Insider trading, Merriam-Webster tell us, is “the illegal use of information available only to insiders in order to make a profit in financial trading.”
In 2011, conservative think-tanker Peter Schweizer wrote a book about legal but unethical financial trading. It was titled “Throw Them All Out.” It described how members of Congress legally traded stocks after learning of nonpublic information that would influence stock prices. The news show “60 Minutes” verified Schweizer’s claims, then interviewed him on TV on Sunday, Nov. 13, 2011.
Insider trading had been illegal for corporate executives since enactment of the Securities Exchange Act (SEA) in 1934. But it failed to include Congress and its employees, leaving them free as a bird to line their own pockets. There’s a Latin phrase that describes this scenario: “Quis custodiet ipsos custodes?” Loosely translated, it asks, “Who watches the watchers?”
The Journal of Financial and Quantitative Analysis answered that question. From 1993 to 1998, Senators’ and House members’ stock trades outperformed the market by 12 and 6 percent, respectively, an almost impossible feat. Luigi Zingales, of the University of Chicago, said they “either are better than hedge-fund managers, or they benefit from privileged information.”
Steve Kroft, “60 Minutes”: “So Congressmen get a pass on insider trading?” Schweizer: “They do.”
Schweizer: “The ones who make the rules (SEA, e.g.) are the political class in Washington. And they’ve conveniently written them in such a way that they don’t apply to themselves.”
Schweizer’s book and “60 Minutes” appearance unleashed a frenzy of public outrage that quickly led to an attempt to make the rules apply to the rule-makers. In the House there was a bipartisan concurrence vote supporting a get-tough new law. Ditto for the Senate, except for three members, which included Richard Burr, who said it would be merely duplicative of other laws.
The result was STOCK (Stop Trading on Congressional Knowledge Act). President Obama signed it into law on April 4, 2012.
STOCK added Congress and its employees to the Securities Exchange Act and ensured transparency by requiring Congress members to post stock trades on the internet. One year to the day after STOCK’s enactment, Congress quietly eliminated the requirement to post their transactions on the internet and President Obama also signed that into law.
No one has been convicted under STOCK. Why? Because proving violations of insider trading laws means establishing that the transactions issued “solely” from Congressional work in which the person was involved, that the trader knowingly used inside information, and that the information could not have come from data available to the public.
Those obstacles are forbidding enough but here’s the kicker: Article I, Section 6, Clause 1, the Constitution’s “Speech and Debate” clause says “(F)or any Speech or Debate in either House, Members of Congress shall not be questioned in any other Place.” That provision has been interpreted by the Supreme Court to prohibit questioning Congress members about their congressional business.
Notwithstanding, do Congress members still trade on nonpublic information? You be the judge:
In January 2020, the Department of Justice began investigating stock transactions of Sens. Richard Burr, Kelly Loeffler, David Perdue, James Inhofe and Dianne Feinstein. All denied wrongdoing and, possibly due to the stringent burden of proof, no charges of STOCK violations were brought, and the investigation of all except for Burr closed in May 2020. Burr’s extended to Jan. 19, 2021.
Certainly, it’s possible that all the senators’ trades were innocuous, and certainly the presumption of innocence applies. However, their transactions fail the smell test.
Investigations were launched because the trades occurred after the senators received privileged briefings about the upcoming COVID-19 virus, and prior to public awareness of the developing pandemic. Burr was chairman of the Intelligence Committee and had vast knowledge of how the virus would likely affect the stock market.
The senators sold stock in companies like hotel chains, which would suffer during a pandemic, and/or bought stock in companies like those making virus masks which would benefit. Loeffler and her husband, Jeffrey Sprecher, chairman of the New York Stock Exchange, began trading the day of the briefing and traded up to $18 million. Burr and his wife traded up to $1.72 million and his brother-in-law traded up to $280,000.
In March, the public woke up to the reality of the pandemic. The stock market also awakened. It tanked.
Pew Research says public trust of Congress stands at 18 percent. Many believe our democracy has morphed into a kleptocracy, with rules written by a plutocracy for its own benefit.
In a Financial Times interview, Lou Mavrakis, mayor of Monessen, Pennsylvania, put it this way: “When these people get inside the 495 Beltway (that runs around Washington), I don’t know whether it’s the damn air, the water or what the hell it is, they become stupid and forget about the rest of the country.”
Michael Smith is a Southern Pines resident.