Justice Department Investigates 2012 Leak of Fed Policy Debate

(Bloomberg) -- The U.S. Department of Justice has joined an investigation into a leak of confidential Federal Reserve information in 2012, escalating a probe that has drawn scrutiny from members of Congress in both parties.

Federal Reserve Chair Janet Yellen revealed the Justice Department’s involvement in a letter to Representative Jeb Hensarling on Monday. She also said the Fed would comply with his request for the names of officials who met with Medley Global Advisors, whose report on details of an internal Fed policy debate is at the center of the probe.

Yellen said she was among the officials who had contact with Medley. She added that her meeting with an analyst from the firm was in June 2012, three months before the September Federal Open Market Committee meeting that was the subject of the leak. “I did not convey any confidential information,” she said.

The Justice Department’s involvement moves the probe beyond an internal Fed investigation that started more than two years ago. The department can bring resources to bear that the Fed can’t, such as FBI agents trained to sniff out criminal behavior and the use of a grand jury to look deeper into the matter and possibly bring criminal charges, said Roscoe Howard Jr., former U.S. Attorney in Washington.

Inspectors general, such as the Fed’s, cannot “go into a courtroom and say we’re going to return an indictment,” said Howard, a partner at Barnes & Thornburg LLP in Washington. “They have to go to the FBI. When the FBI gets involved will probably be decided by the gravity of the situation.”

Cooperating Fully

“The Board’s Inspector General and the Department of Justice are in the midst of an investigation into this matter,” Yellen said in her letter to Hensarling, chairman of the House Financial Service Committee. “We are cooperating fully with them and look forward to the results of their investigation.”

Fed spokeswoman Michelle Smith declined to comment. John Manibusan, spokesman for Inspector General Mark Bialek, also declined to comment, as did Peter Carr, a spokesman for the Justice Department.

As many as five lawmakers, including Democrats Senator Elizabeth Warren and Representative Elijah Cummings of Maryland, have asked for more details about how confidential information spilled out from the Federal Open Market Committee.

In its 2012 report, Medley described the FOMC’s September, 2012 meeting, when the committee decided to buy $40 billion a month of mortgage securities in the third round of so-called quantitative easing.

December-Bound

The report, titled “Fed: December Bound,” telegraphed the possibility that $45 billion of U.S. Treasury purchases would be added to the program, as well as the possible adoption of guidelines on levels of unemployment and inflation that officials would seek to achieve before raising interest rates from near zero.

The Medley report was published one day before minutes of the September meeting were released. On Oct. 4, 2012, the day they were published, then-Chairman Ben S. Bernanke asked General Counsel Scott Alvarez and then-FOMC Secretary William English to investigate the leak, Bloomberg has reported.

Alvarez told House staff in a private meeting that his investigation showed “a small few” number of Fed officials had contact with Medley, according to an April 15 letter from Hensarling to Yellen. In a summary of its probe, the Fed said it was unable “to determine the source” of the leak.

Policy Intelligence

In his letter, Hensarling called the Fed’s probe “inadequate” and asked for the names of the Fed officials who had contact with Medley, which sells intelligence on macro- economic policy to private clients, including hedge funds. House staff intended to conduct their own query through “transcribed interviews,” he said.

Yellen responded on Monday, saying she had “directed the staff to provide the remaining requested names to you with the understanding that the names will be kept confidential.” Her letter was also addressed to Representative Sean Duffy of Wisconsin, chairman of the Subcommittee on Oversight and Investigations.

The Justice Department’s involvement could help Yellen de- politicize the leak probe.

“For the sake of accountability, it is better to go to the Justice Department,” said Kevin Petrasic, a partner at Paul Hastings LLP in Washington, and a former assistant chief counsel at the Office of Thrift Supervision.

“You are going to get more weight behind you if you have Justice making the phone calls instead of the inspector general,” Petrasic said. “From a political perspective, it is also better to send it to the Justice Department” because that eases potential conflicts that could arise from a probe by the Fed’s own staff.

--With assistance from Tom Schoenberg in Washington.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net Alister Bull