Note, there are some eyebrow-raising tables in the piece:
Congress Must Stop Trading Stocks
The Beacon / by Scott Semet / Jan 29, 2025 at 5:17 PM
Legislators—Congressmen and Senators—routinely receive material non-public information that is crucial to crafting legislation for the US government to operate efficiently and meet the needs of the American people. Unfortunately, many legislators use this information to enrich themselves at the expense of the very people they are elected to represent. Using privileged information for personal gain is a tremendous abuse of power and tantamount to graft. Service in the Congress is an honor. Legislators, senior officials in the executive and judicial branches, and their families should be prohibited from trading in individual securities. Those officials who have profited from this abuse of power have revealed their lack of moral fiber and should no longer serve in government.
Acting on an inside tip, on December 27, 2001, Martha Stewart sold her ImClone shares, allowing her to avoid a $45,673 loss when shares tumbled the next day after the FDA announced that it would not review the company’s cancer drug. Stewart, whose recipes and gardening tips have done more to improve Americans’ well-being than many government officials, ultimately served five months in prison for this crime.
The amount of Stewart’s crime was trivial compared to the amounts legislators regularly haul in. The husband of Nancy Pelosi, the former Speaker of the House, loaded up on $1 million of Nvidia call options a week before Congress approved giving subsidies to chip manufacturers, netting a profit estimated at $4 million. The Pelosis are quite active with 57 trades worth over $74 million since 2022. In 2024, their portfolio is believed to have returned 54%, beating most hedge funds. Such activity enjoys bipartisan support: In February 2022, after receiving inside information about COVID-19, Republic Richard Burr sold over $1 million in stock and bought US Treasuries.
Figure 1: Some Legislators Missed Their True Calling as Stock Pickers
Market Return of Selected Legislators vs. SPY (S&P 500 ETF), 2023
Source: Unusual Whales, NASDAQ
At the risk of stating the obvious, insider trading is bad. It destroys public trust in the market and provides an unfair advantage to insiders. The public responds by allocating less funds to the market, resulting in greater use of debt instruments, and is a drag on economic growth. Before the Securities Act of 1934 and the creation of the SEC, which defined and proscribed insider trading, it was widespread and considered a perk of those in power.
Given how serious a transgression it is, the SEC has set severe punishments for insider trading: Civil penalties include disgorgement of gains and fines of up to three times the profit earned (or loss avoided); Criminal penalties include up to 20 years imprisonment for each violation. Like a breach of fiduciary duty by corporate officers, insider trading by members of Congress is a betrayal of a relationship of trust and confidence and should be punished just as severely. Even worse, there is a clear conflict of interest—legislators can vote for things that are good for them financially but bad for the country at large.
The public was outraged by reports of legislators reaping large profits during the Great Financial Crisis and the discussions leading up to adoption of Obamacare. Following President Obama’s 2012 State of the Union address calling for legislation to tackle this problem, Congress passed the Stop Trading on Congressional Knowledge Act, or STOCK Act, with a bipartisan majority in April 2012.
The STOCK Act is a good start but suffers from several deficiencies. First, it requires disclosure of trades within 30 days of receiving notice of the transaction and within 45 days of the transaction date. This is too long—the market has moved by then, and damage to other investors has already been done. For comparison, the SEC requires corporate insiders to file Form 4 within two days. Second, STOCK act disclosures often do not provide definitive information to establish insider trading. Third, the act does not outlaw trading per se but rather compels disclosure to the public. This is a necessary step but merely reveals unethical and immoral behavior. Fourth, the fine of $200 per missed filing is a joke and even this minuscule amount can be dismissed.
This malevolent practice is widespread. One study found that between 2019 and 2021, 97 members of Congress, nearly 20% of the total, bought or sold stock, bonds and other financial instruments of companies whose work intersected with their official duties. During the 117th Congress, 78 Members of Congress violated the law, failing to comply with even the weak STOCK filing requirements, citing oversight, errors by accountants and staff, and ignorance of the law, something which lawmakers of all people should know is not an excuse.
Common sense, fair play and even basic notions of ethics and morality plainly show that this outrageous practice must be eradicated. Polls reveal that an overwhelming bipartisan majority of 86% of Americans support prohibiting members of Congress from trading individual stocks. For legislators to ignore such a clear call from their constituents for definitive action is a massive betrayal of trust and dereliction of duty.
Figure 2: The People Know that Congress Is Taking Advantage of Them
Do You Support Banning Trading by Members and Their Families? % Yes
Source: University of Maryland School of Public Policy
Earlier this month, bills were introduced in the House and Senate to prohibit legislators from trading individual stocks and other securities while in office. This is encouraging. It is important that legislators work to ensure that the language in the bill prohibits not only government officials from abusing their office but also members of their families, which we have seen recently is a common tactic to harvest ill-gotten gains without public scrutiny.
Furthermore, the penalty for conducting a trade is set at the Legislator’s monthly salary, or 10% of the asset’s value, whichever is greater. This is a move in the right direction but is inadequate. The financial penalties should be at least as great as those faced but other insiders, i.e., three times the gain.
Why should members of Congress face less severe punishments than the public at large? Also, if ordinary people face jail time for abusing the public trust, why should legislators be able to avoid the same fate? Why should elected officials be held to a lower ethical standard than everyone else and be punished less for the same transgressions? This is fundamentally unfair and against the principles this country was founded on.
It remains to be seen whether legislators will do the right thing and pass strong legislation to stamp out insider trading among their ranks, even though it goes against their financial rational self-interest. Recent actions by government officials, such as using family members to collect payments for political favors and granting multi-year blanket pardons for illegal activities that have not yet been investigated, do not inspire confidence. Public service should enrich you morally, not financially. “Because we can” is not an excuse for enriching yourself at the public’s expense but rather is indicative of a bad moral compass. Such bad apples have violated the public trust and are unsuited to hold office. The recent realization that the government in general, does not adequately serve the interests of the people and answer to them has led to the current zeitgeist to drive corruption and bloat from government.
The time has come to stop elected officials’ insider trading, a most evil enterprise.
https://blog.independent.org/2025/01/29/congress-must-stop-trading-stocks/?utm_source=rss&utm_medium=rss&utm_campaign=congress-must-stop-trading-stocks
