Congressional Insider Trading
[I wrote this article in January 2018. In light of current events, (https://www.washingtonpost.com/nation/2020/03/20/coronavirus-richard-burr-stock/), it seems worth another read.]
Is it true that many members of the House of Representatives, the Senate, their staffs, and the executive branch of our government see their financial positions increase substantially more than average investors during their time in public office? Might this have any relationship to the ‘altruism’ of elected members and their desire to remain in elected office to ‘see their agendas through’? The STOCK Act of 2012 (Pub.L. 112–105, S. 2038, 126 Stat. 291) was enacted April 4, 2012. (See https://www.congress.gov/bill/112th-congress/senate-bill/2038/text.) As with many pieces of legislation that emerge from Congress, each piece seems to have to have a title with an acronym that is intended to inform the reader as to the content of the legislation. The STOCK Act is no different. The ‘STOCK’ in STOCK Act stands for “Stop Trading On Congressional Knowledge”. And like many other pieces of legislation, this Act purports to do one thing but does not really function as advertised. In fact, the intent of the legislation was relatively misleading. In application, it hit too close to home by potentially depriving members of Congress, their staffs, and executive branch employees of perks and protections that they had become very accustomed to. The Act in its original form did not last long.
§4 of the Act entitled Prohibition Against Insider Trading states, inter alia:
“(a) AFFIRMATION OF NON EXEMPTION.—Members of Congress and employees of Congress are not exempt from the insider trading prohibitions arising under the securities laws, including section
10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 thereunder.
(b) DUTY.—
(1) PURPOSE.—The purpose of the amendment made by this subsection is to affirm a duty arising from a relationship of trust and confidence owed by each Member of Congress and each employee of Congress.”
The bill, in a nutshell, was designed to provide the appearance of preventing members of Congress and employees of Congress from using private information obtained in their official capacities for personal benefit, or any other purpose. It was introduced with great fanfare and publicity by then Senator Joe Lieberman (I-CT) on January 26, 2012 and passed the Senate by a 96-3 vote. The three dissenting votes were from then Senators Jeff Bingaman (D-NM) and Tom Coburn (R-OK), and sitting Senator Richard Burr (R-NC). The House of Representatives subsequently passed the bill by a 417-2 vote. The two dissenting votes were from then Congressman John Campbell III (R-CA) who, in 2010, had been investigated for soliciting campaign contributions from entities affected by legislation then under consideration in 2009, and sitting Congressman Rob Woodall (R-GA). There were no co-sponsors. It was then signed into law by President Barack Obama who, when speaking of the Act said “It's the notion that the powerful shouldn't get to create one set of rules for themselves and another set of rules for everybody else.... If we expect that to apply to our biggest corporations and our most successful citizens, it certainly should apply to our elected officials.” The legislation, as originally passed by both chambers, would have denied federal pensions to members of Congress who might have been convicted of felonies involving public corruption.
The STOCK Act mandated a one-year study of the growing political intelligence industry, and required every Member of Congress to publicly file and disclose any financial transaction of stocks, bonds, commodities futures, and other securities within 45 days on their websites, rather than once a year as they do now. The Act also required members of Congress and Executive branch officials to disclose the terms of mortgages on their homes, and prohibited them from receiving special access to initial public stock offerings (IPO). The bill is divided into nineteen sections. Interestingly enough, not one of the provisions included in the bill appeared to be an internal enforcement provision. That is, the bill did not appear to provide for any mechanism internal to Congress or the executive branch that would investigate and hold accountable those in violation of the Act. Simply, one might be found as having violated the Act but no actions would be taken against the violator, much like a parking ticket that a driver chose to not pay. The Act was amended on April 15, 2013 based on legislation introduced by then Senator Harry Reid (D-NV) on April 11, 2013, with no publicity whatsoever. That legislation is S.716. It passed in the Senate by unanimous consent. Subsequently the bill moved to the House where by official record it received 14 seconds of consideration before being unanimously passed. The amendment provided for some officials, not to include the President, Vice President, members of Congress, or persons running for Congress, to no longer be able to file the required documents on line. The reason cited for the amendment was national security. The amendment does not alter the ability of the President, Vice President, members of Congress, nor those running for Congress, to trade on-line. It does however, obfuscate the financial dealings by the members of Congress and those running for Congress, blocking what little transparency there was and making it very difficult for watchdog organizations to obtain many types of documents with respect to financial dealings of members of Congress or those running for Congress.
An ongoing concern and certainly of interest to many, is the fact that by a widely cited estimate, the financial portfolios of members of Congress continue to outperform the broader markets by about 12% per year. According to Yale professor Jonathan Macey, “On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption”.
Perhaps it is not surprising then that when the Securities and Exchange Commission (SEC) began an investigation into potential insider trading and ex-House Ways and Means staffer Brian Sutter, the House of Representatives sought to block the SEC from proceeding by not complying with various subpoenas, and by motion to dismiss, among other maneuvers. The essence of the investigation was that Sutter had allegedly passed material, non-public information concerning a pending Medicare decision to a lobbyist, who then shared the tip with other firms. According to court filings, the SEC has been looking into an email a lobbyist at the law firm Greenberg Traurig LLP sent to an analyst at broker-dealer Height Securities regarding a deal struck in Congress about Medicare reimbursement rates in 2013. The SEC said the email was sent before the Centers for Medicare and Medicaid Services announced the rates after U.S. markets closed and about 30 minutes before Height issued a report suggesting the change could help companies such as Humana Inc (HUM.N). The SEC’s probe came to focus in part on Sutter, who the regulator said on the day of the announcement had spoken with the Greenberg Traurig lobbyist and had discussed the rate announcement on that call.(See SEC v. Committee on Ways and Means of the U.S. House of Representatives et al, U.S. District Court, Southern District of New York, No. 14-mc-00193.)
As of late 2017, Congressional approval ratings (Gallup news) were hovering around 13%.