Insider Trading and Material Non-Public Information

One of the first things any new hire on Wall Street, or any executive in a publicly traded corporation, learns about is the laws pertaining to insider trading.  Individuals are prevented from trading on material non-public information, and from tipping off their friends to trade on such information as well.  The cases aren’t always crystal clear in terms of legality, but this one seems pretty easy, and I would have gotten in wrong (although, on the correct side – the side that says “don’t do it!”)
From Bloomberg:
“Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.
What’s wrong with this picture? Nothing, according to the law. Nor would it be illegal for him to tip someone else, say, his largest campaign contributor”
Now, it seems pretty clear to me that this is material non-public information.  What’s the “reasoning” behind the legality of it then?
“Laws that criminalize insider trading cover corporate insiders and those they tip, but not specifically Congress. And while scholars differ on whether existing law could be applied on Capitol Hill, it hasn’t been.”
I never really thought about the fact that insider trading laws cover only corporate insiders.  Congressmen are not corporate insiders, thus they are not covered!  Pretty surprising – if there are any securities lawyers in my audience, make your opinions known in the comments – could the existing law be applied to Congressmen?  There is another article linked to from the Bloomberg article that says that the answer is “no.” (of course the whole point of the article itself is that the answer is “no!”  Actually, let me talk for just a second about the claim that linked article makes:

“This Comment argues against prohibiting trading on political intelligence by outside actors  (lobbyists and hedge funds) because these actors are merely the Washington equivalents of market analysts, whose information gathering functions are perfectly legitimate, if not desirable.”

Huh?  Market analysts?  No – they are getting material non-public information from policy makers!  Just like it’s illegal to trade on this information when it comes from company insiders, it should be illegal to trade on this information when it comes from policy makers.

It seems impossible to me that one could make the argument that if Congress is holding confidential talks about a bailout of the big banks, that it should be legal for Congressmen to trade on that information – or even that it is legal!  As the article notes, “scholars differ whether existing law could be applied on Capitol Hill.”
“This is an area in which the public is quite justifiably suspicious about dual standards,” says Representative Brian Baird, a Democrat from Washington state. 
Along with New York Democrat Louise Slaughter, Baird has been trying to apply insider trading law to Congress through the Stop Trading on Congressional Knowledge bill…”

“But when it comes to forbidding members of Congress from using access to secrets for financial enrichment, Slaughter and Baird have gotten nowhere on their bill. Now Baird’s retiring. 
He says Congress could solve the problem without a new law or a repeal of an old one. 
“It’s not that we have laws protecting us,” Baird says. “We don’t have laws applying it to us.” 
All it would take is a change in ethics rules, which now generally forbid conflicts of interest and using official influence for personal gain.

EDIT – how about this from the SEC’s website:

“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. 

Examples of insider trading cases that have been brought by the SEC are cases against:

Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;

-Government employees who learned of such information because of their employment by the government;”

I guess they are talking about something else other than policy makers?  Maybe, like, it’s illegal for the Chairman of the FDA to short the stock of a drug company whose drug his administration is about to reject?

-KD

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