Conflict Of Interest, Congress, America The Beautiful

Lisbon,
 
Last Sunday a 60-Minutes report threw a welcome spotlight on a
preposterous, long-standing situation that virtually no one openly
defends: the fact that U.S. Senators and members of the U.S. House
of Representatives can -- and do -- trade stocks on inside
information that they obtain through performing their legislative
work.
 
Insider trading, trading stocks based on non-public information, is
illegal. 
 
Martha Stewart did it and went to jail for it. Recently, Joseph
"Chip" Skowron III, a Connecticut doctor was sentenced to 5 years
in prison for it. 
 
But if you're a member of Congress it's a whole different story...

Congress trading stocks on inside information

CBS 60 Minutes

 

  It's time to ban insider trading by Congress

Congress is finally shamed into fixing a long-standing scandal.

By Roger Parloff, senior editor

FORTUNE -- Last Sunday a 60-Minutes report threw a welcome spotlight on a preposterous, long-standing situation that virtually no one openly defends: the fact that, as a practical matter, U.S. Senators and members of the U.S. House of Representatives can -- and do -- trade stocks on inside information that they obtain through performing their legislative work.

Although many observers have decried this scandalous situation over the past decade, without having spurred Congress to surrender its sleazy perk, the well-timed 60-Minutes report, coming when Congress hit a new low in approval ratings (9%, according to a CBS News/New York Times poll) may finally shame it into plugging the loophole.

Congressmen do not literally enjoy any express "exemption" to the insider trading laws. If, for instance, a CEO tipped off a senator that the company's next earnings report would exceed expectations, and the senator traded on that information, he could go to jail, just like you or me.

The problem arises with respect to market-moving information a Congressman learns in the course of doing his legislative work. Like, say, realizing after cloakroom discussions that there are now sufficient votes to defeat a tax amendment that would have adversely affected a certain industry. Or learning from committee work that a company has won a big defense contract, though the announcement will not be made till the following Monday.

During the 60 Minutes segment, Hoover Institute fellow Peter Schweizer (author of the recent book Throw Them All Out) asserted that in mid-September 2008, Alabama representative Spencer Bachus, then the ranking member of the House Financial Services Committee, attended closed-door meetings at which Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke warned congressional leaders that a global financial meltdown was imminent. "Literally the next day," according to the Schweizer, Bachus bought stock options in funds that would make money if the market went down. (A Bachus staffer told 60 Minutes that Bachus never trades on non-public information and never trades in financial services stock. Since the segment aired Bachus has written the publisher of Schweizer's book, protesting: "The idea that I or anyone else needed this meeting to know our financial markets were in trouble is just laughable.")

Questionable liability

Nevertheless, the apparent informational advantage that Congressmen have over the rest of us vis-à-vis the stock market has been documented in two lengthy statistical studies led by Alan J. Ziobrowski, an economist at Georgia State University. His study of U.S. Senators, completed in 2004, concluded that their trades beat the market by 10% a year (or 85 basis points per month), at a time when average American households underperformed the market by about 1.4%. (Even corporate insiders, trading their own stock, outperformed the market by only 6%.) Ziobrowski's more recent study of members of the House, published this year, showed representatives beating the market by 6%. (Ziobrowski had corrected anticipated that Senators would outperform House members, hypothesizing that "power is more diluted in the House . . . which is likely to reduce the informational advantages of House Members and result in lower excess returns.")

Why isn't this sort of insider trading illegal? The complicated answer begins with the fact that there isn't really any "insider trading" statute to begin with. Rather, prohibitions against what we call insider trading have evolved through interpretation, by courts and the Securities and Exchange Commission, of the general main federal statute forbidding securities fraud. Those interpretations have hinged on finding that the insider trader is breaching some sort of duty to either the source of his information or to the person on the other side of his trade. For arcane reasons, it is not clear at the moment that Congressmen are breaching a sufficiently powerful or explicit duty of exactly the right kind when they engage in insider trading, even though there is no question that, for instance, their own staffers would be committing a crime if they traded on the very same information. Staffers owe a fiduciary duty to their employers, the Congressmen, not to misappropriate that information and use it for personal gain; it's not clear that Congressmen themselves have a comparable duty to anyone.

There is actually a debate within legal academia about whether Congressmen could be held liable for insider trading even as the law stands—law professor Donna Nagy of the University of Indiana has argued that they could be, while Stephen Bainbridge, a law professor at U.C.L.A., has argued that they can't—but the very fact that there is such a debate deters prosecutors from pursuing cases. Why mount an inherently shaky case against such a high-profile target? As for the SEC, wrote Bainbridge in 2009, "Any government agency is likely to be reluctant to bite the budgetary hand that feeds it."

While Congress never consciously created the cracks in the insider trading laws that its members now enjoy slipping through, they have consciously refused to seal them. Legislation has been introduced in each session of Congress since 2006 (by Louise Slaughter of New York and a handful of others), known as the STOCK Act (for "Stop Trading on Congressional Knowledge Act"), that would solve most of the problem. But until Sunday's 60 Minutes piece, it somehow never gained any traction.

That segment, though—produced by Ira Rosen and Gabrielle Schonder and reported by Steve Kroft—seems to have finally hit a nerve. Since it aired, two Senators have introduced new versions of the STOCK Act, and the House Financial Services Committee—now chaired by Representative Bachus—has already scheduled a hearing on the House version for December 6.

Now that it's made it onto the agenda, can you seriously imagine anyone opposing it?

read original:
http://finance.fortune.cnn.com/2011/11/18/insider-trading-congress/

Lisbon residents you have this same thing going on in town.  In fact it has been going on for so long it is the normal practice of the day for Lisbon Town Government.  It starts with your Chief of Police and trails to the halls of Augusta now.   Please stay tuned as we keep exposing it.
Thanks for reading.