Rotten Eggs and Congressional Insider Trading

… Notwithstanding efforts to apply insider trading law to curb this behavior and the enactment of the Stop Trading on Congressional Knowledge (“STOCK”) Act, fortuitous securities transactions by members of Congress continue to occur in connection with headlining national events; it was recently observed with respect to news of the financial collapse of certain regional banks.

While there is scholarly and political support for laws that would effectively ban such rotten egg behavior, this Article proposes that the conduct be regulated under the statute created with rotten eggs in mind – the Securities Act of 1933. The Securities Act creates speedbumps for persons in a control relationship with issuers who want to sell the issuer’s securities in the secondary market. The speedbumps require both public disclosure and broker inquiry. This article asserts that senators and house representatives are in a control relationship with issuers such that they transcend the status of ordinary investor in the securities law regime and must navigate the obstacles established under the Securities Act for such persons before selling their securities in the secondary market. This approach eliminates the legal and evidentiary challenges of insider trading theory, provides a disclosure mechanism that is vastly more effective than that provided by the STOCK Act, and deploys broker-dealers as gatekeepers to ensure that such trades do not undermine the maintenance of fair markets.

Source: Rotten Eggs and Congressional Insider Trading