U.S. Firing 3 for Data Misuse : Unreleased GNP Figures Used in Bond Trading
The Reagan Administration is firing two Commerce Department employees for using sensitive economic statistics for personal gain and a third for leaking the data to a friend, Commerce Secretary Malcolm Baldrige announced Thursday.
The action resulted from a nine-month investigation by the department’s inspector general, the FBI and the Securities and Exchange Commission into a widely reported leak last September of the early “flash” estimate of economic growth in the third quarter of last year.
The flash estimate, since discontinued because of its unreliability, put growth for the quarter at 2.8%, well below estimates available to the financial markets. Its disclosure, as much as two days before the authorized Sept. 20 release date, could have provided invaluable “insider information” for futures trading in bonds and other securities sensitive to interest rates.
“At least two employees used (unreleased) sensitive economic data for personal financial gain” by trading in bond futures, Baldrige said in a statement, and a third disclosed “advance information for another person’s gain.” He said the department is planning legislation to make leaks of that kind a crime.
The Commerce Department firings, following recent dismissals over leaks by State Department and Pentagon employees, were the latest result of a growing Administration move to tighten security on sensitive information. However, Thursday’s actions were the first time that the Administration has disciplined employees for other than national security leaks.
Made $50 on Bonds
In a report issued Thursday, Inspector General Sherman M. Funk disclosed that one Commerce Department employee had told investigators he made $50 on a bond futures transaction and enabled a “lifelong friend” to clear $783. The second employee made $300 on a bond futures contract, Funk said, and the third passed word of the low gross national product estimate to a friend who was in the process of obtaining a mortgage.
Futures contracts are agreements to buy or sell commodities or financial instruments at a set price on a specified future date. Futures traders can control a large sum of government bonds by putting down only a small deposit. An estimate of weak economic growth would tend to drive down interest rates and increase the prices of bonds. Even a small increase in price could result in an enormous profit for the investor. But a slight decline could wipe out the investment.
The identities of the three employees were not disclosed. Formal notification of their firing was delivered Thursday, but under civil service rules they will have 30 days to respond and defend themselves.
The employees were among “more than 60” career civil servants in the Commerce Department’s Bureau of Economic Affairs who had knowledge of the GNP data in the days before Sept. 20. The inspector general’s report, criticizing “poor security” at the bureau, said that most of those employees should not have had information of such sensitivity.
Only 8 to Get Data
Under recommendations now said to be in force, future GNP reports are to be known by no more than eight bureau specialists.
Neither Baldrige nor his investigators could say for certain who originally leaked the GNP data. The leak had been widely rumored in the New York and Chicago financial markets on Sept. 19, a day before the information was to be made public. In all, 262 of the bureau’s 450 employees were questioned, the report said, and many agreed to take polygraph tests.
“Because of the shockingly poor security atmosphere in (the Bureau of Economic Affairs), we were unable to pinpoint exactly when the September leak occurred, nor could we tie such a leak to movements in the bond futures or other markets,” the report said.
In his announcement, Baldrige stressed the gravity of the case, making clear that he believes leaks of economic data that can affect markets are as serious as national security leaks.
“There are all kinds of leaks that permeate this town,” Baldrige said. “But leaks of sensitive economic data rank up there with national security. Fortunes can be unfairly won and lost.”
A legal opinion prepared by the inspector general and the Commerce Department’s legal counsel concluded that existing statutes, which would make similar insider trading a criminal offense if carried out in the private sector, do not cover government employees involved in analyzing and producing sensitive economic data.
To Urge Legislation
Baldrige said he is ready to recommend legislation “to deter unauthorized disclosure of sensitive economic information by creating criminal penalties.” The report noted that the Agriculture Department for years has successfully deterred leaks of its highly sensitive crop production reports by providing for fines of up to $10,000 and 10 years of imprisonment for unauthorized disclosures.
For now, the Bureau of Economic Affairs is under pressure to cut back on the number of employees authorized to know all the income and consumption information used in GNP estimates. Also, computer access is to be cut back sharply, data printouts are to be rigidly controlled and access to the division’s downtown headquarters is to be more stringently controlled.
