Wednesday, March 12, 2014 9:22 AM
Published on: Thursday, February 16, 2012
By Margie Burns
Insider trading is buying or selling stocks by a company insider, based on special information that the public does not have. Under U.S. law, the officers and directors of a corporation, along with other key employees and large shareholders, are obligated to report their buying and selling of their company’s stock. They are prohibited by law from buying and selling on the basis of material non-public information.
Figuring out five years ago that eBay and UPS would probably do well if rising fuel prices led to more online shopping, if you’re a member of the general public, and buying the stock, is one thing. Selling millions of dollars’ worth of Enron stock, if you’re Ken Lay, at a time when common shareholders are prohibited from selling their Enron stock, is quite another. Buying stock as a member of the public, in a company you think likely to be bought out, is legal. Buying stock in a company because you have inside information that the company is about to be taken over —information you got as an officer of the company — is illegal insider trading.
Last week, Congress finally got around to applying the principles of insider-trading law to itself. After only 93 years, what’s the rush? In a reform called for by President Obama in his State of the Union address, Thursday the House joined the Senate in passing (417-2) the Stop Trading on Congressional Knowledge Act (STOCK) Act. The Senate passed its legislation (96-3) on Feb. 2.
Republicans in Congress call part of the legislation the “Pelosi provision,” referring to a 2008 Initial Public Offering in which House Minority Leader Nancy Pelosi’s husband engaged, barring members from participating in IPOs that the public cannot participate in. The allusion is to a segment aired on CBS’s 60 Minutes last November, about stock trading by members of Congress and their families. The CBS report in turn relied on a book on the issue by Peter Schweizer, Throw Them All Out. However, the House bill was introduced by two Democratic representatives, Tim Walz, D-Minn., and Louise Slaughter, D-N.Y.
Another prominent House personality who traded on information received at a critical time is House Speaker John Boehner, R-Ohio. Boehner, like Sen. Dick Durbin of Illinois, sold stock in 2008 immediately after a small group meeting of Congress members with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke — at which they were warned about a looming economic crisis from the subprime-mortgage derivatives collapse. Boehner and Durbin deny any wrongdoing, and Boehner’s own stock sale in a time of crisis does not tend to figure in GOP talking points about the “Pelosi provision.”
Following the same meeting with Bernanke and Paulson, Rep. Spencer Bachus, R-Ala., did some short-selling — betting on stocks to go down — the next morning, cashing in the stocks within days. Bachus, one of the Birmingham old-boys network long entrenched in Alabama, faces an inquiry by the House Office of Congressional Ethics. Be it noted that Jefferson County, Ala., where Birmingham is located, filed for a record bankruptcy in November 2011. Birmingham’s entrenched public servants seem to have done better by themselves than by the public. Bachus also chairs the House Financial Services Committee.
In short, prohibiting members of Congress and federal employees from making investments based on non-public information they obtain as part of their jobs is a good idea whose time has come. Despite differences between the House bill and the Senate version, the new law constitutes a big step in the right direction and much needed protection for the public.
My own proposal: these principles should extend to the intelligence community. If members of Congress should not get rich through insider trading, why should Central Intelligence Agency officers end up rich through insider trading? This is not to say that legislation should single out the CIA. Notwithstanding complaints and criticisms after Sept. 11, 2001, the U.S. intelligence community still involves at least 16 federal agencies, including offices in branches of the armed forces, the National Security Agency, the Federal Bureau of Investigation, Drug Enforcement Administration, the Bureau of Intelligence and Research in the State Department, and the Department of Homeland Security.
There is no good reason why officials working in either domestic or foreign intelligence gathering should be allowed to engage in insider trades. If the knowledge potentially acquired by members of Congress is sensitive, the knowledge potentially acquired by CIA and Defense Intelligence Agency officials is even more sensitive.