Insider Trading: Don't Do It - Unless You're in Congress

Back in 2003, Martha Stewart was indicted on multiple charges including securities fraud and obstruction of justice. These charges stemmed from an investigation into an investment move back in 2001, when she allegedly dumped her shares of ImClone based on insider information that she had received from her broker. As it turns out, this sort of “insider trading” has been illegal since 1934.

But did you know that these rules, spelled out in the Securities Exchange Act of 1934, don't apply to members of Congress? Despite the fact that they come into contact with non-public, potentially market-moving information on a daily basis, our Senators and Representatives are apparently free to profit from this knowledge.

This was the topic of an investigative report on 60 Minutes last night, and it was maddening to say the least.

According to Peter Schweizer, a fellow at the Hoover Institution:

“The fact is, if you sit on a healthcare committee and you know that Medicare, for example, is- is considering not reimbursing for a certain drug that's market moving information. And if you can trade stock on- off of that information and do so legally, that's a great profit making opportunity. And that sort of behavior goes on.”

In fact, this is very similar to what Martha Stewart was accused of doing. She apparently caught wind that one of ImClone's experimental drugs wouldn't be getting FDA approval before that information was made public, and she acted on it.

Why are members of Congress allowed to do this, when you or I would be subject to huge fines and time in prison?

“It's really the way the rules have been defined. And the people who make the rules are the political class in Washington. And they've conveniently written them in such a way that they don't apply to themselves. [...] We know that during the healthcare debate people were trading healthcare stocks. We know that during the financial crisis of 2008 they were getting out of the market before the rest of America really knew what was going on.”

For example, following a top secret briefing about the impending financial collapse in 2008, Congressman Spencer Bachus (R-AL) bought options that would rise as the market collapsed. And collapse it did.

And during the healthcare debate of 2009, then-House Minority Leader John Boehner (R-OH) allegedly loaded up on health insurance stocks just before the “public option” was removed from the Federal healthcare reform legislation.

And these deals aren't limited to one party or the other… In 2008, former Speaker of the House Nancy Pelosi (D-CA) was granted access to the Visa IPO back in 2008 while the House was considering credit card legislation that would hurt the credit card industry. Her initial $220k investment went up $100k in two days.

While the credit card legislation would ultimately make it into law, that didn't happen until much later, and the successful legislation was initiated in the Senate.

What do you think? While everyday citizens - as well as members of the Executive and Judicial branches - are barred from this sort of behavior, Congress gets of Scot free. As far as I'm concerned, this stinks.

Interestingly, going back at least to 2004, there has been interest in closing this loophole, but the issue hasn't gained any traction. And why would it? The inmates are running the asylum, and they have no interest in regulating themselves.

Source: CBS News

The original article can be found at Trading: Don't Do It - Unless You're in Congress