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Profiteering From Insider Stock Trading

Are members of Congress exempt from the law?

By Heide B. Malhotra
Epoch Times Staff
Created: January 4, 2012 Last Updated: January 4, 2012
Related articles: Business » Economy & Trade
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Senator Kirsten Gillibrand attends Lifetime Television's 2012 'Every Woman Counts' campaign at Hofstra University on December 2, 2011 in Hempstead, NY. In a Dec. 1 speech before the U.S. Senate Committee on Homeland Security, she said "The American people don’t have a lot of trust in Congress. They look to Congress and they know it’s broken." (Joe Corrigan/Getty Images)

Senator Kirsten Gillibrand attends Lifetime Television's 2012 'Every Woman Counts' campaign at Hofstra University on December 2, 2011 in Hempstead, NY. In a Dec. 1 speech before the U.S. Senate Committee on Homeland Security, she said "The American people don’t have a lot of trust in Congress. They look to Congress and they know it’s broken." (Joe Corrigan/Getty Images)

A December Gallup University poll of Americans from all walks of life, including Republicans, Democrats, and Independents, indicated that 89 percent of Americans don’t trust Congress and believe that the members are only out for number one. Public opinion against Congress and the Washington bureaucrats has reached an all-time low. This is the highest negative rating the American public gave to Congress since 1974.

“The American people don’t have a lot of trust in Congress. They look to Congress and they know it’s broken,” said Sen. Kirsten Gillibrand in a Dec. 1 speech before the U.S. Senate Committee on Homeland Security.

On Nov. 13, a CBS “60 Minutes” episode was doing the public a disservice, enraging Americans against members of Congress even further by accusing them of insider trading. The accusation was based on the book “Throw Them All Out,” authored by Peter Schweizer, and a Wall Street Journal op-ed by Sarah Palin, former Alaska governor and Republican vice-presidential
candidate.

The “outrage should be aimed at ‘60 Minutes’ itself, along with Peter Schweizer, whose new book, ‘Throw Them All Out,’ provided the misleading data that was the basis for the broadcast,” according to a Dec. 13 article on the Advisor Perspectives website.

Expressing the same line of thought as Schweizer and Palin, professors at Yale University and

Massachusetts Institute of Technology published a research paper in June, stating that certain stocks held by members of Congress did exceptionally well between 2004 and 2008, outperforming market-based investment firms’ investments in the same stock.

On the other hand, regular investments by members of Congress did rather poorly, suggesting that without specific knowledge that was unavailable to the general public, the members of Congress would not have made a killing.

“We find that the politically-connected subset of members’ portfolios outperformed
the rest of their investments. … This finding is especially significant considering that there is no evidence of either individual investors or money managers outperforming the market in their local investments in recent decades,” the research paper concluded.

Insider Trading in a Nutshell

“‘Insider trading’ is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct,” states the U.S. Securities and Exchange Commission (SEC) on their website.

Legal insider trading occurs when executives, managers, and other staff of a corporation buy or sell stock from the company they are employed in. Such trades have to be reported to the SEC.

Insider trading becomes illegal when investors, with no one exempt because of legal, political, or other association, are aware of nonpublic information and use the knowledge to their benefit or tip off another individual.

To prosecute violators, the SEC employs the general antifraud provisions of the federal securities laws, as “there is no express statutory definition of the offense of insider trading in securities,” according to a statement by Robert Khuzami, director of the Division of Enforcement at the SEC, published on the SEC website.

Application of Insider Trading Laws

“There is no reason why trading by Members of Congress or their staff members would be considered ‘exempt’ from the federal securities laws, including the insider trading prohibitions,” said Khuzami in his statement.

However, there are some caveats that might exempt insider trading issues from being prosecuted when it comes to members of Congress.

“The application of these principles to such trading, particularly in the case of Members of Congress, is without direct precedent and may present some unique issues,” Khuzami said.

As with nonmembers of Congress, extensive investigation has to prove guilt or innocence. First, the Congressional Code of Ethics must establish if the members used knowledge of a given issue for personal benefit.





   

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