The fact that many members of Congress appear to have traded on non-public information in their personal brokerage accounts during the financial crisis is outrageous.But since this bombshell news broke on Sunday night, the excuse has been that, however ridiculous it may sound, insider trading is legal for Congress.
This same assertion has been repeated for years, every time someone observes that Congress members do much better in their personal stock trading than average investors do. Unlike average Joes, the pundits explain, Congress has exempted itself from insider-trading laws, so Congress-people are allowed to trade on private information that they gather in the course of their work while other Americans can’t.
But at least one law professor argues that this is just not true.
Insider trading is just as illegal for members of Congress as it is for the rest of the 300+ million Americans, Indiana Law Professor Donna Nagy argues.
Congress never “exempted” itself from insider trading laws, Nagy says — because Congress has never actually passed a law about insider trading.
By trading on information gathered in the course of their jobs, Nagy says, Congress-people are abusing the public trust and violating a legal duty, just the way any other insider-traders do.
So the Congress people who traded during the financial crisis (and since) should be investigated and, possibly, prosecuted for their behaviour.
The definition of insider trading is trading while in possession of material non-public information.
On September 16th, 2008, a new book by Peter Schweizer alleges, Rep. Spencer Bachus and other members of Congress attended a private, off-the-record (read: non-public) briefing from Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke about the state of the economy.
The next day, some Congress-people who attended the briefing, including Rep. Bachus and Dick Durbin, sold stocks or bet against the market. A few days later, after the market had tanked, Rep. Bachus cashed out his bet for a tidy profit.
Now, hands up, who out there thinks that a private off-the-record briefing from the two most important financial executives in the country would be considered “material non-public information”?
I certainly do.
“Material non-public information” is any information that a reasonable person might want to consider when making an investment decision.
And this reasonable person, anyway, would definitely want to consider the latest thinking and information of the Fed Chairman and the Treasury Secretary when placing a bet on the market.
If a Wall Street executive had been at that briefing and then immediately dumped his/her stocks or bet against the market, you can be confident that Congress and the public would be screaming about corruption and unfairness and the shafting of “the little guy” and calling for the executive’s head.
The personal trading of Congress-people after this briefing is no different.
Bachus and Durbin (and others) got the information they traded in possession of because they were doing a job on behalf of their constituents. The information was confidential, and, in all likelihood, material. And they appear to have immediately used it for their own personal gain.
Even if this behaviour is not judged to be illegal, it’s certainly unethical. At the very least, the SEC should launch a full investigation.
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