Janet Yellen, the chair of the Board of Governors of the U.S. Federal Reserve System, is thought to be the most powerful person in the economy according to Time. Perhaps backing up this claim, her predecessor, Ben Bernanke, was called “the most powerful man in the world” by Seeking Alpha. Despite this fact, many American’s wouldn’t recognize her name.
More than one person has daydreamed about the seemingly endless amount of easy money that could be earned trading stocks and futures if only they knew what moves Federal Reserve chairs like Yellen, Bernanke, and his predecessor, Alan Greenspan, were going to make before they made them. What stops the average person in this line of thought is how utterly illegal and immoral trading on such news, even if it somehow became available to an individual, would be.
Yet, a recent article published in the Wall Street Journal claims that insiders connected to the Federal Reserve through Wall Street firm Medley Global Advisors might be doing just that.
Southern District of New York federal prosecutors are investigating a possible leak of inside information flowing from Federal Reserve Chair Yellen to Medley in 2011 and 2012. The Commodity Futures Trading Commission is reported to be investigating whether anyone actually traded on the information.
The Federal Reserve has reportedly turn down the opportunity to comment on the investigation.
In what is being described as a “novel” defense, Medley is reported to have claimed status as a news organization. It is unclear how many other firms Medley may have disseminated sensitive information to.
“It may be more difficult for prosecutors and regulators to obtain information from those firms, given the First Amendment implications,” Justin Shur a lawyer with MoloLamken LLC and former prosecutor was quoted. “And proving the information is nonpublic could be an uphill battle if widely disseminated.”
In September 2012, the Federal Reserve Board met in a private meeting and voted to begin a new round of asset purchases valued at $40 billion in an effort to stimulate the U.S. economy. The plan was that Reserve Chair Yellen would announce the initiative to the public in early October.
Before the October 4, 2012 date when Yellen was set to make the intentions of the Federal Reserve known to the public, both the Wall Street Journal and Medley Global Advisors published articles indicating that Federal Reserve asset purchases were likely. The day before Yellen was to speak, Medley published a research note that “included confidential details” indicating “the information came from inside the Fed.”
In a separate incident, involving a lack of oversight in relations between The Goldman Sachs Group, Inc. (NYSE: GS) and the Federal Reserve, Senator Elizabeth Warren has stated that “Congress must hold oversight hearings,” in regards to 46 hours of audio recordings made by whistleblower Carmen Segarra, as reported by the Inquisitr.
In May, a report issued by Singapore Management University stated that in the minutes leading up to releases by the Federal Reserve there was “statistically significant” evidence that traders had inside information, were trading on it, and profited, as reported by Bloomberg. Researchers draw these conclusions by analyzing trades made during the lock up periods before announcements, calculating how successful they were and comparing this with market norms.
In liquid stock, bond, and futures markets the use of computers and fairly extensive study is required to make such determinations. However, in more thinly traded junior issues, and even NYSE- and NASDAQ-listed issues, market observers have made anecdotal observations concerning bursts of trading activity before market moving news is made public for years.
A compelling example, similar to what insiders connected to Federal Reserve are being investigated in relation to, can be seen in the shares of Canadian Kerr Mines Inc. (TSX: KER). In November 2010, Kerr Mines, which was renamed from Armistice Resources in January 2014, reported that it was ready to “start gold production” in 2011, according to the Toronto Star.
“The gold was always there,” then-CEO Todd Morgan was quoted. “We all believed in it a long time ago.”
By 2013, Morgan had stepped aside as CEO, the company changed its name in early 2014, and by the end of the year Kerr had quietly dumped the mine properties, as reported by Yahoo Finance. No gold was ever produced.
What is interesting is the 100 percent or so run-up in the price of Kerr shares in the days leading up to the February 12 announcement that the mine property, supposedly the company’s crown jewel, was to be sold. Close to two million shares traded hands on February 9, and 1.4 million on February 11, in a stock that currently has a daily average trading volume near 100,000 shares, as reported by Yahoo Finance. Shares have been nowhere near the $0.25 intra-day high (the chart below features closing prices) reached on February 12 since. Kerr Mines closed yesterday at $0.03, down 88 percent in the eight months since the questionable move.
While it isn’t possible for the casual observer to know exactly what transpired here, that Kerr Mines hadn’t released any significant news for weeks, and that its shares suddenly jumped 100 percent in the days leading up to the last real news the company has ever released, could potentially be viewed as suspect.
The game that U.S. investigators are looking into, that may be being played by insiders connected to Medley Global Advisors and the suspected Federal Reserve leak is similar the one that one might suspect was being played in the shares of Kerr Mines in February of 2015; except with dollar amounts in the millions and billions, rather than the hundreds of thousands.
[Federal Reserve Building Photo by Mark Wilson / Getty Images — Janet Yellen Photo by Justin Sullivan / Getty Images — NYSE Photo by Andrew Burton / Getty Images]