Insider trading is the trading of a public company’s stock or other securities based on material, non-public information about the company. This form of insider trading is illegal in the United States. Martha Stewart is a businesswoman, author, and television personality. She was also convicted of insider trading in 2004 and spent five months in federal prison for her role in ImClone insider stock trading case. She was restricted from serving as a director, CEO, CFO, etc. due to her federal conviction. Jeffrey Skilling was indicted on 35 counts of fraud, insider trading and other crimes relating to Enron. Skilling sold $60 million in shares of Enron stock after leaving the company with the insider knowledge that Enron would file bankruptcy. Insider trading penalties can range from a fine to 20 years in jail.
The illegality of insider trading is meant to permit a fair-trading environment for everyone. Insider trading takes away from confidence in the market system. It makes sense to have a law against something that is unethical and creates an unfair advantage.
Who seems to be exempt from insider trading rules are the very people creating the laws and policies that affect businesses: politicians.
In 2012, Congress passed the Stop Trading on Congressional Knowledge Act (The STOCK Act of 2012), which clarified that insider trading laws bind members of Congress as well as the president.
However, an illustration of continued abuse of insider knowledge comes in an article from The New York Times on Sept. 13 by Parlapaino, Playford and Kelly: “97 members of Congress Reported Trades in Companies Influenced by Their Committees.” The lawmakers claimed the trades were done independently by a spouse or a broker with no input from them.
The 2020 congressional insider trading scandal involved allegations that members of the U.S. Senate sold stock at the start of the COVID-19 pandemic based on knowledge given to them at a closed Senate meeting. The trades occurred before the stock market crash in February 2020. Sen. Richard Burr was investigated by the Senate Ethics Committee and the Securities and Exchange Commission (SEC). Unsealed FBI documents show Burr and his wife liquidated more than half of their equity holdings in early February 2020, right before stocks plunged. In Burr’s position, he had information on the virus’s spread that was not available to the public and his equity positions went from 76% of his holdings to 3%. Burr’s brother-in-law sold substantial equities after a call from Burr’s wife, his sister. Twenty minutes after that, Burr called his brother-in-law and then the brother-in-law called his investment manager and sold his holdings. Burr was never prosecuted and remains a U.S. senator from North Carolina.
It is difficult to bring a case against a member of Congress for insider trading. Federal authorities must prove materiality. A member of Congress has never been prosecuted under the STOCK Act.
An Oct. 11 Wall Street Journal article, “Federal Officials Trade Stock in Companies Their Agencies Oversee,” cited the examples of an FDA official who owned “dozens of food and drug stocks on its no-buy list,” an EPA top official that purchased oil and gas stocks and a Defense Department official who “bought stock in a defense company five times before it won new business from the Pentagon.”
From recent evidence, it seems the STOCK act needs an overhaul or more teeth to really make a difference. A recent bill was created to restrict lawmakers, their spouses and dependent children from trading stock and holding certain other investments. Voting on the bill was put off this month by the House until after the midterm elections, even though polls suggest two-thirds of Americans support the measure. I guess it’s difficult to regulate yourself when you don’t have anyone looking over your shoulder and there’s so many financial benefits of not doing it.
All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice. Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.
Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc. in State College.
