I was in Washington D.C. this past week and you could almost feel the strife in the brisk January air, with the endless squabbling over President Biden’s stalled Build Back Better plan being Exhibit A.
And yet I did find instances of bipartisanship, featuring some strange bedfellows the likes of which I hadn’t seen since Representative Alexandria Ocasio-Cortez and Senator Ted Cruz briefly aligned on Twitter last year during the meme stock brouhaha — before AOC kicked Ted to the curb, 67 minutes later.
Here too the common ground is about stock trading. But in this case, it's much closer to home for lawmakers, specifically, that oh-so tawdry practice of stock trading by members of Congress.
Intriguingly, there are high-profile members on both sides of the aisle, and on both sides of the issue, i.e., both Dems and Repubs who are pro stock trading by members and both who are con. It’s a debate that has come to the fore this week; two competing bills were introduced on Wednesday, and that plus a flurry of articles could foster some real change here. (Yahoo Finance produced three articles this week on the subject; here, here and here.)
I urge you to temper your expectations however. Let’s remember the people who would write the stricter rules would be theoretically financially disadvantaging themselves. How often has that happened in human history?
It’s not just members of Congress who’ve come under the microscope btw. Federal judges, as well as Federal Reserve officials are being scrutinized and in some instances have taken recent falls. There’s much to chew on there as well, but I’m going to focus on members of Congress because there’s plenty enough to explore in those hallowed, and slightly sordid, halls.
Another reason to focus on Congress is that the laws there are relatively lax. Donna Nagy, a law professor at Indiana University-Bloomington who focuses on insider trading, notes that rules governing members of Congress don’t “impose any type of conflict of interest restraint on members of Congress akin to the anti-conflict legislation that is enforced for the executive branch and judicial branch.
“Judges can’t have a financial interest in matters before their courts. It’s a very similar statute — in purpose and effect — to the executive branch statute,” Nagy says. “Members of Congress aren’t governed by any of these statutes. There’s no independent statute that addresses a broad prohibition on conflicts of interest for members of the legislative branch.”
Believe it or not, before 2012, regulations for Congress were even looser, until the passage of the STOCK Act, or Stop Trading on Congressional Knowledge. (When did it become a thing, btw, that all bills had to be acronyms?) This law effectively bans members of Congress and their families from trading on inside information. Yes, you are reading correctly. Prior to 2012, Congresspeople could (and did) trade on inside information! The law also requires members to report all trades in 45 days instead of one year.
Former Washington (state) Congressman Brian Baird was a lone voice in the wilderness pushing for this legislation, which was going nowhere until a scathing "60 Minutes" piece in 2011 cited members of Congress for this practice, in particular during the financial crisis of 2007-2008. (CBS reporter Steve Kroft called out House Speaker Nancy Pelosi in the piece, more on her in a bit.) The STOCK Act passed the Senate by a vote of 96-3 with one of the "no" votes cast by Senator Richard Burr of North Carolina (More on him in a bit.)
So then after 2012, no more trading on inside information and members have 45 days to report, so we’re all good here? After all, these are lawmakers, so if anyone’s going to follow the law it would be these folks, right?
Actually, no. The abuses have continued. And so have the new stories reporting them. One of the more recent and comprehensive efforts for example was by Insider called "Conflicted Congress," which came out last month. This report and other media have found that 54 members of Congress violated the STOCK Act last year alone.
Bigger picture in the first nine months of last year, according to an expert named Tim Carambat: “Senate and House members have filed more than 4,000 financial trading disclosures — with at least $315 million of stocks and bonds bought or sold." Carambat would know because he created and now maintains two public databases of lawmaker financial transactions — House Stock Watcher and Senate Stock Watcher. Then there’s this mega report by Unusual Whales.
Bottom line: Many members of Congress have a busy side gig of buying and selling securities and some of them are not following the rules. To quote Ronald Reagan: “Well, I’m not surprised.”
Neither are the American people, or at least that’s what Rep. Abigail Spanberger (D-VA) told me this week, garnered from her conversations with folks in the wake of the pandemic, after reports surfaced of Congresspeople profiting from stock trades. “What was disturbing to me was that with the American public, or at least my constituents, the reaction was, ‘yeah, of course, we expected this.’ That there is this acceptance of the idea that ‘yeah, sure, it absolutely makes sense to me that my elected representative would be more interested in their stock portfolio.’”
