About the Author: Raimund Stieger is in his final year as an evening student at American University’s Washington College of Law. During the day he works as an ethics specialist for the Food & Drug Administration focusing on financial conflicts of interest.
In 2012, Congress passed the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”) to combat insider trading occurring within the Federal government.[1] The STOCK Act prohibits members of Congress, Congressional employees, and executive branch employees designated as public filers “from using nonpublic information derived from or obtained through their official positions for personal benefit and other purposes.”[2] Congress passed the STOCK Act because, prior to its enactment, members of congress could legally make trades utilizing the nonpublic information they learned through their congressional duties.[3] The fact that it took until 2012 for such an act to be passed may come as a surprise, especially to the framers who wrote of “old corruption” and “rotten boroughs”[4] two and a quarter centuries earlier.
Despite the STOCK Act not being passed until 2012, the United States has not been sitting idly by in its fight against corruption. Over the years, Congress has passed the Federal Election Campaign Act[5] focusing on increasing the public disclosure for federal campaign contributions, the Foreign and Corrupt Practices Act[6] formally prohibiting the bribery of foreign public officials, the Ethics in Government Act[7] establishing the Office of Government Ethics as an independent federal agency, the Inspector General Act[8] allowing inspectors general to operate independently within their respective agencies, and other anti-corruption focused legislation. Congress implemented many of these acts in response to public opinion or current affairs of the time—such as the Ethics in Government Act, which Congress passed in response to the Watergate scandal.[9] Each of these Acts created a means of prosecuting offenders since the Constitution does not give Congress the authority to enact general criminal offenses. All federal offenses are based on one or more of Congress’ enumerated legislative powers.
Despite Congress’ passage of a plethora of federal legislation designed to weed out and prevent corruption, the Department of Justice (the “DOJ”) has never successfully prosecuted a member of Congress or an employee of Congress for violating the STOCK Act.[10] Recently, several members of Congress were investigated for insider trading scandals because they sold millions of dollars of stocks after being briefed on the COVID pandemic,[11] days before the Dow Jones’ fell nearly 3,000 points on March 16, 2020[12]—the largest single-day drop in U.S. stock market history. Figure 1 shows the top ten trades made during this scandal.
Figure 1: Ranked from most to least profitable, the above table shows trades made by Senators and the resulting drop in the company’s stock after the March 16th crash.[13]
Despite the public outcry and clear financial gain these senators obtained, both the FBI and the DOJ found the Senators had not violated the STOCK Act.[14] Senator Perdue, one of the senators investigated by the DOJ, was able to avoid $2.2 million in losses by liquidating a significant portion of his portfolio—dumping $1.7 million worth of stock in thirty-three transactions—weeks before the March 16th crash.[15] The overwhelming appearance that these senators gained financially from nonpublic information is, however, not sufficient to justify prosecuting a sitting senator. As such, the DOJ announced in January of 2021 that it was dropping its investigation into Senator Burr’s alleged STOCK Act violations.[16]
While the DOJ does not comment publicly on its rationale behind its decision to prosecute, it is likely that the DOJ did not believe it could overcome the two large obstacles protecting members of Congress: The Speech or Debate Clause and proving the “materiality” of the nonpublic information given the unique circumstances surrounding the trades. The Speech or Debate Clause states that “[t]he Senators and Representatives shall . . . in all Cases . . . for any Speech or Debate in either House . . . not be questioned in any other Place.”[17] This premise provides members of Congress with general criminal and civil immunity for acts taken in the course of their official duties to protect them from being intimidated by the other branches of Government.[18] The D.C. District Court upheld this premise in United States v. Rayburn House Office Building,[19] where it held that the FBI had violated Representative William Jefferson’s constitutional right under the Speech or Debate Clause and ordered the return of documents covered under the Clause’s privilege.[20]
The framers, in their writing of the Constitution, intended to protect members of Congress from possible corruption or a hostile judiciary. Their well-intentioned drafting has shown that some people can wield shields as swords. A determined individual could, as was seen in Rayburn, use the protections provided by the Speech or Debate Clause to cripple any would-be prosecutors from obtaining the evidence necessary to get a conviction.[21] It cannot be said with certainty that the significant hurdle presented by the Speech or Debate Clause impacted the DOJ’s decision to drop its investigation, but it can also not be ruled out.
