Questions About Leak at Federal Reserve Escalate to Insider-Trading Probe
Firm at center of probe says it is a media organization with special legal protections
WASHINGTON—A high-profile investigation into a leak of sensitive information from the Federal Reserve in 2012 has escalated to an insider-trading probe led by a key market surveillance agency and federal prosecutors in Manhattan, according to people familiar with the matter.
But the firm at the center of the probe, Medley Global Advisors, has thrown up a roadblock by claiming a novel defense: It says it is a media organization entitled to special protections under the law, the people said.
Federal prosecutors in the Southern District of New York are focusing on the information leak while the Commodity Futures Trading Commission is looking into whether anyone violated insider-trading rules in 2012 when Medley disclosed to its clients details about the Fed’s plans for further economic stimulus, according to people familiar with the matter.
A spokesman for Medley said the firm “reserves complete editorial freedom in its newsletters, an integral principle for any serious newsgathering organization.” He said, “Medley’s journalists are focused on providing their readers deep insight,” and that the firm’s work is “made available to all subscribers and has a global audience from Kansas City to Madrid to Tokyo.”
The Fed declined to comment on the investigation and insider-trading probe.
The CFTC began its investigation after news of an internal Fed probe into the matter became public in December 2014. The 2010 Dodd-Frank financial regulatory law gave the CFTC the ability to pursue insider-trading charges based on confidential government information that affects the price of a commodity, including futures. The agency hasn’t yet brought any such charges.
The investigations by the Southern District of New York and the CFTC are still in the fact-finding stages, and it isn’t clear whether any insider-trading violations occurred.
Medley’s assertion that it is a news organization has raised prickly legal issues for prosecutors, the people said. Earlier this year, former Attorney General Eric Holder issued new rules requiring prosecutors to obtain additional high-level approvals to subpoena materials from reporters involved in investigations.
Medley’s claims also could impact at least three other insider-trading probes involving policy research firms that allegedly relayed confidential government information to Wall Street traders.
Traditional media firms are largely immune from insider-trading prosecution because even if they acquire private information, they publish it to a broad section of the public. But the government has no clear definition of what constitutes a media organization, in part because it is wary of being accused of infringing on the First Amendment.
Medley’s website refers to recipients of its research notes as “clients,” not readers or subscribers. It says the firm serves “the world’s top hedge funds, institutional investors, and asset managers” by delivering “unbiased intelligence on macroeconomic and political events by cultivating relationships with senior policy makers around the globe.”
In 2010, Medley was purchased by the Financial Times. Medley hasn’t disclosed how many clients receive its newsletters.
The investigation is in “uncharted territory and raises some unique issues,” said Justin Shur, a former Justice Department prosecutor now with MoloLamken LLP.
“It may be more difficult for prosecutors and regulators to obtain information from those firms given the First Amendment implications,” Mr. Shur said. “And proving the information is nonpublic could be an uphill battle if widely disseminated.”
Insider-trading law is notoriously vague, and there is no specific statute prohibiting it. Securities lawyers say it could be illegal for a government official to knowingly disclose private and market-moving information to an investor or an individual working on behalf of investors. And investors could run afoul of the rules if they trade on information they know was illegally obtained from the government.
The Justice Department and the Fed’s inspector general were previously conducting investigations to identify Fed employees who may have improperly shared details of the Fed’s deliberations in September 2012 with Medley senior managing director Regina Schleiger. House Republicans also have subpoenaed the Fed after accusing the central bank of botching its internal investigation.
The leak probe centers on a confidential Sept. 12-13, 2012, meeting of senior Fed officials. At the meetings, the Federal Open Market Committee voted to begin a new effort to spur the economy by buying $40 billion worth of mortgage-backed securities each month.
The Fed announced the move after the meetings concluded. It left open the possibility of further stimulus.
The important details of the Fed’s internal deliberations at the September meetings were supposed to be disclosed by the Fed in early October.
Before that happened, The Wall Street Journal published a story reporting that Fed officials at the September meeting were considering further action to stimulate the economy. The Sept. 28 story said there was a “strong possibility” the Fed would begin purchasing large amounts of Treasury bonds.
The next week, Medley sent a research note to its clients saying with more certainty that the Fed was “likely to vote as early as its December meeting” to begin monthly purchases of $45 billion worth of Treasury bonds.
The Oct. 3 Medley note, which came the day before the Fed released the meeting minutes, included confidential details that indicated the information came from inside the Fed.
For example, Medley stated that Fed officials debated providing an assurance that they wouldn’t consider raising interest rates until unemployment fell below 6.5% or the medium-term outlook for inflation rose above 2.5%. The language was adopted later that year.
Medley also wrote that “tomorrow’s minutes will reference a staff paper” and disclosed that staff members at the Fed worked past midnight to prepare for the meeting.
The Fed’s decision to initiate $45 billion in Treasury bond purchases, which the Fed announced after its December meeting, was intended to put downward pressure on Treasury yields and other interest rates, weaken the dollar and stoke the stock market.
After the Journal story and the Medley analyst report were made public, Ben Bernanke, then the Fed chairman, asked the Fed’s general counsel to investigate whether any information was improperly leaked by Fed employees.
In March 2013, the investigation found that Fed officials who spoke with the Journal didn’t provide details of Fed “policy proposals or actions.” Disclosures made to the Journal “appeared to be unintentional or careless,” the investigation found.
That same investigation concluded that “nearly everything” in the Medley note was previously disclosed by the Journal.
The Journal hasn’t received any subpoenas on the matter, said Colleen Schwartz, a spokeswoman for Dow Jones & Co., which owns the Journal.
When the Fed’s internal investigation was made public earlier this year, the chairman of the House Financial Services Committee called it “inadequate.” The committee chairman, Rep. Jeb Hensarling (R., Texas), later issued a subpoena to the Fed requesting more details about the investigation.
The Fed investigation said it failed to determine who provided the information to Medley.
Still, the alleged leak was surprising to some inside the central bank because the Fed had adopted a policy two years earlier to avoid such disclosures. The communications policy, written in June 2011, stated that members of its top policy-making committee “will strive to ensure” they don’t provide any profit-making entity “with a prestige advantage over its competitors.”
Policy makers “will consider this principle carefully and rigorously” when meeting with “anyone who might benefit financially from apparently exclusive contacts” with Fed officials, according to the policy, which was amended in January this year.
The Fed found that a handful of officials had in fact sat down with Ms. Schleiger, including then-vice Chairwoman Janet Yellen, who met with the Medley analyst in June 2012, long before the leak. The Fed hasn’t released the names of other officials who met with Ms. Schleiger.
After the Fed’s investigation became public, the CFTC launched its own probe, according to people familiar with the matter. Investigators asked Medley to turn over information related to the October 2012 research note. Lawyers for Medley declined to do so, saying it is a media company and entitled to protections under the First Amendment.
At issue for federal officials: Is there a legal difference between research firms that gather information about confidential government activity for clients and more traditional news organizations that publish similar information for a broader set of subscribers?
Before joining Medley in 2003, Ms. Schleiger worked for a decade as a reporter covering financial services for Knight Ridder.
There is no record of Medley applying for a media credential from the congressional press gallery, which is the traditional way journalists in Washington obtain press passes. The Fed says it hasn’t issued media credentials to Ms. Schleiger or anyone at Medley.
The firm’s spokesman said “Medley’s status as a media organization does not turn on whether it applies for media credentials.”