Four U.S. Senators have been accused of trading stocks based upon non-public information about the coronavirus outbreak. The most disturbing cases appear to be Republican Senators Richard Burr and Kelly Loeffler. Senator Burr, who as Chair of the Senate Intelligence Committee attended a daily confidential briefing on the pandemic, divested between $628,033 and $1.72 million from industries hardest hit by coronavirus restrictions, including two major hotel chains. Senator Loeffler, who attended a confidential meeting about the coronavirus on January 24th, divested $1.275 million to $3.1 million from industries most hit, while also purchasing stock in teleconferencing companies. (Two other Senators, Democrat Dianne Feinstein and Republican Jim Inhofe, both also made significant stock sales during this time, but Senator Feinstein’s funds are in a blind trust, and Senator Inhofe has said his financial decisions are made by his financial advisors without consulting him.)
This is not the first time that concerns have been raised about Members of Congress corruptly taking advantage of their privileged access to inside information to enrich themselves, though the fact that Senator Burr engaged in these transactions shortly after having co-authored a piece claiming that “the United States today is better prepared than ever before to face emerging public health threats, like the coronavirus” makes his case particularly egregious. In 2004, a quantitative study found that the investment portfolios of U.S. Senators consistently outperformed the market, a result that at least suggests that Senators were using non-public information to inform their investment decisions. In response to this concern, in 2012 Congress enacted a bipartisan bill called the Stop Trading on Congressional Knowledge (STOCK) Act. (Senator Burr, it should be noted, was one of only three Senators to vote against it.) The main purpose of the STOCK Act was to expressly affirm that Members of Congress and their staffers were covered by the general prohibition on insider trading. The Act also increased transparency by requiring that Members of Congress and senior staff release financial disclosures within 45 days of major trades.
The STOCK Act was a step in the right direction, but it does not do nearly enough to prevent federal legislators from using their privileged positions to enhance their own wealth. To eliminate this form of corruption, the law should impose much more aggressive, prophylactic restrictions.
One of the STOCK Act’s most significant weaknesses is that it’s very difficult to enforce in those cases where Members of Congress receive information in confidential briefings, to which investigators do not ordinarily have access even after the fact. Indeed, in the case of Senators Burr and Loeffler, we don’t actually know that the confidential meetings they attended included discussions of the likely impact of the coronavirus epidemic. That such discussions took place is a reasonable inference, but in other cases it won’t be so clear whether a Member of Congress’s stock trades had anything to do with the content of their confidential discussions. (Indeed, Senator Burr is defending himself by arguing that he relied on publicly available information when deciding to divest from hotel chains.) And while it might be possible to amend the Act to provide select prosecutors with security clearances to examine confidential transcripts in certain cases, it’s not feasible or desirable to open up secret national security briefings to federal law enforcement monitors on an ongoing basis.
Even putting this issue to one side, the STOCK Act also fails to provide sufficient transparency with respect to the required financial disclosures. The original 2012 version of the Act provided that these disclosures were to be made available in a searchable online database, but after an independent report suggested that an online database would leave government officials vulnerable to identity theft, Congress amended the law in 2013 to eliminate the online database. Under the amended version of the law, to get access to the disclosures, one must visit an office in the basement of the House of Representatives building in Washington D.C., request the records of an individual, and print out those records for $0.10 a page. While it might be easy enough to amend the STOCK Act to reintroduce the online database (assuming the concerns about identity theft could be adequately addressed), this would still not solve the larger problems with the Act.
Much stronger medicine is needed to prevent Members of Congress from profiting off of their privileged access to inside information. One possibility, which has been advocated by (among others) Senator Jeff Merkley and Senator Elizabeth Warren (who included it in her proposed anticorruption bill), and which has some support in the House of Representatives, is to prohibit Members of Congress from owning individual stocks; Members could invest in the stock market only through diversified index funds or mutual funds. An alternative approach would be to require Members of Congress and their senior staff to place all their investments in a blind trust prior to assuming office. (As noted above, Senator Feinstein has defended herself from accusations that she benefitted from inside information about the coronavirus by emphasizing that all of her assets are in a blind trust, and decisions about what stocks to buy or sell are made by the trust managers without her knowledge or input.)
