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Congressional Insider Trading: Where Things Stand Now

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President Obama calls the STOCK Act "a good first step."

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MINYANVILLE ORIGINAL Former Goldman Sachs (GS) director Rajat Gupta's insider trading trial is currently entering its third week, in a case that has already sent Galleon Group founder Raj Rajaratnam to prison and won more than two dozen other convictions.

Back in 2011, when Rajaratnam prepared to stand trial on insider trading charges involving 35 stocks, among them Google (GOOG), Advanced Micro Devices (AMD), IBM (IBM), eBay (EBAY), and Goldman Sachs, I was particularly shocked to find out that if Rajaratnam had been a US Senator rather than a $7 billion hedge fund manager when he made the trades in question, there would have been no criminal proceedings at all.

Believe it. As Craig Holman, government affairs lobbyist at nonprofit watchdog group Public Citizen, explained, the Securities and Exchange Act did not apply to members of Congress.

Holman may be America's foremost expert on the subject; he told me he had been "working on this for years" before the issue gained any traction.

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.


"Any inside, non-public knowledge they gain can be acted upon," Holman told me in a telephone interview. "Some of the stories are just… breathtaking."

Engaging in "the type of insider trading that would send Martha Stewart to prison" was not illegal for our representatives in Washington, Holman told CBSNews.com last June. "They go into hearings and confidential meetings with business interests, understanding new legislation is going to come out next week," and are free to use that information to guide their trades. (According to one widely-cited study, US Senators' stock portfolios annually outperformed the market by 12%. Over the same period, US households annually underperformed the market by 1.4%.)

But legislators' actual returns are really almost beside the point.

"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," Holman said.

Congresswoman Louise Slaughter (D-NY) first introduced the STOCK Act in 2006, along with Congressmen Tim Walz and Brian Baird. The Act would make it illegal for members of Congress to trade stocks based on inside information, but it continued to languish. Victoria Dillon, Congresswoman Slaughter's press secretary, told me lawmakers were simply not interested.

"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. [Insider trading] shouldn't be legal. This is not one of the more complex pieces of legislation. This is common sense.'"

Then, this past November, Steve Kroft -- with guidance from Craig Holman -- ran with it on 60 Minutes. Kroft called out House Speaker John Boehner (R-Ohio); House Minority Leader Nancy Pelosi (D-Calif.); and Rep. Spencer Bachus (R-Ala.), chair of the House financial services committee. (All the lawmakers denied any insider trading.)



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No positions in stocks mentioned.
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