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Move to ban alleged insider trading faces pitfalls

Spurred by a CBS “60 Minutes” report and a new book by Peter Schweizer, a fellow at the conservative Hoover Institution, on alleged insider trading by members of Congress, there’s growing momentum for an effort to ban members and congressional staff from trading stocks or commodities based on confidential information they have on pending bills.

Yet despite the attention given to the “60 Minutes” report, such a ban is a long way from becoming law, partly because it would be difficult to enforce and might create significant unintended consequences.

“Many constituents saw the report and will be asking their lawmakers, ‘So what are you doing to fix that problem?’ Politically, they need some kind of an answer,” said congressional scholar John Pitney, who teaches political science at Claremont McKenna College in Claremont, Calif.

One answer is a House bill called the “Stop Trading on Congressional Knowledge Act,” or STOCK Act.

The bill, sponsored by Rep. Tim Walz, D- Minn., and Rep. Louise Slaughter, D- N.Y., would ban buying or selling stocks or commodities by a member of Congress or staffer who has “material nonpublic information” regarding legislative action that relates to a specific company or commodity.

Author Peter Schweizer and "60 Minutes" correspondent Steve Kroft join Morning Joe to discuss a report on insider trading in Congress.

It would also prohibit House members and staff from disclosing information about any pending bill or amendment relating to a particular company or commodity if the member or staffer “has reason to believe” that the information will be used to buy or sell the company’s stock or the commodity.

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A hearing on the Walz-Slaughter bill is scheduled for Dec. 6 before the House Financial Services Committee. The chairman of that panel, Rep. Spencer Bachus, R- Ala., is one of the members whom 60 Minutes accused of improper trading, a charge his spokesman has denied.

A similar bill has been introduced in the Senate.

Meredith McGehee, the policy director of the Campaign Legal Center, a nonpartisan reform group which supports the STOCK Act, said, “Right now there is not enough clarity in current law and in current rules” to make sure that members of Congress and staffers don’t profit from their inside knowledge of pending legislation.

She added, “Unless you have a member of Congress dumb enough to say, ‘Hey, I just learned this in a secret committee,’ it can be very difficult to prove” that a member made a stock trade based on confidential information gained from their job.

“Experience has shown that unless there are explicit prohibitions, the (House and Senate) ethics committees are loath to take any kind of enforcement action,” she said. “And obviously without the statute explicitly stating that members of Congress are covered, a prosecutor is not necessarily going to say, ‘I’m going to take this case on’ because it can be very difficult in a court of law to make the case about what statute was violated.”

Sen. Jon Tester, D-Mont., talks to Richard Lui about the possibility of insider trading in Congress and his efforts to stop it.

Let’s say, for instance, that a crucial amendment benefiting a specific defense contractor has just picked up the last few votes that will allow it to become law. In such a case, said University of Pennsylvania law professor Jill Fisch, an expert in securities law, if a member of Congress or a staffer trades a stock based on information “that has a significant predictable impact on whether the bill is going to pass, that’s over the line,” in other words a violation of insider trading laws “to the extent that he is misappropriating or misusing the information.”

And she said, “There’s a case to be made for additional clarity” in the law to make clear that members of Congress are misappropriating confidential information if they trade. 

Washington attorney Stan Brand, who served as general counsel to the House and who has represented several members in ethics proceedings, said, “Insider trading rules could already be applied to members of Congress if the SEC (Securities and Exchange Commission) thought they could make such a case. I guess they never have.” He called the Walz-Slaughter bill “a solution looking for a problem.”

Disclosure could serve as a deterrent: the reason that “60 Minutes” knew that members owned particular stocks was that they are required to file annual financial disclosure forms.

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If voters look at the disclosure form and see that Rep. X owns 50,000 shares in a company and they know that he inserted a provision in a bill to benefit that same company, they might think he had a conflict of interest and could boot him out at the next election, if they wanted to.

Pitney pointed out, “The people who read a lawmaker’s disclosure forms most carefully are opposition researchers from the other party. When they find something, they bring it to the media’s attention. In that sense, ‘oppo’ guys are the real ethics cops. But ‘Don’t worry, trust the oppo guys’ is not a satisfying answer for most constituents.”

But given the vast scope of issues and businesses which Congress regulates, finding out about potential insider trading would seem a daunting task.

“Capitol Hill is home to hundreds of lawmakers and thousands of staffers who love to talk,” Pitney said. “Every day, they have countless conversations with reporters, lobbyists, executive branch officials, and ordinary citizens. In this setting, the line between public and nonpublic information is blurry at best.”

And he added, “Just about every bill has an effect on publicly traded companies, so the potential reach of the legislation is so broad as to be impractical.”

For example, the Energy Policy Act of 2005 had effects on every solar, oil, coal, natural gas, ethanol, biomass, nuclear and other energy firm. Everyone from sugar cane growers to refrigerator manufacturers stood to gain or lose from the bill. It would have been difficult, at best, to monitor conversations that every member of Congress had about that bill with his constituents, industry representatives, and environmentalists interested in the how the bill was being shaped.

Even McGehee, a supporter of the STOCK Act, says it might have a potential unwanted effect.  “I do have a concern about the way the language is drafted” she said. There might be certain facts that members of Congress “would want to hide and then they’d say, ‘well, this is a ‘material nonpublic fact’ and we can’t disclose it.’ Anytime you’re dealing with Congress and you give them an explicit statutory right to keep things secret, it needs to be thought through very, very carefully…. You’re dancing on the edge of a cliff here: you want to make sure they aren’t using insider information, but at the same time you have to be careful of giving them something that can be used as a carte blanche to hide” information which the public needs to know.