Tuesday, August 11, 2009

Insider Trading Is OK If you’re a member of Congress.



A loophole "still exists which allows members of Congress and high-powered executive branch appointees to exploit 'insider' knowledge of the financial industry in order to turn personal profit."

Little-known fact: Members of Congress are exempt from rules that prevent insider trading.

Or so says the left-leaning advocacy group Public Citizen in a July 10, 2009, e-mail sent to supporters.

"The federal government has finally got the message that it’s time for stronger oversight of Wall Street and the financial services sector. It’s also time to put an end to secret spending and insider trading," the e-mail reads. "A dangerous legal loophole still exists which allows members of Congress and high-powered executive branch appointees to exploit 'insider' knowledge of the financial industry in order to turn personal profit."

It goes on to describe an army of lobbyists and traders who "haunt the halls of Congress seeking insider tips from staff — known as 'political intelligence consultants'" who may also use the confidential information.

The e-mail asks supporters to write their representatives to support the Trading on Congressional Knowledge Act, a bill sponsored by Reps. Louise Slaughter of New York and Brian Baird of Washington, that would ban insider trading by lawmakers, members of the executive branch and staff, and require that they publicly disclose stock trades of more than $1,000 within 90 days. It would also require the "political intelligence consultants" to register as lobbyists in both chambers of Congress.

We hadn't heard the allegation that members of Congress had a leg up for insider trading and wondered if it's true.

Thomas Newkirk, a partner with the law firm Jenner and Block, told us that indeed there's some uncertainty about how insider trading rules impact members of Congress and their staff.

For example, in 2001, a financial consultant meeting with the Treasury Department learned that the department planned to kill off the 30-year bond. In turn, the consultant tipped off traders at Goldman Sachs who proceeded to use that information to make the firm lots of money. It was considered insider trading because the consultant knew he was not supposed to release the information, Newkirk said. Federal regulators settled with Goldman Sachs and the consultant for about $10.3 million in September 2003.

But with members of Congress, it's different. Unless lawmakers have some express confidentiality agreement — whether it's in writing or in word — they can do whatever they want with the information they obtain on Capitol Hill, Newkirk said.

Bruce Carton, a former Senior Counsel with the SEC's enforcement division and current editor of Securities Docket, agreed there is uncertainty about the rules. "Insider trading depends on some kind of duty. You can steal information, but unless you have some sort of duty of confidentiality to it, you're not going to be held liable," Carton said.

Right now, there is no duty of confidentiality for Congress, their staff or executive branch employees, he said.

"It may be unethical, and it may be unseemly, but it's not illegal," Carton said.

So yes, it seems there is a way for members of Congress to engage in insider trading. Whether they are actually doing it is another story. So far, there are no specific examples of lawmakers engaging in "secret spending and insider trading," as the e-mail indicates. But for its factual claim, we give Public Citizen a True.

Source: Politifact

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