Time for a Broad Prophylactic Against Congressional Insider Trading
In 2011, Peter Schweizer published a book, Throw Them All Out, in which he exposes some questionable means by which politicians manage to increase their personal wealth fifty percent faster than the average American. Footnote #1 content: PETER SCHWEIZER, THROW THEM ALL OUT xvii (2011). Schweizer suggests that trading on material nonpublic information is one method by which congresspersons achieve outsized returns on their investments. Footnote #2 content: See id. at xvii, xviii. He cites one study finding that, while the average American investor underperforms the market when trading in individual stocks, “[t]he average senator beats the market by 12% a year.” Footnote #3 content: Id. at xviii. This statistic is concerning on its own, but it is downright disturbing when considered alongside the same study’s finding that corporate insiders and hedge funds (the usual targets of most insider trading complaints) beat the market on average by about only seven percent. Footnote #4 content: Id.
Schweitzer’s book was followed by a feature story on the CBS News show, 60 Minutes, highlighting some dubious stock trades by leaders of both political parties. Footnote #5 content: See, e.g., John Bresnahan, ‘60 Minutes’ on ‘Honest Graft’, POLITICO (Nov. 13, 2011), https://www.politico.com/story/2011/11/60-minutes-on-honest-graft-068271 [https://perma.cc/D6SD-UDE6]. These stories got the public’s attention and spurred Congress to act, adopting the Stop Trading on Congressional Knowledge (STOCK) Act in April of 2012. Footnote #6 content: 15 U.S.C. § 78u-1.
The STOCK Act made explicit what many already regarded as implicit— that congressional trading based on material nonpublic information acquired by virtue of their positions as public servants is a breach of their fiduciary duties and therefore constitutes insider trading in violation of the general anti-fraud provisions of Section 10b of the Securities Exchange Act of 1934. Footnote #7 content: See id. § 78u-1(g)(1). Violations of Section 10b can lead to civil enforcement actions brought by the Securities and Exchange Commission (SEC) and criminal enforcement by the Department of Justice (DOJ). Footnote #8 content: Section 10b was implemented by the SEC with Exchange Act Rule 10b-5. 17 C.F.R. § 240.10b-5 (2022). Civil penalties for insider trading violation can include, inter alia, injunctive relief, disgorgement, and a fine of up to three times the profits gained or losses avoided by the illegal trading. See STEPHEN M. BAINBRIDGE, INSIDER TRADING LAW AND POLICY 141–44 (2014). Criminal convictions for insider trading can be punished by a five million dollar fine and up to twenty years imprisonment. 15 U.S.C. § 78ff(a). The STOCK Act also expanded disclosure requirements for members of Congress, the Executive Branch, and their staff members. Footnote #9 content: See, e.g., Office of White House Press Secretary, FACT SHEET: The STOCK Act: Bans Members of Congress from Insider Trading, THE WHITE HOUSE (Apr. 4, 2012), https://obamawhitehouse.archives.gov/the-press-office/2012/04/04/fact-sheet-stock-actbans-members-congress-insider-trading [https://perma.cc/5XMA-E7UT]; see also infra Part I for a more detailed discussion of the STOCK Act’s disclosure requirements.
No sooner had the STOCK Act passed, however, than it was quietly overhauled to weaken certain key disclosure provisions, Footnote #10 content: See Tamara Keith, How Congress Quietly Overhauled Its Insider-Trading Law, NPR (Apr. 16, 2013), https://www.npr.org/sections/itsallpolitics/2013/04/16/177496734/howcongress-quietly-overhauled-its-insider-trading-law [https://perma.cc/QNV5-KAY2]; see also infra Part I. and in any event the Act has not been enforced consistently since its adoption. Footnote #11 content: See, e.g., Dave Levinthal, ‘Conflicted Congress’: Key Findings from Insider’s Five-Month Investigation into Federal Lawmakers’ Personal Finances, INSIDER (Dec. 17, 2021), https://www.businessinsider.com/conflicted-congress-key-findings-stock-actfinances-investing-2021-12 (noting that “lawmakers and top congressional staffers face minimal and inconsistently applied penalties for violating the STOCK Act”). For example, an investigative counsel in the House of Representatives’ independent Office of Congressional Ethics recently admitted “enforcement of the [STOCK Act’s] financial-disclosure requirements is virtually nonexistent.” Footnote #12 content: Camila DeChalus, Kimberly Leonard & Dave Levinthal, Congress and Top Capitol Hill Staff Have Violated the STOCK Act Hundreds of Times. But the Consequences Are Minimal, Inconsistent, and Not Recorded Publicly., INSIDER (Dec. 17, 2021), https://www.businessinsider.com/congress-stock-act-violations-penalties-consequences2021-12. As a result, public cynicism concerning congressional insider trading has once again snowballed. A recent poll found that seventy-six percent of American voters think members of Congress have an “unfair advantage” in trading stocks. Footnote #13 content: Bryan Metzger, 76% of Voters Disagree with Pelosi, Think Members of Congress Have an ‘Unfair Advantage’ in Trading Stocks: Poll, INSIDER (Jan. 7, 2022), https://www.businessinsider.com/76-percent-disagree-with-pelosi-congress-unfairadvantage-stock-trading-2022-1. In fact, many market participants build their trading strategies upon the assumption that congresspersons are trading on material nonpublic information. For example, a