A former director of the Federal Reserve Bank of New York was indicted on charges of leaking sensitive information about interest rates to a now-defunct New Jersey brokerage firm.
Robert A. Rough, 49, became the first Federal Reserve official indicted for alleged improprieties in the 75-year history of the central bank system. Rough served on the nine-member board of directors of the Fed’s New York branch from 1982 to 1984. He allegedly leaked advance word of confidential data to the firm Bevill, Bresler & Schulman Inc., enabling it to make millions of dollars in profitable trades in government securities.
The indictment charges that one of Rough’s telephone calls to Bevill Bresler was made from the New York Federal Reserve Bank’s board room immediately after a meeting.
In exchange for the information, Rough allegedly received a $47,000 loan from the firm, with interest deferred and no repayment schedule, according to the indictment.
The 17-count indictment obtained by Samuel A. Alito Jr., the U.S. attorney in Newark, N.J., accuses Rough of wire fraud, securities fraud and bank fraud. If convicted on all counts, he faces a maximum sentence of 29 years in prison and a fine of $141,000. Rough resigned earlier this year as president of the National Bank of Sussex County in New Jersey.
His lawyer, Michael B. Himmel, said: “Mr. Rough is going to enter a plea of not guilty, and he is going to vigorously fight the charges.” An arraignment is expected within two weeks.
Allegations that Rough had leaked the information first surfaced in April, 1987, during the trial of Gilbert C. Schulman, former president of Bevill Bresler. Schulman and three others at the firm were convicted and sent to prison on charges that they had defrauded customers, including banks, savings and loans and municipalities, of $144 million.
A spokesman for the U.S. attorney’s office in Newark said an investigation of Rough was launched during the Schulman trial. But he said it took more than a year to obtain an indictment because agents of the Federal Bureau of Investigation had to wade through extremely complicated records concerning interest rate movements and government securities trading.
Rough is accused of leaking information about the Federal Reserve’s plans for changing the discount rate, which is one of the Fed’s most closely guarded secrets. The discount rate is the interest rate charged by the Fed for loans to financial institutions.
A change in the discount rate is a key indicator of the Fed’s monetary policy, suggesting that the central bank intends to push broader interest rates up or down. Changes in the rate usually cause changes in other interest rates and affect the price of government securities such as U.S. Treasury notes, bills and bonds.
The indictment charges that Bevill Bresler traded on Rough’s tips and “would and did, on some occasions, fraudulently make millions of dollars in profits and avoid millions of dollars in trading losses which they would not have made or avoided without access to the defendant’s confidential information.”
The Federal Reserve Bank of New York is one of 12 such branches around the country. Decisions on changing the discount rate are made by the Federal Reserve Board in Washington. But the 12 regional banks make recommendations to Washington and then are informed of the decision before a public announcement is made.