Congress moves to end its crisis over insider trading on outbreak
Members of Congress are moving with speed and determination to meet an existential crisis on a bipartisan basis. This is not about the coronavirus. The public has learned, once again, that lawmakers may be profiteering in the stock market. Members from both parties have worked for decades to prevent the closing of this obvious avenue of corruption. I know because I have been advocating for two decades that members of Congress should agree to the mandatory use of blind trusts for any stock ownership.
But members of Congress know voters will soon move on, distracted by the outbreak of a deadly disease or redirecting their political rage against the opposing party. The past incubation period for ethics outbreaks is only a couple of weeks and, with some political distancing, the curve is already flattening out. Lawmakers can rest easy because normalcy is simply one news cycle away and, until then, they are tax sheltering in place.
Several members of Congress have been denounced for dumping stocks before the government took critical measures to deal with the pandemic. Senators Richard Burr, Kelly Loeffler, James Inhofe, and Dianne Feinstein together are responsible for as much as $11 million in recent stock sales. It turns out that many lawmakers become market investment geniuses after they enter Congress. A University of Memphis study found that 75 percent of randomly selected members had made “stock transactions that directly coincided with legislative activity.” A Georgia State University study noted that, from 1993 to 1998, senators beat the stock market by 12 points with their portfolios and outperformed “corporate insiders” by 8 points.
Over the years, I have written about the obvious profiteering by members through insider information, stock manipulation, and sweetheart deals. It is not just a problem for the lawmakers. In 2016, the spouse of an aide to House Speaker Nancy Pelosi bought stock in two pharmaceutical firms, just before Congress passed a bill benefiting the companies. In 2017, the Senate demanded that the Justice Department open an investigation into the drugmaker Mylan. Nine days later there was a $465 million settlement with the company. Meanwhile, during that brief period, an aide to Senate Minority Whip Richard Durbin sold tens of thousands of dollars of Mylan stock. An investigation by Politico revealed numerous examples of such suspicious trades by House and Senate staffers of both parties.
Whenever a member of Congress is caught in such a scandal, Washington immediately turns to its timely and proven emergency plan and protocol. First, all lawmakers will express shock and dismay. Second, the affected members call for ethics investigations of themselves. Third, Washington waits for the next shiny object to dangle before voters. Why not? We fall for the same $5 genuine gold watch scam over and over again. The two political parties have us so wired into hating the other side that we still refuse to accept that both parties are equally craven and corrupt.
Right on cue, Washington has moved gingerly through phases one and two of its emergency contingency plan. Senate Minority Leader Charles Schumer and members like Burr have called for ethics investigations. This, after all, is what the ethics rules of Congress are really designed for. They give cover to the alleged corrupt practices of members. What happened here is perfectly legal and, even more troubling, ethical under the rules of Congress. There is no requirement of a blind trust by members.
Under a blind trust, the trustees and beneficiaries generally communicate only to discuss asset distributions, to discuss general investment goals or to disclose summary trust information required for tax purposes. A blind trust is a mandatory requirement which lawmakers in neither party want. Accordingly, when scandals arise, members pass legislation named for public consumption, like the laughable Stop Trading On Congressional Knowledge Act which, notably, does not stop members from trading on congressional knowledge. The law, also known as the Stock Act, applies the same insider trading rules to members and staff that are applied to company executives. While fines are possible, they are unlikely.
Insider trading cases are hard for prosecutors to make against members of Congress because the law was designed to punish corporate officials who trade stocks by using proprietary information. Members of Congress do not deal with proprietary information held by company executives and, even with the broader definitions applied by the courts, it would be very difficult to use the legal language to fit legislative profiteering.
Moreover, legislative information usually holds some public controversy component that can be pointed to as the reason for a trade. Indeed, Burr has claimed that his decision was based on public information, a defense that would be challenging to defeat given the level of media attention and the varying reports that were being aired. While a shareholder would face alleged securities fraud in a civil action, Burr can legitimately claim that his action to sell simply showed better instincts than information.
The Stock Act has worked as members intended, however, as the public eventually moves on. One year after its passage, Congress then quietly amended the law to reduce disclosure requirements. The leadership on Capitol Hill passed the bill in “30 seconds” while most members were out of town to further reduce accountability. President Obama held a massive ceremony to sign the original bill, but his signing of the amendments one year later resulted in just a single sentence acknowledgement.
This is just one of the many federal loopholes that have allowed members of Congress to grow rich in public service. This includes the ability of the children and spouses of our elected officials to receive windfall contracts and undeserved positions from companies to buy influence, while elected officials can insist there is nothing illegal about such deals. This is how the rules are written. They facilitate, not frustrate, special dealing.
As so many of our leaders in Congress have declared, this crisis will pass. The ethics investigations will drag on, and public attention will shift back to political rage. Voters will soon be denouncing the opposing party with the same reliable and willful blindness to the transgressions in their own party. For now, both Republicans and Democrats are remaining steadfast and assuring their respective voters to keep calm and carry on.
Jonathan Turley is the Shapiro Professor of Public Interest Law at George Washington University. You can follow him on Twitter @JonathanTurley.