popular website tracks congressional trading in individual stocks and identifies “buy” and “sell” trends. Footnote #14 content: See What’s Trading on Capitol Hill?, CAPITOL TRADES, https://www.capitoltrades.com/ [https://perma.cc/J35C-J2QS] (last visited June 5, 2022). The website organizes congressional trading data by category. For example, the “Latest” category highlights recently traded stocks, and the “Biggest Players” category highlights the most actively trading politicians. Id. The website explains that “[t]racking Capitol Hill politicians’ trades can provide valuable insights for your investment research — and we offer you a free solution to do just that.” Footnote #15 content: Id. Some politicians have achieved almost cult status on social media for their stock trading. For example, Speaker Nancy Pelosi’s stock trades have a regular online following on Twitter, TikTok, and Reddit, with popular accounts such as “@NancyTracker.” Footnote #16 content: See, e.g., Joshua Bote, The Financial Gurus on TikTok and Twitter Obsessively Tracking Nancy Pelosi’s Stock Trades, SFGATE (Feb. 3, 2022), https://www.sfgate.com/nationalpolitics/article/Nancy-Pelosi-viral-stock-trades-16826801.php [https://perma.cc/APX85T6T]; House Speaker Pelosi’s Stock Trades Attract Growing Following Online, Newsmax (Jan. 26 , 2022), https://www.newsmax.com/politics/pelosi-stock-trades-onlineattention/2022/01/26/id/1054069/ [https://perma.cc/KW59-UYTP] [hereinafter Pelosi’s Stock Trades]. Moreover, the search “Pelosi stock trades” hit a record high on Google in January 2022. Footnote #17 content: See Pelosi’s Stock Trades, supra note 16.
Of course, Speaker Pelosi is not the only congressperson suspected of insider trading. Footnote #18 content: See, e.g., Kenny Stancil & Common Dreams, Amid Push for Ban, Lawmakers Traded $355 Million of Stock in 2021, ALTERNET (Feb. 1, 2022), https://www.alternet.org/2022/02/insider-trading-congress/ [https://perma.cc/4X5RY3HD]. Senators Richard Burr, Diane Feinstein, and Jim Inhofe, as well as then-Senator Kelly Loeffler, have come under scrutiny over suspicious trades as the threat of the COVID-19 pandemic emerged in 2020. Footnote #19 content: See Jack Kelly, Senators Accused of Insider Trading, Dumping Stocks After Coronavirus Briefing, FORBES (Mar. 20, 2020), https://www.forbes.com/sites/jackkelly/2020/03/20/senators-accused-of-insider-tradingdumping-stocks-after-coronavirus-briefings/?sh=488905914a45. Each of these Senators sold off significant stock holdings shortly after participating in a confidential briefing “about the coronavirus and the massive impact it will have upon the economy, jobs and the stock market.” Footnote #20 content: Id. Though it is hard to quantify the impact of congressional insider trading on the markets, as the Supreme Court explained in United States v. O’Hagan, “investors likely would hesitate to venture their capital in a market where [insider] trading . . . is unchecked by law.” Footnote #21 content: 521 U.S. 642, 658 (1997). So what, if anything, is to be done? Just as they did in 2011, Footnote #22 content: See Jeanne L. Schroeder, Taking Stock: Insider and Outsider Trading by Congress, 5 WM. & MARY BUS. L. REV. 159, 165 (2014) (noting that the STOCK Act was adopted with overwhelming bipartisan support in 2012 after “The Wall Street Journal and the television magazine 60 Minutes ran exposés of congressional trading” in 2011). members of Congress on both sides of the aisle are rushing to get out in front of the issue. And a number of bills have garnered bipartisan support. Footnote #23 content: See infra Part II; see also Stephanie Hughes, Congress Looks to Ban Lawmakers from Trading Individual Stocks, MARKETPLACE (Feb. 8, 2022), https://www.marketplace.org/2022/02/08/congress-looks-to-ban-lawmakers-from-tradingindividual-stocks/ [https://perma.cc/56A9-X6XB]. Many of these bills propose a broad prophylactic of proscribing members of Congress from trading in individual stocks while in office. Footnote #24 content: See, e.g., Ban Conflicted Trading Act, H.R. 1579, 117th Cong. (2021). Some bills would go so far as proscribing trades by spouses and dependent children as well. Footnote #25 content: See TRUST in Congress Act, H.R. 336, 117th Cong. (2021); Ban Congressional Stock Trading Act, S. 3494, 117th Cong. (2022).
But while momentum is building for broad, new restrictions on congressional stock trading, some representatives continue to express concerns. For example, Speaker Pelosi openly resisted calls for an outright ban on trading in individual stocks by members of Congress, arguing, for example, that “[w]e’re a free-market economy” and members of Congress “should be able to participate in that.” Footnote #26 content: See Bote, supra note 16 (quoting Speaker Nancy Pelosi). This Article counters such arguments and defends a broad prophylactic against congressional insider trading in individual stocks as a means of preserving market integrity and restoring the public’s trust in the legislative branch. Part I offers a brief summary of the current state of insider trading laws, with a special focus on their application to Congress. Part II surveys some of the proposed insider trading reform bills under consideration by the 117th Congress. Part III argues that, given congresspersons’ unique role vis-à-vis securities markets, a broad prophylactic against congressional insider trading is both justified and needed.
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