“By taking away this sort of activity, you would remove the fear that members of Congress will introduce particular pieces of legislation or oppose them for some personal financial concern,” says Ben Edwards, an expert on securities law and professor at the William S. Boyd School of Law at the University of Las Vegas Nevada.
Two years ago Spanberger and Chip Roy (R-TX) proposed the Transparent Representation Upholding Service and Trust (TRUST) in Congress Act (acronym alert), which would go much further than the STOCK Act and require lawmakers simply to put their stock holdings in a blind trust while in office. This bill didn't go anywhere for a while, but lately gained steam as a precursor and a companion bill to one of the aforementioned bills introduced in the Senate this week, that being by Jon Ossoff (D-Ga.) and Mark Kelly (D-Ariz.), the Ban Congressional Stock Trading Act. Sen. Josh Hawley (R-Mo.) introduced a similar bill. (One of those bedfellow situations I alluded to earlier.) Not be outdone, crowd favorite Ted Cruz reportedly wants in on this too and may propose his own bill. (There’s also the Ban Conflicted Trading Act that has been floating around since last year as well.)
'Laws-are-for-thee-and-not-for-me type of scenario'
Before we get to these efforts and where they stand I want to get into the nitty-gritty of what’s transpired over the past few years, because it’s been positively swampy, with both Democrats and Republicans stepping in it.
Let’s start with Speaker Pelosi, who’s aligned herself here with Senator Burr in having an active family portfolio and in pushing back against toughening up laws. As recently as December the Pelosis bought call options in Google, Salesforce, Micron, Disney and Roblox.
The speaker defends herself and her colleagues thusly when it comes to stock trading: “We are a free market economy,” Pelosi told reporters during a recent news conference. “They should be able to participate in that.” And this: “No,” Pelosi, D-Calif., told reporters at a news conference when she was asked whether she would support such a prohibition. Somewhere in the Speaker’s home district, (or maybe New Zealand), free-marketeer-in-chief Peter Thiel is applauding.
To be clear, Pelosi has said that it is imperative that members adhere to the terms of the law. And Drew Hammill, deputy chief of staff to Pelosi, points out that: “The Speaker does not own any stocks. As you can see from the required disclosures, with which the Speaker fully cooperates, these transactions are marked 'SP' for Spouse. The Speaker has no prior knowledge or subsequent involvement in any transactions.”
Be that as it may, stock trading by the Pelosi family has attracted the attention of one Chris Josephs, co-founder of Iris, a social media app that tracks the trades of members of Congress.
“Speaker Pelosi has been on a tear with recent trades going back to 2018,” Josephs says. “She bought Tesla very early, Crowdstrike, Nvidia, Google. We created a portfolio [of] her disclosures, so when she makes a new buy, everyone who follows the portfolio on Iris gets an instant notification saying Nancy Pelosi just bought Micron, buy some if you want. Since we launched the profile on Iris she has around 65,000 people following her actual portfolio."
And notions of Pelosi as a stock trading "queen" and "whale" have been making the rounds on TikTok, including one with Josephs, who says the Pelosis outperformed the market. (Also, see here an interview Josephs did with Yahoo Finance last fall.)
“Why is it that my younger brother, who works in finance, can't buy individual stocks while the Speaker of the House who makes laws that regulate the economy is allowed to?” Josephs asks. “It doesn’t make sense. It’s a laws-are-for-thee-and-not-for-me type of scenario. It’s hypocritical.”
Pelosi’s California colleague Senator Dianne Feinstein (D-CA) has also attracted unwanted attention for familial stock trading. In 2000, she was reportedly investigated by the FBI over stock trades made by her husband. And last year the senator “admitted that she did not properly disclose one of her husband's stock purchases and has said that she would be prepared to pay the relevant fine,” according to the Independent.
Now let’s head down South and over to the GOP side of the aisle where other lawmakers were busy buying and selling securities too, starting in Georgia, where there may be something in the water. Let’s start with former GOP Senator David Perdue whom The New York Times noted made 2,596 trades in a six-year term ending in 2020. Some investments, the paper reports, were made in companies where Perdue had at least an appearance of a conflict of interest. Perdue’s office denied the conflicts and said the senator's brokers made the trades. The DOJ investigated but declined to bring charges. (Ossoff, who defeated Perdue to become Senator, had attacked him for the stock trading.) Fear not Perdue fans, the former senator has announced he will run for governor of the state this year.
