Congressional Insider Trading

Posted on June 30, 2009 by Jack J. Gravelle

On Friday the Cleveland Plain Dealer reported that members of the U.S. House Financial Services Committee bought and sold financial stocks last fall, at the same time that the Committee was approving the bailout, and in the same companies that the Committee would later criticize for incompetence and greed. The article points out two potential problems:

1. The potential for conflicts of interest; and
2. The potential for trading on material, non-public information.

Some of the trades resulted in avoiding significant losses; while perhaps more troubling, some trades resulted in increased losses, which may at least be proof there was no impropriety.

In any event, such trades do not appear to violate Congressional ethics rules (although, arguably they could violate broad rules against using one’s office for “improper advantage”); however, the securities rules are more troublesome. If a member of Congress trades in securities based on material, non-public information provided by a corporate insider, the representative faces possible liability under a tipper/tippee theory assuming other elements of the offense are met. But, if the representative trades based on material, non-public information that results from the representative knowing about a new regulation or government program that will affect a company, liability depends on whether the representative has breached a duty to the source of the information, presumably Congress or some other source to which no duty is owed.

Congressional staffers are not so lucky, as they potentially owe a duty to their representative, the source of the information.

This is not a new issue. The Stop Trading on Congressional Knowledge Act aims to close this loophole but has failed to pass despite annual tries since 2006. Also interesting is the fact that two SEC lawyers got in trouble about a month ago for trading in the securities of issuers under investigation, and the Commission quickly enacted rules to stop the practice. Congress has been at least 3 years slower.
 

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Illegal Insider Trading and the Healthcare Industry

Posted on May 1, 2009 by Jack J. Gravelle

The SEC announced yesterday charges against a former Citigroup investment banker who allegedly tipped his friends and family about upcoming mergers involving Citigroup’s healthcare industry clients, resulting in more than $5,000,000 in illegal insider-trading profits.

The case highlights a common insider-trading scenario: an employees uses inside information not to trade stock in his or her employer, but rather to trade stock in the employer’s clients.

In particular, privately-owned companies tend to think of illegal insider trading as a public-company problem, but often private companies and their employees are privy to information about public-company clients that can lead to insider trading concerns.

For example, the healthcare industry has a strong support industry of researchers, policy analysts, consultants, lobbyists, etc., all of whom potentially have access to material non-public information from their public healthcare clients that can be used to engage in illegal insider trading.

This raises a host of issues for private companies that service public companies, including:

  • Should we have a company policy regarding employees owning stock in our clients?
  • Should we accept stock as payment for services?
  • If an employee who knows a lot about the industry makes great stock picks in client stock, will it seem like illegal insider trading even if technically it is not?
  • If an employee pieces together a series of seemingly inconsequential non-public information and trades stock based on that information, what are the chances he or she will be accused of illegal insider trading?
  • Is there a difference between having a hunch something good will happen to the client’s stock and knowing something good will happen?
  • May an employee trade stock based on information that is technically publicly available (or would be provided by the client upon request) but was never actually in a press release?

These issues become more important as the SEC continues to step up enforcement.
 

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More Efficient Oversight of Insider Trading

Posted on August 14, 2008 by Jack J. Gravelle

The major U.S. securities exchanges and self-regulatory organizations have agreed to consolidate oversight of insider trading in the hands of two regulators: NYSE Regulation and FINRA. The following equity exchanges and FINRA have signed the agreement, which must now be approved by the SEC:

  • American Stock Exchange LLC
  • Boston Stock Exchange, Inc.
  • CBOE Stock Exchange, LLC
  • Chicago Stock Exchange, Inc.
  • International Securities Exchange, LLC
  • NASDAQ Stock Market, LLC
  • National Stock Exchange, Inc.
  • New York Stock Exchange, LLC
  • NYSE Arca Inc.
  • Philadelphia Stock Exchange, Inc.
  • NYSE Regulation, Inc. (acting under authority delegated to it by NYSE)

Currently, each securities exchange is responsible for investigating insider trading by its market participants, which amounts to 11 separate programs. The consolidation of power into two regulators is expected to make insider trading investigations more efficient by preventing duplicative efforts and failed detection of illegal activity.

The consolidation may result in more convicted insider traders, or it may simply result in more efficient investigation of insider traders who would have been caught anyway. The Wall Street Journal's MarketWatch reports FINRA has already referred 104 insider trading cases to the SEC in 2008, compared to 118 in all of 2007. NYSE Regulation has referred 90 cases as of the end of June, compared to 141 in all of 2007.
 

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