By Sara Kropf
There have been heartwarming stories of good deeds during the coronavirus pandemic, from the adorable (kids helping elderly neighbors) to the downright heroic (doctors and nurses risking their own lives).
But one particularly viral (pun intended) covid-19 story was the one that revealed the suspiciously-timed investment choices of two members of Congress. It hit a nerve with folks already on edge about the serious effects of the pandemic both on the nation’s health and its economy.
As described in The Atlantic:
Senator Richard Burr, the chairman of the Senate Intelligence Committee, sold off what looks like a large share of his personal holdings the day before Valentine’s Day, picking up between $628,000 and $1.72 million in cash. Roughly a week later, the market tanked. And Senator Kelly Loeffler, whose husband is the chairman of the New York Stock Exchange, began selling equities on January 24, the day of an all-Senate briefing from officials including Anthony Fauci of the National Institute of Allergy and Infectious Diseases. Through mid-February, her household dumped dozens of stocks and bought shares in Citrix, which makes teleworking software.
On April 1, 2020, news broke that Senator Loeffler had traded millions more than previously disclosed, including nearly $19 million of shares sold in Intercontinental, T. J. Maxx and Lululemon. Perhaps most suspicious is her purchase (with her husband) of over $200,000 in shares of DuPont de Nemours, a supplier of protective gear for medical workers fighting covid-19.
Any fan of Wall Street or Billions knows that insider trading is illegal. Generally, insider trading is based on trades made because of information shared by (or known by) insiders to a company. The senators here are accused of making trades based on information known by insiders to…well…the government.
Is that a crime?
Why, yes, it is. As we’ve written about before, the Stop Trading on Congressional Knowledge (STOCK) Act extended insider-trading concepts to elected officials.
Basics of the STOCK Act
Even though congressmembers have received information that could be useful for trading since the signing of the Buttonwood Agreement in 1792, which governed the first securities trading, it took until 2012 to pass a law making clear that members of Congress were not exempt from insider trading laws themselves.
(To be clear, they never were exempt from insider trading laws. But some news stories suggested that they were and the appearance of impropriety was enough to spur passage of the STOCK Act.)
It’s worth noting that one of the three votes against passage in the Senate (it passed 96-3) was Senator Burr.
The STOCK Act prohibits members of Congress from using confidential information obtained during the course of their duties for their personal benefit.
Section 4 of the Act contains an “Affirmation of Nonexemption”
(a) AFFIRMATION OF NONEXEMPTION.—Members of Congress and employees of Congress are not exempt from the insider trading prohibitions arising under the securities laws, including section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 thereunder.
You can find this section in the U.S. Code as a statutory note to 15 U.S.C.A. § 78j.
The STOCK Act also defines the duty of congressmembers with respect to the information they learn in their day jobs:
[E]ach Member of Congress or employee of Congress owes a duty arising from a relationship of trust and confidence to the Congress, the United States Government, and the citizens of the United States with respect to material, nonpublic information derived from such person’s position as a Member of Congress or employee of Congress or gained from the performance of such person’s official responsibilities.
In short, the STOCK Act reaffirms that Congress members are subject to insider trading prohibitions created by federal securities laws. It also creates some reporting obligations for members of Congress about their stock trades.
Is There Already an SEC/DOJ Investigation?
The coronavirus has already led to one Justice Department indictment for marketing a fake vaccine. And the SEC issued a public statement warning against insider trading by the private sector, noting in part:
We wish to emphasize the importance of maintaining market integrity and following corporate controls and procedures. For example, in these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading. Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws.
According to media reports, SEC and possibly the DOJ have opened investigations into these stock trades and contacted Senator Burr.
What Could Their Defenses Be?
Both senators have denied the (public) accusations. It should go without saying that neither has been charged with anything; it’s all innuendo at this point and lots of bad public relations stories.
Senator Burr said he traded purely on publicly available market information: “I relied solely on public news reports to guide my decision regarding the sale of stocks on February 13. Specifically, I closely followed CNBC’s daily health and science reporting out of its Asia bureaus at the time.”
Senator Loeffler tweeted that her “[i]nvestment decisions are made by multiple third-party advisors without my or my husband’s knowledge or involvement.” She also posted a screenshot of a document suggesting that she was not informed of the trades until mid-February, a few weeks after they were made.
Even if there were charges, they would not be home run winners. Both of the senators would have a few strong defenses to assert:
1.The information they relied on to make the trades was public. Senate ethics rules define “non-public” as “confidential or not widely disseminated to the public.” The senators may argue that around the time of trades, there were reports of the spread of the coronavirus in China and some rumblings of it spreading to the United States. Their lawyers will try to show what media stories existed at that time to inform their trades. Plus, it would be the government’s burden to show that the information was “not widely disseminated,” and that could be an uphill battle. This is not the same of the news of a corporate merger being kept quiet until the day it is revealed.
2.The information was not “material.” Senate ethics rules define “material” as information a “reasonable investor would want to know when making an investment decision.” This will depend on what the senators learned during the January 24 briefing. Was it about the science behind covid-19, or how quickly it could spread, or how it might affect the economy? The government will get a copy of whatever slide deck or other materials were presented at that briefing, if it can. They could argue that they could not have known that the information learned during Senate briefings would have caused a significant change in price in the particular stocks that they traded or that they couldn’t have predicted a general crash of the market.
3.They didn’t know about – or direct – the trades until after they were made. This is Senator Loeffler’s defense, it seems. And the government will be hard pressed to prove that this was insider trading if the senators did not know about the trades, or direct them, either directly or indirectly. This is where traditional methods of insider trading investigations could come into play. The government will look at phone records and emails (to the extent they can obtain them) to determine if the senators contacted their brokers in short order after they learned non-public information. Insider trading cases can be made on a timeline: the defendant learned the information at 10:03 am one day and traded at 10:16 am that same day. It’s very like that these senators’ brokers and investment advisors could receive subpoenas to turn over communications and trading records.
All in all, if Senator Loeffler can show that she did not know about the trades until several weeks after they were made, then that is a very helpful fact for her and may shut down the investigation altogether. The government will focus on when and how she shared insider information with her financial advisors. One can imagine a situation where she told her financials advisors something about what she learned but did not direct any trades. Her financial advisors then made the trades without her knowledge, and she can truthfully deny any knowledge of or articipation in them.
Will There Be a Widening Circle?
The SEC and DOJ need not stop investigating at these Senators’ doors. They could open an investigation into their financial advisors or brokers, or even their friends. Did the advisors make trades for other clients based on that information (knowing it was material, non-public information) and financially benefit from them? Did the senators tell friends or family members?
The government has access to a lot of information to investigate suspiciously-timed trades and the power to subpoena emails and phone records.
You can bet the SEC and DOJ are not looking only at these two senators’ trades but at those of lots of people in their orbit.