|Insider Trading Laws Do Not Apply to Members of Congress. No, Seriously.|
By Justin Rohrlich OCT 13, 2011 5:30 PM
And not only are Senators and Congressmen immune, their aides are, too.
In my 1966 book I said unequivocally that insider trading by any government officials on information received in the course of their work should be outlawed. The economic consequences of this trading on stock prices will be the same as any other informed trading, but there are many other aspects to the economic argument for legalizing insider trading generally that just will not pass the 'smell test' for government officials. The compensation argument for corporate insider trading cuts in exactly the opposite direction for government officials. We do not want them to receive extra compensation or outside compensation for doing their jobs. And, of course, all too frequently their access to this information is merely another form of a bribe, and that sure as hell is not legal.
Congressional insider trading is not a new phenomenon; a handful of media reports have surfaced over the past several years, but, as Holman said, the story “never really stuck.”
In a 2009 article on The Hill’s “Congress Blog,” Holman explained the loophole.
"The Securities and Exchange Commission (SEC) does not have the authority to hold employees of Congress or the Executive Branch liable for using non-public information gained from official proceedings for insider trading. Under current law, ‘insider trading’ is defined as the buying or selling of securities or commodities based on non-public information in violation of confidentiality -- either to the issuing company or the source of information. Most federal officials and employees do not owe a duty of confidentiality to the federal government and thus are not liable for insider trading."
Of course, members of Congress do owe a duty of confidentiality to the citizenry by whom they were elected. That’s why congressional ethics rules specifically state that members must not use privileged information gleaned during the course of their duties for personal gain.” But the rule is just a rule; it is not legally binding, and the SEC has never brought an enforcement action against any member of the Senate or the House.
A couple of years ago, a radio segment on American Public Media looked at two cases of suspicious financial activity that took place on both sides of the aisle during the initial days of the financial crisis back in September, 2008.
The next day, according to personal financial disclosures, Henn said that John Boehner, who was GOP House Minority Leader at the time --and was present at the meeting --“cashed out of a fund designed to profit from inflation” and “[s]ince he sold, it's lost more than half its value.” Henn also pointed out that Senator Dick Durbin, an Illinois Democrat, “sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.” Durbin was also at the meeting.
“A year ago this week Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke dashed to Capitol Hill. They hastily met with a small group of congressional leaders to tell them that the country was teetering on the edge of financial catastrophe,” correspondent Steve Henn said. “Paulson and Bernanke asked Congress to spend hundreds of billions to save the banks.”
Public Citizen’s Holman asserts that actual financial gain is almost secondary in such cases.
“Whether members of Congress are in fact cashing in on insider information, or coincidence just makes it appear so, the damage to the integrity of the federal government is the same,” he says.
In the Yale Journal of Regulation two years ago, Maureen O’Hara, the Robert W. Purcell Professor of Finance at the Johnson Graduate School of Management, Cornell University and Jonathan Macey, the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University, wondered why no legal framework regarding this had yet been set up.
The idea that the SEC -- the administrative agency ostensibly in charge of protecting the nation's capital markets -- would not at least attempt to formulate a rule, much less an enforcement strategy, to combat insider trading by federal elected public officials seems particularly strange in light of the clear public policy problems involved in this sort of trading. [N]onpublic information creates perverse incentives for these officials, and introduces innumerable distortions and the potential for immeasurable harm in a legal system in which public trust and confidence is critical. With the SEC unwilling to take any sort of initiative against insider trading by senators and other congressional officers, Congress has been left to police itself. Not surprisingly, this effort has not been a success.
For this reason, Congresswoman Louise Slaughter, along with Congressmen Tim Walz and Brian Baird (who has since retired), has repeatedly introduced the “Stop Trading on Congressional Knowledge Act,” or STOCK Act that would make it illegal for members of Congress to trade stocks based on inside information.
Before he left office, Baird told a reporter that no hard evidence exists that insider trading is a widespread problem in Congress.
“But in a town that trades on information,” he said, it’s “almost a certainty.”
Victoria Dillon, Congresswoman Slaughter’s press secretary, told me that the bill has not garnered much support among lawmakers.
“The first time this legislation was introduced, 14 people endorsed it,” she said. “The last time, it got nine. Congresswoman Slaughter is saying, ‘We shouldn’t have the opportunity to do this. It shouldn’t be legal. This is not one of the more complex pieces of legislation. This is common sense.”
Dillon explained that the STOCK Act is “still a legislative priority for Congresswoman Slaughter.”
Melanie Sloan, executive director of the Center for Responsibility and Ethics in Washington and a former federal prosecutor, has her doubts about the STOCK Act's future.
“There’s rarely support for things that limit lawmakers’ behavior,” she pointed out.
And Robert M. Stern, president of the Center for Governmental Studies, said, “I don’t think I would hold my breath for that one."
Still, it's not as if Congress hasn't instituted any regulations regarding stock ownership in an effort to curtail insider trading. For example, The Senate Armed Services Committee forbids staff and presidential appointees requiring Senate confirmation from owning stocks or bonds in 48,096 companies that have Defense Department contracts.
The Senators themselves?
19 of the 28 senators on the Committee held assets in companies among the prohibited 48,096 between 2004 and 2009, worth a total of $3.8 million to $10.2 million.
Come on now, you didn't think they'd extend the rules to themselves, did you?