Even if, arguendo, prosecutors were able to overcome the protections laid out by the Speech or Debate Clause and obtain documents showing that a member of Congress had nonpublic information, there exists a second hurdle—proving materiality. Under the Federal Rules of Evidence, evidence is material only if it is logically connected to a fact of consequence that is in question and that fact in question can impact the outcome of the case.[22] For example, the Periodic Transaction Report Speaker Pelosi filed on July 2, 2021, listed that her husband purchased between $1–5 million worth of call options for Alphabet in mid-June.[23] Speaker Pelosi’s vote on the House Judiciary Committee later that month on the House’s ongoing tech-focused antitrust efforts resulted in her husband’s options netting $5 million in profits.[24]
A brief reading of the facts may cause a reader to infer that Speaker Pelosi violated the STOCK Act by making this trade, but the DOJ neither investigated nor prosecuted her. That may be in part due to an inability to prove that Speaker Pelosi had access to nonpublic information that was material in her husband purchasing those call options. Speaker Pelosi has also stated that “[she] has no involvement or prior knowledge of [her husband’s Alphabet call options purchases].”[25]
Prosecuting insider trading can be difficult, even more so when it involves members of Congress, but that difficulty should not be the reason for a lack of enforcement actions. The difficulty should motivate prosecutors and investigators to work that much harder at rooting out corruption in the legislature.
The National Bureau of Economic Research published an empirical study in April of 2020 that found, after the passage of the STOCK Act, members of Congress generally underperform the market in the short term and slightly outperform the market at the one-year mark.[26] These findings imply that when a member of Congress makes an extraordinarily successful short-term trade it is against the statistical norm. Purchasing over one million dollars of call options that results in over $5 million in profit, as Speaker Pelosi’s husband did in June, is an outlier and outliers should be investigated.
Despite all of this, eight years after its passage, not a single member of Congress has been prosecuted for violating the STOCK Act. While Former Congressman Chris Collins was imprisoned in 2020 for insider trading, this imprisonment was for his role as a board member with a biotech company and unrelated to his legislative duties.[27] An option that, while radical in 2012, may be feasible in the current political climate could be to provide strict trading and investment limitations for members of Congress, similar to the restrictions placed on employees of the Securities and Exchange Commission (“SEC”).[28] Given the vast amount of information members of Congress have access to, it is likely that the Office of Congressional Ethics could not feasibly review all requests in a reasonable amount of time.
Therefore, a more economical solution would be to restrict members of Congress to trading only sector funds or diversified mutual funds. Such a restriction would remove the two major hurdles currently impacting the DOJ’s ability to prosecute STOCK Act violations, essentially eliminating the possibility of members of Congress making unethical trades. In addition, members of Congress should pride themselves on being held to a higher standard than the average American. The constitution should be a shield protecting the people, not a sword for financial opportunists capitalizing on America’s trust.
[1] See generally Stop Trading on Congressional Knowledge Act of 2012, Public Law 112.
[2] Synopsis, Stop Trading on Congressional Knowledge Act of 2012, Public Law 112, 105.
[3] Zeke Miller, ’60 Minutes’ Blows the Lid Off Congressional Insider Trading, Business Insider (Nov. 14, 2011), https://www.businessinsider.com/congressional-insider-trading-revealed-on-60-minutes-2011-11.
[4] Merriam-Webster Collegiate Dictionary (11th ed. 2003). Rotten boroughs being a historical British term used to describe an election district with a small or declining electorate that retained its original representation in parliament. These boroughs were frequently represented by a member of the district’s patron family that, generally, did not vote in the interests of their electorate, resulting in unfair representation in parliament.
[5] Fed. Election Comm’n, Legis., https://www.fec.gov/legal-resources/legislation/ (last visited Oct. 21, 2021).
[6] Foreign and Corrupt Practices Act of 1977, 15 U.S.C. § 78dd–1.
[7] Ethics in Government Act of 1978, Pub. L. No. 95-521, 92 Stat. 1824.
[8] Inspector General Act of 1978, 5 U.S.C. § 2.
[9] Walter M. Shaub, Jr., 35th Anniversary of the Ethics in Government Act, Office of Government Ethics, https://oge.gov/Web/oge.nsf/Resources/35th+Anniversary+of+the+Ethics+in+Government+Act (last visited Oct. 21, 2021).
