Insider Traders in Government

June 24th, 2011
in Background, econ_news

Insider-Trading Econintersect:  There are recurring reports about members of Congress and others in government profiting from trading stocks based on insider information they obtain through their government activities.  What is amazing about this is that these activities are not illegal.  When somebody in business trades stocks based on information that is not yet public, securety laws are being violated.  However, Congress, in their self-serving wisdom, has not enacted legislation that make the same trading activity illegal for them.

Follow up:

This has been covered by a number of reports, including Michael Terry, writing at Seeking Alpha, and Rich Smith at Motley Fool.

From Rich Smith at Motley Fool:

Congress is stuck in a time warp. For more than five years now, Rep. Louise Slaughter (NY) has co-sponsored versions of this bill. And it couldn't come soon enough. A recent study by four university professors found that members of the House of Representatives beat the market by 6 percent from 1985 to 2001. An earlier study by the same group found that in the 1990s, U.S. senators outperformed the stock market by 12 percentage points per year. For context, that's twice as much outperformance as company insiders manage on average.

Members of Congress have outperformed the giants of the investing world, including the legendary Warren Buffett.  Of course, when someone exceeds market averages someone else must fall short.  After all averages fall exactly in the middle.  So, if government personna are exceeding market averages, non-government investors must fall under the average.

There have even been accusations of conflicts of interest similar to insider trading on the Supreme court.  The left-leaning Alternet has accused Justice Clarence Thomas of receiving financial benefits as a  result of his decisions.

One of the leaders in the insider trading investigations is Preet Bharara, U.S. Attorney for the Southern District of New York.  Here is a CNN video report:


Click here to view video.

Some have accused Bharara of political partisanship.  From the right-leaning Media Research Center:

CNN did not mention that Bharara was a chief counsel to Sen. Chuck Schumer (D-N.Y.) on the Senate Judiciary Committee, before he was nominated by President Obama. He also helped oversee the congressional investigation into the firings of eight attorneys by the Bush administration in 2006.

CNN touted Bharara's record going after Wall Street but also online poker websites and the Times Square bomber. They did mention a common complaint of his critics – that he hasn't caught any of the big wigs responsible for the 2008 economic fiasco – but buried it deep in the segment and immediately followed up with a positive quote from a government official.

In spite of repeated attempts to bring attention to the insider information and financial advantage problem, it makes little headway.  Here is a quote from a Washington Independent article in 2009:

Yesterday, we ran a piece pointing out that there’s really nothing stopping lawmakers, congressional staffers and other government employees from using the non-public information they gather from their daily duties to guide investments and reap enormous profits. Although a House bill — the Stop Trading on Congressional Knowledge Act — takes steps to end the practice, support on Capitol Hill has been less than enthusiastic. Indeed, only four of 435 House members have endorsed the proposal, leaving even public-interest advocates to write off its chances of going anywhere.

Today, however, Rep. Dennis Moore (D-Kans.), who heads the House Financial Services Oversight and Investigations Subcommittee, announced that his panel will take a closer look at just how prevalent government insider trading really is. The hearing, entitled “Preventing Unfair Trading by Government Officials,” is scheduled for July 13 (2009).

Expect attendance to be spare.

Sources: Motley Fool, Washington Independent, Seeking Alpha, Alternet and Media Research Center

Hat tip to Roger Erickson



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