Then there’s Perdue’s former colleague, former Senator Kelly Loeffler, (whom I wrote about in 2019.) She also attracted the attention of the authorities with her stock trading. Loeffler, who’s married to Jeffrey Sprecher, CEO of ICE, the parent company of the New York Stock Exchange, went on a selling spree after attending a private briefing in January 2020 about the incipient pandemic. This Atlanta Constitution Journal story provides a timeline of both Loeffler and Perdue’s stock-picking peccadillos. Like Perdue, Loeffler was ultimately not charged by regulatory authorities. Also like Perdue, Loeffler lost a close election. (Coincidence or not?)
Next let’s check back in with Senator Richard Burr (R-NC), remembering him from above as one of the "no" votes against the STOCK Act. No vote? No wonder. Burr, who also traded in the wake of being given access to classified documents about the impending pandemic in early 2020, has not been cleared of wrongdoing. CNBC reports that Burr, who’s retiring this year, is under investigation by the Securities and Exchange Commission. Here’s CNBC:
“Sen. Richard Burr of North Carolina and his brother-in-law, who is chairman of an independent federal agency, spoke on the phone shortly before both men sold off stocks weeks ahead of national COVID lockdowns in 2020, the Securities and Exchange Commission said in a civil court filing. The filing comes as the SEC continues to investigate whether Burr, a Republican, and his brother-in-law Gerald Fauth sold the stocks on the basis of material nonpublic information that Burr obtained as part of his job.”
So now we have the Spanberger/Roy bill in the House and the Ban Conflicted Trading Act as well as the Hawley and Ossoff bills in the Senate. A few notes regarding the latter two. First Axios reports that Hawley and Ossoff tried to work together but that “talks between offices fizzled out.” Also “Ossoff had sought a Republican co-sponsor before partnering with Kelly.” Also you may be wondering if Ossoff has walked the talk, i.e., put his money in a blind trust. The answer is yes, according to The Atlanta Journal Constitution.
How sanguine is Representative Spanberger? “I think we're doing the building block work that needs to be done right now,” she told me. “Chip Roy and I were just talking and we’re both having really good conversations with members who’ve got some questions. I think that’s pretty exciting, and certainly not something that we have seen before.”
What about support from Speaker Pelosi? “It's true that Speaker Pelosi hasn't come up to me and said, ‘I love your bill,’” Spanberger says. “I have perceived her comments to mean she may not be supportive. Certainly I disagree with the statements she has made. But I don't know that she is immovable on this.”
“I know Nancy Pelosi well, I know she’s very ethical,” says Craig Holman, a government affairs lobbyist at Public Citizen who works on proposals regulating stock trading by members of Congress. “I don’t believe she’s doing inside trading with her husband. But clearly Iris and everybody who trades with Iris believes that’s the case. And that image alone ought to compel Pelosi into joining others and saying, ‘OK let’s stop trading on the stock market altogether.’”
Do I think members of Congress and their families should be able to own stocks? Generally speaking, yes. Should they be able to trade stocks (buy and sell) while in office? Generally speaking, no. I include the caveat "generally," because hard and fast rules generally aren’t a good idea in complex situations like these. For instance, it would be OK for them to own stocks (and not trade), except what if Congresswoman Gabriella Gunslinger, who holds a $50 million slug of Lockheed Martin, becomes head of the House Armed Services Committee? Not a good look. As for never buying or selling, what if Senator Foghorn Leghorn, whose only assets are $175,000 of a publicly-traded candy company founded by his grandfather, needs money to pay for his wife’s cancer treatment? Hard to make hard and fast rules, right?
However, that doesn’t mean there shouldn’t be new rules. The STOCK Act was a good start. You would have thought that the bright shining light of day provided a disincentive to lard up at the trough. Except there hasn’t been much recourse, either in terms of the legal process, (in a few cases $200 fines) or in the form of public outcry. Both of which are a shame.
Change might be coming here. In December, AOC tweeted: “It is absolutely ludicrous that members of Congress can hold and trade individual stock while in office.” I don’t want to jinx it, but that means AOC and Ted Cruz are on the same page again. And this time it seems to be longer lasting.
This article was featured in a Saturday edition of the Morning Brief on January 15, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer