Worst lapse in years: Fed probes early release of minutes

The Federal Reserve launched an investigation on Wednesday into the U.S. central bank's worst security lapse in years, but said it appeared the early release of market-sensitive minutes of a policy meeting, including to some banks, was accidental.

Minutes of Fed meetings can shed vital light on the future path of U.S. monetary policy and frequently impact financial markets worldwide. As such, they are normally guarded by elaborate security measures.

"At this time, we do not know whether there was any trading related to inadvertent early distribution of the minutes," a Fed spokesman said. "We will be working with market regulators, the SEC and CFTC, to ensure they have the information they need to evaluate the incident."

Securities and Exchange Commission spokesman John Nester confirmed the SEC had been contacted by the Fed, but declined further comment. A spokesman for the Commodity Futures Trading Commission also confirmed that the agency had been informed by the Fed.

The Fed's inspector general is also investigating.

The central bank said it discovered the error around 6:30 a.m. (1030 GMT) on Wednesday. More than 100 people, primarily congressional staffers and employees of trade associations, had received the minutes of its March policy meeting around 2 p.m. (1800 GMT) on Tuesday - about 24 hours before their scheduled public release.

Among those who received the minutes early were people with email addresses that identified them as working for a number of financial firms, including Goldman Sachs, Barclays Capital, Wells Fargo, Citigroup, UBS and JPMorgan, which regularly trade on new information about U.S. monetary policy.

After discovering the breach, the Fed decided it would publish the minutes at 9 a.m. (1300 GMT).

"We discovered the early distribution on our own early this morning and we released the minutes publicly as early as practicable," the Fed spokesman said. "Every indication at this time is that the early release of the minutes was entirely accidental."

The spokesman said the people who got the minutes on Tuesday had been on a list of professional contacts held by an individual at the central bank.

A copy of the email obtained by Reuters showed it was sent by Brian Gross, a member of the Fed's congressional liaison staff. The minutes were sent as an attachment to the email that was labeled as being embargoed for release at 2 p.m. (1800 GMT); the attachment referenced both Wednesday and the date April 10.

Long-time watchers of the central bank could not recall another incident when such a highly sensitive document was released a day early.

"It's certainly an embarrassment for the Fed," said Robert Brusca, chief economist at Fact and Opinion Economics in New York. "It will make the Fed mind its technology better."

Several other congressional staffers contacted by Reuters said that they had received the email of the minutes on Tuesday, but had not noticed until after the story broke.

SENSITIVE RELEASE

The minutes detail discussions between the 19 members of the policy-setting committee over each of the Fed's regular two-day meetings, held eight times a year, plus Fed staff forecasts for the U.S. economic outlook.

Although they do not name individual officials' policy preferences, the minutes give a pretty clear sense of where the consensus at the Fed lies around key issues, such as if and when it plans to taper monthly Fed bond purchases.

Such insight into possible future Fed actions can move the prices of stocks, bonds and currencies. The release of the minutes three weeks after each policy meeting has become a key trading event in the financial markets calendar.

Indeed, the latest set of minutes, which suggested policymakers were nearing a decision on tapering their bond purchases, pushed prices for U.S. government debt lower and helped lift the dollar to a four-year high against the yen after they were released broadly on Wednesday morning.

The minutes of the previous two meetings had an even bigger impact. Minutes released in late February led to the biggest drop in U.S. stocks in three months, while minutes in January sparked a selloff in the Treasury market that drove benchmark yields to their highest level since May 2012.

Premature disclosures of sensitive U.S. government data is unusual but not unprecedented. Last August, the U.S. Labor Department accidentally posted weekly jobless claims data to its website the afternoon before the report was due to be released.

Lawyers and former federal prosecutors said that any insider trading case based on the early release of the minutes would hinge on whether the recipient of the information specifically knew the details were provided on a confidential basis.

"The major issue is whether the recipients understood that the information that was leaked early was confidential," said Mark Fickes, a partner in BraunHagey & Borden LLP in San Francisco, and a former senior SEC trial counsel. "It would be hard to imagine liability if the early release were totally accidental and the recipient didn't know the release was early."