with the press in 2020, a stunning number and a smoking gun for a man also trading S&P 500 futures.
Twice in the span of six days in May of 2020, Kaplan predicted that unemployment was going to surge to 20 percent. That’s a very bold and apocalyptic call that would have benefited short sellers. According to the Congressional Research Service, the maximum unemployment rate in 2020 topped out at 14.8 percent in April.
Kaplan first made the 20 percent unemployment prediction on Fox Business with Maria Bartiromo, the cable TV show, on May 1, 2020. When the interview started, around 8:34 a.m. ET, Dow futures were down 450 points. By the time Kaplan finished speaking, Dow futures had dropped another 10 points. The Dow closed the day down 622 points. You can watch the program here. In addition to the 20 percent unemployment prediction, Kaplan also described the economic outlook in the interview as an “historic contraction,” “very severe,” and noted that the consumer (which represents two-thirds of GDP growth in the U.S.) had “suffered a body blow.”
Now we learn from the Fed Inspector General’s report that on the very day Kaplan was providing fuel for short sellers on TV, he was also actively trading himself on May 1, 2020. Below is a screen shot from the Inspector General’s report for the month of May 2020, showing Kaplan’s trading. According to his previously filed financial disclosure forms, each trade was in excess of $1 million.
Robert Kaplan's Trades on May 1, 2020
Also note the absurdity of an Inspector General taking two years to conduct this investigation, stating that it had access to Kaplan’s brokerage statements, and then failing to indicate on the above chart whether these trades were purchases or sales. We reached out to the Inspector General’s office yesterday, asking for this long overdue information. Their response was: “Thanks for your inquiry but we decline to comment.”
Because the Fed was engaging in unprecedented bailout operations in 2020 to stem the economic damage from COVID, in addition to its regular blackout trading bans around FOMC meetings, the Fed imposed an additional blackout period from March 23, 2020 through April 30, 2020. The Fed sent advisories to this effect to each regional Federal Reserve Bank, including the Dallas Fed.
On the very first day after this blackout period ended, May 1, 2020, Kaplan was back to trading like a hedge fund kingpin while simultaneously using his stature as a Fed Bank President to make outrageous negative predictions on a TV show watched by traders.
Kaplan could have made money by shorting the market ahead of his negative pronouncements or he could have bought low after making those pronouncements.
Neither the Dallas Fed nor the Inspector General will say if Kaplan engaged in shorting the market during a national health crisis. (Shorting means to place a bearish bet that the market or a security will fall in value.) Goldman Sachs did not respond to multiple inquiries, one as recently as yesterday, as to whether it was the brokerage firm conducting Kaplan’s trades. There is a strong suggestion that Goldman Sachs is where Kaplan was trading because he was using a Goldman Sachs, “GS,” money market fund to hold idle cash not deployed for trading.
Kaplan was also trading in and out of oil stocks in 2020, including shares of Chevron, Marathon Petroleum, Occidental Petroleum and Valero Energy. According to Kaplan’s financial disclosure form for 2020, he made “multiple” trades in each of these oil stocks in sums of “over $1 million.”
On May 28, 2020, Kaplan gave an interview to Reuters news wire which generated a headline that he was predicting “a global oil glut lasting well into 2021.” He also made the bearish comment in the interview that many smaller firms and those with lots of debt may not survive.
West Texas Intermediate (WTI), the U.S. domestic crude oil that trades, had collapsed from a price of $60 a barrel at the beginning of 2020 to a range of $30 at the time of the Reuters’ interview with Kaplan. Calling for a “global oil glut lasting well into 2021” was not a bullish call for the oil fields in Texas. WTI actually bounced back to its $60 handle in early April of 2021.
Despite the Inspector General’s finding that Kaplan violated no Fed rules, the type of trading done by Kaplan appears to be expressly prohibited by the Code of Conduct of the Dallas Fed. Appendix A on “Disqualifying Interests” of the Code of Conduct reads as follows:
“De minimis exemption for a matter of general applicability. An employee may participate in a particular matter of general applicability, such as rulemaking, where the disqualifying financial interest arises from ownership by the employee, his or her spouse or minor children of securities issued by one or more entities affected by the matter, if:
“(1) the securities are publicly traded, or are municipal securities, the market value of which does not exceed; (a) $25,000 in any one such entity; and (b) $50,000 in all affected entities;
“or (2) the securities are long-term federal government securities, the market value of which does not exceed $50,000.”
There was certainly nothing de minimis about Kaplan’s trading. In addition to his “multiple” trades in and out of S&P 500 futures, he lists on his financial disclosure form for 2020 “multiple” purchases and sales of greater than $1 million per transaction in 11 individual stocks. Three of those were interest-rate sensitive Big Tech stocks (Amazon, Apple and Facebook) that rose between 75 percent to 90 percent from their March 2020 lows, in no small part because of the interest rate cuts and other interventions by the Federal Reserve in 2020.
The Federal Reserve had very specific rules against Kaplan’s style of speculative trading for decades, but those rules 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).”
When we looked in 2021 at the then current Federal Reserve Board of Governors’ ethics rules and those that had 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 rule when he started trading in and out of S&P 500 futures.
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