By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
Last week saw the release of news showing some Congresscritters plumbing new deaths of ethically challenged behaviour. Seems that after receiving briefings about the coming COVID-19 calamity, senators Richard Burr and Kelly Loeffler, cooed reassurance to constituents – and then proceeded to dump shares.
As Politico tells the story:
Burr, the chairman of the Senate Intelligence Committee, on Friday called for a Senate Ethics Committee investigation into his trades amid an uproar over reports that he had sought to safeguard his portfolio against the looming pandemic even as he assured the public all was well. Burr, who had been present for a classified briefing on the outbreak in late January, wrote an op-ed declaring the U.S. “better prepared than ever before” to face down the virus on Feb. 7 — six days before unloading at least $628,000 of his own stock as the market was peaking.
And Burr’s not the Senate’s only COVID-19 miscreant. Politico again:
The North Carolina Republican is one of several senators, including Loeffler, Sen. Dianne Feinstein (D-Calif.), Sen. James Inhofe (R.-Okla.) and Sen. David Perdue (R-Ga.), who sold stock in late January and early February as the Senate was ramping up coronavirus briefings.
And, again according to Politico, nor are efforts to dodge the financial impact of COVID-19 limited to esteemed senators:
Previously unreported lawmakers who sold assets in the weeks leading up to the market crash include Rep. Susan Davis (D-Calif.), who unloaded thousands of dollars of stock in Alaska Air and Royal Caribbean cruises. A senior aide to Sen. Mitch McConnell made a mid-January purchase of Moderna, Inc., a biotechnology company that had four days earlier announced it would begin developing a coronavirus vaccine. And an aide to Sen. Jeanne Shaheen, who serves on the Senate Foreign Relations Committee, sold off stock in companies including Delta Airlines in late January and later bought stock in Clorox, Inc., which makes bleach and sanitary wipes.
Davis, the 10-term California Democrat who is a member of the House Armed Services and Education and Labor Committees, unloaded stock on Feb. 11 in the airline and cruise industries, two sectors that have since been ground to a halt by the pandemic nearly two weeks before the market tanked. Davis’ spokesman said she has a “third party handling her portfolio and does not play a role in the purchase or sale of her stocks.”
Alrighty then. Politico’s account has more sordid details, concerning additional players and transactions, so I encourage you to read it in full.
Under current law, again according to Politico:
It’s illegal for lawmakers and aides to trade stocks based on private information. But they are allowed to buy and sell shares based on public information they absorb on Capitol Hill so long as they disclose those trades within 30 days. That permissive approach to buying and selling stocks — the executive branch has much stricter rules — has drawn criticism from watchdogs who argue the freedom to trade isn’t as important as the need for the public to trust Congress to act only on its behalf.
A Modest Proposal
Congress has long played fast and loose in the realm of insider trading – and surprise, surprise, just as Dodd-Frank didn’t protect us from financial meltdowns, so the Stop Trading on Congressional Knowledge (STOCK) Act, signed into law on April 4, 2012, didn’t eliminate the sort of behavior that anyone but a Congresscritter would recognise as problematic
Here I find I do agree with Harvard Professor Laurence Tribe’s tweet:
Given the STOCK Act of 2012, any halfway decent Attorney General would by now have directed the DOJ to open criminal insider trading investigations into Senator Burr and the other Senators who exploited their positions to profit by endangering the publichttps://t.co/10TCX4xto5
— Laurence Tribe (@tribelaw) 20 March 2020
By calling for an ethics committee inquiry, Burr seems confident that he did nothing wrong.
And, who knows, according to the letter of the law – or what some clever white shoe lawyer can twist it to mean – he may not have done.
A Modest Proposal
So, I have a modest proposal to advance. One that will not result in the death of any innocent babies.
Keep the current framework, with one major immediate change.
Let the Congresscritters trade away on “public information”. Invest. Buy and Sell.
Provided that, within 24 hours of booking a trade, they also fully disclose, online, their transactions, in a simple, easy to understand format.
They would have already made the trade. Make them post the confirm.
And to prevent unseemly attempts to circumvent the law, make related party transactions subject to similar disclosure requirements, akin to those that currently that apply to politically exposed persons under anti-money laundering requirements. In other words, a Congresscritter can’t route a personal transaction through a spouse, progeny, Grandma, weird Uncle Albert, a next door neighbor, or a professional colleague, so as to elude the disclosure requirement.
I would extend this immediate disclosure requirement to staff members as well.
An alternative to this idea is to upend the existing system, to require all Congresscritters to place all their holdings in a blind trust – managed by trustee – and then throw the full force of the US securities law at anyone who indulges in a dodgy transaction. Because if IIRC, the Securities and Exchange Commission (SEC) cannot pursue Congresscritters directly.
But some immediate problems would arise. First, the lack of tough SEC enforcement capability.Yes, I will concede say that the SEC has a (slightly) better track record on insider trading than in other areas. But I doubt whether their attorneys would zealously pursue transgressions on the part of trustees acting on behalf of Congresscritters. Ditto for congressional staff. And even if some SEC enforcement staff have the gumption go after these targets, they would first have to flag the trade, then initiate and pursue the enforcement action. Which would take time. And would happen way after the date of the alleged offense.
I’m not just aiming to crack down on potential profiteering. I’m trying to change the system so that when key members of Congress act to safeguard or enhance their portfolios, we the public see that activity in real time.
Yet another option would be to restrict Congresscritters to a limited choice of investments, somewhat analogous to the crappy options available in many 401(k)s.This might include index funds, with low fees.
The trouble with this option is that Congresscritters still have access to information that affects the broad market – and as we see above, some of them traded on that knowledge. In other words, they know the shit is about to hit the fan, but the problem is they think they can protect their finances but have no obligation to clue us, the public, into impending catastrophe. Again, this solution might trim the profiteering, but without letting us know the real score.
What Is to Be Done?
Require all congressional trades to be subject to my modest proposal: immediate disclosure, in a clear, simple format, online.
Then we could immediately see which Congresscritters aren’t putting their money where their mouth is.
And ask them just why this is the case.