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Fed Prepares Action Against Goldman Sachs in Leak Case

Two years ago, the Federal Reserve faced a predicament: One of its New York employees had leaked confidential government information to a banker at Goldman Sachs.

Both men ultimately pleaded guilty to stealing government property. Goldman, for its part, paid a $50 million penalty to New York State regulators because its "management failed to effectively supervise" the banker.

At that point, the case seemed to be closed, which was just as well for Goldman and the Fed — institutions dogged by the public perception that they are a little too cozy.

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York.
Andrew Harrer | Bloomberg | Getty Images
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York.

But the Fed is now preparing an enforcement action of its own against Goldman, according to people briefed on the matter, and the bank is expected to pay a financial penalty in that case as well.

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The Fed is also considering an action against a third man, a former Goldman executive who worked alongside the more junior banker who received the leaked material. Unlike Goldman, the former executive plans to fight the Fed if it files a case against him, the people briefed on the matter said.

The cases would reflect a broader effort at the Fed to address Wall Street misdeeds and ramp up its enforcement efforts against individual bankers. In 2015, the Fed chose to bar six bankers from the industry, twice the number in 2014. The year before that, the Fed did not take any such actions.

But for the Fed, the circumstances of the looming Goldman actions are both unlikely and awkward.

The leak, after all, originated at the Federal Reserve Bank of New York with one of its own employees. And the junior Goldman banker who received the confidential information was a former New York Fed employee himself, illustrating the perils of the proverbial revolving door between government and Wall Street. The banker came to Goldman with a job reference from a New York Fed official.

The Fed's board in Washington, a unit that operates separately from the New York Fed, is pursuing Goldman and the former executive.

These actions would not be the Fed's first to stem from the leak. After the leak provided Goldman a window into the Fed's private insights about regulatory matters, the New York Fed fired its employee and notified law enforcement agencies, saying at the time it was "resolute to learn from our experiences."

The Fed in Washington, which declined to comment for this article, permanently barred the junior Goldman banker from the industry.

But the Fed appeared to stop there. When the New York State Department of Financial Services penalized Goldman last year, it invited the Fed to announce its own action at that time, another person briefed on that matter said. The Fed declined, making its decision to pursue Goldman now all the more surprising.

The Fed's case against Goldman could be announced in coming weeks, according to the people briefed on the matter, who spoke on the condition of anonymity. The penalty is expected to be less than the $50 million that the New York regulator imposed, though in settling the case Goldman would agree to enforce policies that might prevent another leak.

In a statement, a Goldman spokesman said that the bank had already "reviewed our policies regarding hiring from governmental institutions and have implemented changes to make them appropriately robust."

The spokesman, Michael DuVally, also emphasized that "We have zero tolerance for improper handling of confidential information."

The banker who received the leaked material worked at Goldman for less than three months, Mr. DuVally said, and the bank "immediately began an investigation and notified the appropriate regulators, including the Federal Reserve" once it detected the problem. Goldman fired the banker, Rohit Bansal, within days of discovering the leak.

It also fired the executive, Joseph Jiampietro, who at the time was a managing director at Goldman and helped oversee Mr. Bansal. Mr. Jiampietro, previously a senior adviser to Sheila C. Bair when she was chairwoman of the Federal Deposit Insurance Corporation, was dismissed after Goldman's own investigators found New York Fed documents on his desk.

Yet Goldman never concluded he knew about the leak, instead reporting to regulators that he "failed to properly escalate" the problem. He also avoided criminal charges, telling federal prosecutors that he never read the documents and had no clue that they were illegally obtained, one of the people briefed on the matter said.

In a court filing, Mr. Bansal's lawyers said he "was being unduly influenced by the pressures of his new job" and he "came to believe that certain of his superiors wanted him to obtain information or documents" from the New York Fed. Mr. Bansal, who accepted a misdemeanor plea deal with federal prosecutors in Manhattan, did not explicitly accuse Mr. Jiampietro of instructing him to obtain the documents.

That has not stopped the Fed from pursuing its own enforcement action against Mr. Jiampietro, the people briefed on the matter said. In contrast, the Fed is not expected to penalize the other Goldman employees who worked closely with Mr. Bansal.

Mr. Jiampietro's lawyers have told the Fed that if it pursues an action, they will fight the case through the Fed's disciplinary proceedings, disputing that Mr. Jiampietro had anything to do with the leak.

"As my client has insisted from the start, Mr. Jiampietro did nothing wrong and the Fed appears to now be using Mr. Jiampietro as an industry scapegoat," one lawyer, Adam Ford, said in a statement. "If the Fed brings charges against Mr. Jiampietro, any allegation will stand in stark contrast to the findings of every other investigatory regulator who has already ended their inquiries without any action taken against him."

The New York Fed has taken steps to become a more stringent regulator under William C. Dudley, its president. In 2013, Mr. Dudley unnerved some Wall Street executives when he publicly declared seeing "evidence of deep-seated cultural and ethical failures at many large financial institutions."

Yet the Fed's ties to Goldman — nicknamed "Government Sachs" for all the employees it swaps with federal agencies — are unmistakable. Mr. Dudley, for example, is a former Goldman economist.

Mr. Bansal joined Goldman in July 2014 from the New York Fed. Goldman hired him "in large part for the regulatory experience and knowledge he had gained," the New York State Department of Financial Services said last year when it settled with Goldman.

At Goldman, Mr. Bansal joined a unit in the investment bank that advises financial institutions on mergers and regulatory matters, a role that presented a potential conflict of interest. While federal rules about such conflicts are somewhat ambiguous, Mr. Bansal filled out a form that prohibited him "from knowingly accepting compensation" from a midsize bank he previously regulated.

Despite that warning, Goldman assigned Mr. Bansal to advise that bank. Mr. Bansal accepted the assignment, indicating that he was allowed to do the work so long as it happened behind the scenes.

Much of what Mr. Bansal did was legal. But trouble came when he obtained confidential information from one of his former New York Fed colleagues, Jason Gross. Some of the documents helped him advise the midsize bank.

In a Sept. 26 conference call with a high-ranking Goldman executive, Mr. Bansal circulated an email that included a New York Fed document.

Inside Goldman, the email set off alarms. The bank opened an internal investigation and alerted the New York Fed.

At Mr. Bansal's sentencing hearing in March of this year, the federal judge called the documents "essentially innocuous." Mr. Bansal received probation, as did Mr. Gross.

"Rohit is pleased with the sentence and looks forward to putting this behind him and moving on with his life," his lawyer, Scott Morvillo, said at the time.