Insider Trading is Illegal…Unless You’re a Member of the U.S. Congress

Image From Peter Schweizer

Peter Schweizer, a Hoover Fellow at Stanford University, is a known political conservative. But in his new book, Throw Them All Out, Schweizer is politically unbiased in his exposure of legalized insider trading among members of the U.S. Congress. [Click here for a basic definition and example of "insider trading."]

I have not read Throw Them All Out but was prompted to do some research after I heard Peter Schweizer interviewed on AM talk radio. In the interview, Schweizer mentioned that he derived his findings on politicians’ investment habits through public records — yes, those available to U.S. citizens. But be warned: sorting through public records is a complex endeavor, according to Schweizer.

Schweizer’s book cites examples of senators and representatives profiting from stocks influenced by U.S. legislation. One reported liberal offender is Nancy Pelosi, who was granted special access to Visa’s 2008 IPO. Pelosi and her husband purchased between $1M and $5M of stock in the credit card company. These investments occurred two weeks after a House bill was proposed that would hamper Visa’s profitably by giving merchants more negotiating power over transaction fees. Nancy Pelosi, as then-House Speaker, deferred the bill for two years — during which time her stock value in Visa grew 200%. [Read this Washington Times article for more details.]

An example in the conservative corner is Republican John Boehner, who made some “lucky” investments during this tenure as House minority leader. While Boehner and fellow members of Congress debated the Obama healthcare reform legislation, “the Boehner investment team” purchased stock in private health insurance companies. Guess how that investment fared after Obama-Care failed to pass? John Boehner seems like the perfect guy — he’s rich and not afraid to cry in public. [Read more on The Daily Beast]

So are these and other instances of insider training among Washington’s elites illegal? The answer is no. Currently, there are no laws barring members of Congress from investing in stocks overseen by their committees. Effectively, it’s legal for Congress to trade stocks based on publicly unavailable information but for everyone else, such actions are considered “insider trading” and highly illegal. Now I understand the appeal of a career in Congress: good pay, long breaks, and exclusive access to stock profits.

So does Peter Schweizer propose a solution to the unscrupulous investment practices of above-the-law politicians? You don’t even need to read Throw Them All Out to guess the answer. Maybe I’m just projecting but I’m interpreting the book’s title at face value.

P.S. What’s “insider trading?”
According to Wikipedia, “insider trading is the trading of a corporation’s stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company.”

P.P.S. What’s a basic example of insider trading?
Here’s a case I made up: A family friend is the CEO of an up-and-up pharmaceutical company that is publicly traded on the U.S. stock exchange. As an investor, you’re excited the company stock has risen since your initial investment. Then you receive a call from the CEO, your family friend. He tells you the company’s upcoming product has been rejected by the FDA. That upcoming product was expected to be the company’s main source of revenue in the next twelve months. The CEO tells you the government will issue a public announcement in two days. You go to your online trading account or broker and sell your shares, making a nice profit right before the FDA rejection is publicized and the stocks take a big dip. You participated in insider trading in this case, punishable by U.S. law. A senator in the same scenario would not be punished.

P.P.S. What are some actual cases of insider training?

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