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.
The second consideration centers on materiality, which raises the question of whether informed investors would consider the information of importance to investment decisions.
Lastly, the investigation needs to establish that the information was nonpublic and how the information was provided to the member.
In the end, “the conduct at issue must be intentional or reckless. Since all of these issues are inherently fact-specific, it is difficult to generalize about the likely outcome of any particular scenario,” Khuzami concluded.
Members of Congress on Defensive
“A public perception has developed that Congress is not covered by insider trading laws, and worse, has exempted itself from them. This is not true,” stated Sen. Joe Lieberman, chairman of the Homeland Security and Governmental Affairs Committee, in a statement on the committee’s website.
Prior legislation on the issue was vague and thus opened loopholes, which allowed certain members of Congress to skirt legalities and use nonpublic information for personal gain.
“There is no oversight authority on Congressional insider trading,” according to Congresswoman Louise M. Slaughter’s website.
For years, a number of members of Congress introduced bills to close loopholes that allowed a member to profit from nonpublic information, either by buying or selling securities or from providing the information to another individual.
The first Stop Trading on Congressional Knowledge Act (STOCK Act) was introduced by Rep. Brian Baird in March 2006 and reintroduced in May 2007 and on Jan 26, 2009.
In response to recent public outcry, a revision of the STOCK Act was introduced by Rep. Timothy Walz in March (H.R.1148), while related versions were introduced by Sen. Scott Brown (S. 1871) and Sen. Kirsten E. Gillibrand (S. 1903) on Dec. 1.
“I have introduced in the Senate the Stop Trading on Congressional Knowledge (STOCK) Act of 2011 and the accompanying Senate Resolution, which would prohibit members or employees of Congress, as well as Executive Branch employees, from using nonpublic information obtained through their public service for the purposes of investing or otherwise making a personal financial gain,” said Brown in his Dec. 1 testimony before a Senate Committee.
Law Professors Differ in Opinion
“I continue to say with confidence now, that congressional insider trading in securities violates the broad anti-fraud provisions in federal securities law as well as the federal mail and wire fraud statutes. Thus, congressional insider trading is already illegal under existing law,” testified Donna M. Nagy, law professor at Indiana University.
On the other hand, John C. Coffee Jr., a Columbia University law professor, states in his testimony before the aforementioned Senate Committee that insider trading laws are fraught with ambiguities. Therefore, public prosecutors and Supreme Court judges would hesitate to prosecute members of Congress.
Because of political sensitivity, insider trading violation cases would be difficult to prosecute unless convincing evidence exists, according to the testimony of Donald C. Langevoort, law professor at Georgetown University. No public prosecutor or the SEC would touch such cases. This is clearly why the SEC has so far not brought any suits against members of Congress.
UCLA professor of law Stephen Bainbridge, having been the least impressed with all past and recent legislative attempts to reign in members’ attempts to profit from their nonpublic knowledge, suggests that “what Gillibrand’s proposal does is to completely rethink the STOCK Act by simply applying existing law to Congress. … In sum, Senator Gillibrand and her staff are to be highly commended for coming up with a ban on Congressional insider trading that is simple, effective, comprehensive, and workable.”