[10]Karen Woody, Criminal Laws to Combat Corruption and Prosecutorial Discretion in Enforcement of Anti-Corruption Laws (June 15, 2021).
[11]See Lachlan Markay, William Bredderman, & Sam Brodey, Sen. Kelly Loeffler Dumped Millions in Stock After Coronavirus Briefing, The Daily Beast (March 20, 2020), https://www.thedailybeast.com/sen-kelly-loeffler-dumped-millions-in-stock-after-coronavirus-briefing; Tia Mitchell, David Perdue’s stock trading saw an uptick as coronavirus took hold, The Atlanta Journal-Constitution (April 7, 2020), https://www.ajc.com/news/state–regional-govt–politics/david-perdue-stock-trading-saw-uptick-coronavirus-took-hold/MRWmzwXeHgxi6IcmBbPgaN/; Karl Evers-Hillstrom, Senate Intel Chair Unloaded Stocks In Mid-February Before Coronavirus Rocked Markets, OpenSecrets (March 19, 2020), https://www.opensecrets.org/news/2020/03/burr-unloaded-stocks-before-coronavirus/.
[12] Kimberly Amadeo, How Does the 2020 Stock Market Crash Compare With Others?, The Balance (updated June 1, 2021), https://www.thebalance.com/fundamentals-of-the-2020-market-crash-4799950.
[13] See 2020 Congressional Insider Trading Scandal: A Stock Analysts’ Perspective, https://marketsentiment.substack.com/p/2020-congressional-insider-trading (showing financial information was collected through efdssearch.senate.gov which allows the public to search the periodic transaction reports (Office of Government Ethics Form 278-T) of members of Congress; the OGE 278-T is a mandatory form that requires public filers to disclose any financial transaction above the $1,000 de minimis threshold within thirty days).
[14] Katie Benner & Nicholas Fandos, Justice Dept. Ends Inquiries Into 3 Senators’ Stock Trades, N.Y. Times (May 26, 2020), https://www.nytimes.com/2020/05/26/us/politics/senators-stock-trades-investigation.html.
[15] See 2020 Congressional Insider Trading Scandal: A Stock Analysts’ Perspective, supra note 13.
[16] Nicholas Fandos & Katie Benner, Justice Dept. Ends Stock Trade Inquiry Into Richard Burr Without Charges, N.Y. Times (Jan. 19, 2021), https://www.nytimes.com/2021/01/19/us/politics/richard-burr-stock-trades-investigation.html.
[17] U.S. Const. art. I, § 6, cl. 1.
[18] Todd Garvey, Understanding the Speech or Debate Clause, Congressional Research Service (Dec. 1, 2017), https://fas.org/sgp/crs/misc/R45043.pdf.
[19] See generally 497 F.3d 654 (D.C. Cir. 2007).
[20] Id. at 667.
[21] Id. at 654.
[22] See Fed. R. Evid. 401.
[23] Nancy Pelosi, Periodic Transaction Report (July 2, 2021), https://disclosures-clerk.house.gov/public_disc/ptr-pdfs/2021/20019004.pdf.
[24] Antoine Gara, Inside Nancy Pelosi’s Husband’s $5 Million Alphabet Options Windfall, Forbes (July 8, 2021), https://www.forbes.com/sites/antoinegara/2021/07/08/inside-nancy-pelosis-husbands-5-million-alphabet-options-windfall/?sh=b06bd8db8575.
[25] Id. (quoting Speaker Pelosi’s spokesperson Drew Hamill (internal quotations omitted)).
[26] William Belmont et al., Relief Rally: Senators As Feckless As the Rest of Us at Stock Picking, Nat’l Bureau Econ. Res. (April 2020), https://www.nber.org/papers/w26975.
[27] Press Release, Dept. of Just., Former Congressman Christopher Collins Sentenced for Insider Trading Scheme and Lying To Federal Law Enforcement Agents (Jan. 17, 2020) (on file at Justice.gov).
[28] 5 C.F.R. § 4401.101. Employees of the SEC, under OGE regulations and SEC supplemental regulations, cannot trade a security without receiving prior clearance from the SEC Ethics Office.