by Bruce Carton
Despite evidence that some members of Congress might be engaged in insider trading based on information obtained from the legislative process, the SEC has never taken any enforcement action in this area.
This may be due, in part, to the fact that the SEC is beholden to Congress for its budget, and does not want to bite the hand that feeds it. But the SEC’s silence on the matter may stem more from the fact that, surprisingly, the federal securities laws do not clearly prohibit members of Congress from trading based on such information, and any such action would therefore be not only politically dangerous, but unprecedented.
For five years, Representatives Brian Baird (D-Wash.) and Louise Slaughter (D-N.Y.) have repeatedly introduced a bill called the “Stop Trading on Congressional Knowledge Act” (the STOCK Act) that would explicitly make it illegal for members of Congress and their aides to trade stocks and other securities based on inside information obtained from the legislative process. And during that period, almost everyone else in Congress has completely ignored it. While a bill prohibiting Congressional insider trading would seem like something that no public servant could ever oppose, the STOCK Act has never even come close to receiving a floor vote, because Congress has consistently turned a blind eye to it. While even the most trivial bill can easily get dozens of co-sponsors, the STOCK Act had a grand total of six co-sponsors when it was unsuccessfully introduced, yet again, in 2010. Congress’ attitude toward the bill has always seemed to be that there was no need to impose potentially troublesome (and profit-killing) rules upon itself given that nobody other than a few members of Congress, a handful of professors, and some bloggers seemed to care one bit.
The STOCK Act’s years of languishing in obscurity ended on Nov. 13, 2011, however, when the popular television show 60 Minutes aired a hard-hitting segment on the topic. The 60 Minutes piece provided evidence that congressmen including Representative Spencer Bachus of Alabama may have benefited from trading based on inside information, and it offered a reminder that, unlike everyone else in the world, members of Congress are not subject to the insider-trading laws. Major newspapers such as the Wall Street Journal and others have covered the issue before, but have never been able to capture the public’s attention. The 60 Minutes piece, combined with the upcoming national elections and an historically abysmal 9 percent approval rate for Congress, seems to have finally created the “perfect storm” necessary to provoke public outrage and prod politicians into supporting a law to ban such insider trading.
A tidal wave of press coverage of the issue has followed the 60 Minutes piece, almost all of it harshly critical of Congress for refusing to hold itself to the same standards to which the rest of the world is held. Republican presidential candidates Rick Perry and Newt Gingrich have also spoken out on the topic. In a campaign video released shortly after the 60 Minutes piece, Perry bluntly stated that “any congressman or senator that uses their insider knowledge to profit in the stock market ought to be sent to jail. Period.” Gingrich did not propose throwing anyone in jail but denounced the practice and noted that with a 9 percent approval rating and a rising level of contempt in the nation for Congress, “dramatic changes” such as a requirement of blind trusts for congressmen were needed.
On Dec. 1, the momentum behind the STOCK Act continued to grow as the Senate Committee on Homeland Security and Governmental Affairs held a hearing on insider trading and congressional accountability. Senators Kirsten Gillibrand and Scott Brown issued statements about proposed STOCK Act legislation that they are introducing. Sen. Brown stated that his bill “is similar to the bipartisan Baird/Slaughter legislation that has been introduced in the House of Representatives over the past few years but has languished as Congress has lacked the will to affirm that we live by the same rules as everyone else.” The recent media attention, he said, “means that the American people are watching to see if we are serious about regaining their trust.”
Interestingly, the 60 Minutes piece has also brought out an opposing view that insider trading by Congress is already illegal under existing securities laws—albeit never enforced. According to Donna Nagy, a law professor at Indiana University and one of five professors and other legal experts who testified before the Senate committee, the key question is whether a member of Congress who trades on inside information owes a “duty of trust and confidence to either the investors with whom he or she traded or to the source of the material non-public congressional knowledge.” Professor Nagy argues that although case law conflicts on whether members of Congress are “employees” of the federal government (which would create a duty to their employer), Congress may still owe numerous other fiduciary-like duties of trust and confidence to a host of parties, including:
- Their constituents;
- the United States;
- the general public;
- Congress, as well as the Senate or the House;
- other Members of Congress; and
- federal officials outside of Congress who rely on a member’s loyalty and integrity.
Nagy stated in her testimony that she believes a federal district court would hold a member of Congress liable for securities trading based on material non-public information obtained through congressional service if the SEC or the Department of Justice could successfully prove a case. For a court to conclude otherwise, she said, would mean it views non-public congressional knowledge “as an emolument of office belonging to the individual Senator to do with as he wished.”
SEC Enforcement Director Robert Khuzami provided the Senate committee with the SEC’s position on the issue. Khuzami stated that the SEC similarly believes that there is no reason why Congress should be viewed as “exempt” from the insider- trading prohibitions. Although he acknowledged that there is no case law addressing the duty of a Congressman with respect to trading on the basis of information he or she learns in an official capacity, he said that courts have held in other contexts that “[a] public official stands in a fiduciary relationship with the United States, through those by whom he is appointed or elected.”
Professor Stephen Bainbridge of the UCLA School of Law, however, who did not testify but whose work was cited at the hearing, believes that the view expressed by Nagy and the SEC is a minority position. Bainbridge writes that the “predominant view” on the issue is that the types of duties listed above are irrelevant because “what is needed under insider- trading law is either a duty to the person with whom one trades or to the source of the information, not some generalized duty to members of the public in the abstract.”
Perhaps anticipating that some version of the STOCK Act may be inevitable at this point as Congress ducks and runs for cover, Khuzami stated that any statutory changes in this area “should be carefully calibrated to ensure that they do not narrow current law and thereby make it more difficult to bring future insider-trading actions against individuals outside of Congress.” Indeed, different versions of the bill are now being pushed hard in the House and Senate. Rep. Slaughter, one of the original champions of the STOCK Act, says that prior to the 60 Minutes piece she had a measly nine co-sponsors for her bill. As of Dec. 2, 2011, she had 153 and counting. On the Senate side, Sen. Joe Lieberman, the chairman of the Senate Homeland Security and Government Reform Committee, has reportedly asked the committee to hold a drafting session on a bill by Dec. 15. A recent report from Capitol Hill stated that the STOCK Act is perhaps the only bill currently on a bipartisan fast track.
After years of deafening silence from their counterparts in Congress, Rep. Blair and Rep. Slaughter’s effort to make insider trading illegal for Congress finally looks like it may have the support necessary to become law. (After five terms, Rep. Baird finally retired in 2011). The exposure for the issue from the 60 Minutes piece seems to have come at precisely the right moment in time and is making it impossible for Congress to ignore this well-overdue piece of legislation any longer.
Originally published in Compliance Week. Reprinted with permission.
© 2011 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com. Call (888) 519-9200 for more information.