More aggressive measures along these lines would not only address concerns about improper use of inside information, but might also address the serious concerns about the conflicts of interest that can arise when legislators have investments in the very industries that they regulate. Of course, one obvious barrier to enacting any legislation along these lines is that it’s very difficult to convince a majority of legislators to vote against their own financial interests. But the public outrage provoked by the coronavirus insider trading scandal may provide a window of opportunity for reform advocates to pass a bill and implement one of these preventative solutions.
Thanks Cristina for this great, timely post. Can you tell me more about the independent report that exposed potential identity theft vulnerabilities? Who commissioned the report and who carried out the study? Additionally, I would like to know where you fall on the spectrum of ways to curb congressional corruption in this area. Do you favor the blind trust idea or the more radical requirement that Members of Congress forgo individual stock ownership in office? Do you seen any weaknesses with these options, other than political feasibility concerns? Lastly, I too would like to see more substantive progress on this issue and hope you are right about momentum arising from the coronavirus, but also think there is value in making step-by-step progress if that public outrage subsides and officials turn their attention elsewhere. In this case, advocating for the reinstatement of online disclosure processes would still be a valuable (albeit incomplete) step forward.
Thank you Cristina for this very timely and compelling piece.
First, I understand the concern about investigators not being allowed access to confidential information used to brief lawmakers, but, in your opinion, do you think that this difficulty precludes any sort of meaningful enforcement mechanism against members who do engage in insider trading? Essentially, must reform efforts focus exclusively on ex-ante prevention of insider trading before it occurs, rather than subsequent punishment?
Second, I agree with Duffy – I’d love to know what you think is the best approach to combat problematic trading by members of Congress. I personally think that the blind trust option would be more palatable to members of Congress, and therefore more feasible, but I’m interested in your thoughts.
Thanks Christina for the very timely and important post.
I was curious about your skepticism that effective monitoring of national security or otherwise classified briefings might be challenging or even undesirable as a means to prevent congressional insider trading. On the back end of suspect congressional trades, prosecutors from Main Justice’s and the D.C. U.S. Attorney’s Office’s National Security Division would already have the necessary security clearances to examine the contents of confidential briefings, so that wouldn’t seem to pose much of an obstacle. Do you think an increased possibility of prosecution would be an effective deterrent?
The ongoing monitoring is what seems to be the most burdensome and perhaps politically infeasible. Do you think an Inspector General-like position would be workable and effective? The appointment mechanism would need to be different to avoid separation of powers issues, but perhaps normalizing oversight of confidential congressional briefings isn’t a bad thing? Do you think the problem of congressional insider trading is actually severe enough to warrant constant monitoring? It’s seems a bit hard to judge without knowing how pervasive the insider trading problem actually is, but I’d be curious to hear your thoughts.
Very interesting post, Cristina! The first point that you make draws my attention in particular. Considering that the Stock Act establishes that the traditional criminal prohibition to insider trading encompasses the “congressional insider trading”, it is possible that a federal prosecutor starts a grand jury investigation in the face of suspicion of practice of this sort of crime by a member of the Congress. In this context, perhaps a sub poena duces tecum may compel the Congress to disclose even the content of confidential discussions that are relevant to elucidate the possible existence of crime. Apparently, the precedent in United States v. Nixon, 418 U.S. 683 (1974), applies to the situation. Another alternative would be the obtention by the prosecutor of a judicial order (warrant) based on probable cause to access the secret information. Otherwise, it would be impossible to investigate this kind of offense. Do you know if any suspected fact happened after the Stock Act was investigated? Any member of the Congress was indicted and convicted? Thank you.
Thank you for the fascinating post Cristina! I’m also interested in know a bit more about what you think would be the best approach between the blind trust and requiring Congresspeople to forgo stocks. As far as the latter proposal goes, would you have any concerns about possibly disincentivizing qualified individuals from running for Congress? i.e. might we be worried that individuals who are heavily invested in the stock market may simply eschew running for Congress if they were required not to own stocks?
In terms of prosecutorial investigation, I wonder how often prosecutors would be able to prove that insider information actually caused a congressperson to take a particular action. How often will it be possible to disentangle an individual congressperson’s access to classified briefings from publicly available information? I suppose that would weigh in favor of the blind trust option.
Finally, I’m interested in the degree to which you think there is a political solution. To what degree can/should we expect the voters to penalize perceived insider trading?