Congress’ insider trading: Just really good at ‘guessing’

Posted on June 21, 2011

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If you haven’t found a reason to loathe and despise the flagrant hypocrisy and profiteering that literally personifies the United States Congress yet, then you simply aren’t looking.  In case you were under the foolish assumption that your elected officials run for elected office “to serve the greater good,” I’m about to – once again – shatter your delusion.

If you buy and sell stocks based on secret information you picked up from a friend at the office or through someone who works in, for or around the company the stock represents, you could very well find yourself in jail convicted of insider trading. But when a United States Senator does it, it’s all peachy, legit and legal because the Securities and Exchange Commission (that laughable bastion of executive-felating corpocracy) has determined that members of Congress are allowed to buy and sell stocks for their personal gain based on advance knowledge of information about the stock that only they are privy to from conducting the “business” of Congress.

What’s this mean to you and me?  Think of it this way: If you happen to hear through the office grapevine one day that police are on the way to arrest your CEO and then you sell a massive number of shares for a massive profit just before news of the arrest becomes public knowledge; that’s insider trading and it’s a felony. But if a member of Congress calls a friend of theirs who is a judge and asks them to write the arrest warrant for that CEO, and then cashes in on that stock before the arrest is public knowledge – that’s perfectly legal and legitimate according to rulings by the SEC.

During the past two years, 72 congressional aides from both political parties made highly profitable trades in companies that the politicians they work for help oversee. Time after time, the same people in Congressional offices made “miraculous guesses” about stock activity, but the staffers deny the trades sprung from inside knowledge.

Statistics over the past dozen or so years indicate one of two things:  Either members of Congress are unfathomable geniuses when it comes to stock trading; or they are capitalizing on serious amounts of inside information way before the public does and they’re making enormous bank from it.

A pair of recent academic studies found that members of Congress consistently beat the stock with gains of between 6 and 10 percent. In the 2011 study “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,” four university professors found that a stock portfolio patterned after the actual purchases of several representatives outperformed the stock market by 55 basis points per month, or approximately 6 percent annually. That’s 6 percent better than your portfolio could do under any circumstances within that time frame. The study looked at 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001.

In 2005, companies stuck in asbestos litigation suddenly saw inexplicably heavy trading and a 38-percent rise in share price on Nov. 15, 2005. The next day, then-Senate Majority Leader Bill Frist announced a breakthrough on a bill to create a government-backed fund to settle asbestos cases. It was later confirmed that political intelligence firms benefitted from a leak in Frist’s office. Nobody was ever investigated or charged with any wrong-doing.

In September 2008, U.S. Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee, drew criticism for his trading of short-term put and call options in 2007, including a single transaction on Dec. 10 that netted him $15,000. He’d held that particular investment for just two weeks, and sold it on the same day that the company’s stock price surged following its announcement that it would acquire a competitor. Bachus’ trading in 2007 reportedly allowed him to supplement his $165,200 annual congressional salary by an additional $160,000 that year.

Then there was the case in 2000 when Tony Rudy, a senior aide to then-House Republican Leader Tom DeLay, made more than 500 trades on the computer in his office on Capitol Hill – while supposedly conducting legislative business – and made more than $2 million in gains, with only one trade not posting a profit. It ended flat – meaning neither a gain nor a loss – on the one day that Rudy traded it.

So … what … we’re supposed to believe that members of Congress are just innately smarter than we are, and significantly better at predicting stock market activity than professional traders? Are we supposed to believe that members of Congress are consistently and remarkably luckier than anyone else? Half of Congress can barely read. We’re supposed to believe they’re investment savants?

Once again this year, two Democrats have introduced legislation called the STOCK Act — or Stop Trading On Congressional Knowledge Act — that would prohibit such political speculation. The bill – sponsored by Democrat representatives Louise Slaughter of New York and Tim Walz of Minnesota – would present members of Congress, their staffs, and others in Washington with a new set of legal prohibitions and restrictions.

The STOCK Act would, among other things, amend Section 10 of the Securities Exchange Act and Section 4(c) of the Commodities Exchange Act to:

  • prohibit members of Congress, employees of Congress, or executive branch employees from buying or selling stocks, bonds, or commodities futures based on non-public information they obtain because of their status;
  • prohibit those outside Congress from buying or selling stocks, bonds, or commodities futures based on non-public information obtained from within Congress or the executive branch;
  • prohibit Congressmen and employees from disclosing any non-public information about any pending or prospective legislative action obtained from a member or employee of Congress for investment purposes; and
  • require members of Congress and employees to report the purchase, sale, or exchange of any stock, bond, or commodities future transaction in excess of $1,000 within 90 days.

The bill has been proposed nine times since it was first introduced in 2006. It’s never even been allowed to go to a floor vote in the House of Representatives. And its passage doesn’t look any more promising this year, either. When it comes to forbidding members of Congress from using access to secrets for financial enrichment, Slaughter and Walz have gotten nowhere on their bill.

All it would take is tougher enforcement of already existing House and Senate ethics rules, which now generally forbid conflicts of interest and using official influence for personal gain.

Every effort to strengthen those ethics rules has been vehemently opposed and prevented from progressing through Congressional channels.

Kinda makes you wonder why so many members of the House and Senate are so dead-set against any increases in the Capital Gains Tax, doesn’t it?

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