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For me but not for thee? Insider trading by members of the US Congress

November 21, 2011

1. History, 2. Law

For me but not for thee?  Insider trading by members of the US Congress

I don’t understand some things in life.  I do, however, understand a lot.  I get the 2d Law of Thermodynamics, for example. Scientists can use all the big words and symbols that they want, but the most concise statement of the 2d Law is that “eventually, all things turn into sh**.”  I know that geese fly in a V because it increases their collective distance by 70% before they all need to rest.  That’s a good thing to know.  Thanks to my son, I now understand the internal-combustion engine – at least to some degree.  But there are many things in this world that I don’t get.

Chief among those things outside my grasp is why people are treated differently when they do the same precise act as each other.  This earlier post is a variation on this theme, but it’s not where I’m going.

Let’s set this predicate:  The Declaration of Independence (agreed – not the Constitution) states “that all men are created equal.”  I grant you that clearly Tommy Jefferson must have been thinking all white men when he wrote that phrase gazing at his slaves, but we’ve gotten over that troubled perspective.  All it took was roughly 80 years for the democrat and sitting Chief Justice of SCOTUS Roger Taney to tell us in Dred Scott v. Sanford that he was perfectly fine with a state that choose to protect the rights of slaves as individuals and with a state that decided to treat slaves like any other piece of personal property (a wagon, for example) – in the end, they ain’t citizens, so who cares?  But, he continued, as for the federal government, Africans brought here as slaves, regardless of the subsequent number of generations, are considered property.  Taney’s decision didn’t sit well, and over the ensuing decade we corrected both his error and Tommy’s perspective.

So here we are:  All men are created equal.  No one is above the law.  So we are told.  If I – a coal cracker with black dust permanently embedded in the creases of my face – commit a Murder, I shall pay the price.  If you – a person of privilege who never wanted for any financial comfort – commit a Murder, you, too, shall pay the price.

Laws are applied equally.  When we write that all men are created equal, we must necessarily mean that all men are also treated equally.

We have risen certain bad acts to be crimes (catch some background here).  Other bad acts remain private.  Those acts are handled in civil court – automobile accidents, arguments over contracts, etc.  But the acts that have risen to be crimes are handled differently – we incarcerate people for homicide, burglary, etc.

Some bad acts are an interesting mixture.  White-collar crimes come to mind, specifically Insider Trading.  Our financial institutions (I mean this broadly – not just banks but investment houses and all the beasts that impact Wall Street) need to respect the important role they play in our economy.  If I manipulate the price of a stock for my personal gain, somebody’s gonna get burned.  Depending on the exact nature of my acts, I may see a civil penalty – loss of the profit I made, loss of my license to trade.  I might, alternatively, see the inside of a prison cell complete with a few cellies rolling the dice to determine how many days one of them gets to claim me as his wife before the next in line gets his turn.

Insider Trading turns on the adjective “insider.”  An “insider” is someone who has non-public information that when it becomes public will affect the price of the company’s stock – up or down.  Assume that I sit on the Board of Directors of Widgits, Inc.  I know the street believes that our earnings for this quarter will be $0.07 a share.  I sit in a meeting to review the financials before they are released to the public.  Earnings are $0.21 a share.  The price of our stock is going up at least $10.00 based on this news.  When the meeting ends, I call my broker and tell her to buy 100,000 shares immediately.  I then call my son and tell him to buy.  I call my priest and tell him, too.  Everyone buys.  The earnings news hit three days later, the stock price jumps, and we all sell immediately for substantial profits.  It is good to be king.

But then what happens?  Because I flooded the market with sell orders, the price goes down.  I got my profit – screw you.

And the “insider” doesn’t actually have to be “inside,” such as a Board Member or Officer.  I laughed uproariously many years ago when a Partner in a law firm within which I was an associate – a Partner with a real fricking holier-than-thou attitude – put a “buy order” into his broker for a certain bank stock.  We were working on a huge acquisition for that bank for many months.  The buy order was set for 1:10PM or something like that.  The news release was scheduled for 1PM.  Well, at the very last minute, the release got rescheduled for 3PM.  The Partner was wholly consumed with the issues surrounding the two-hour delay, and couldn’t contact his broker.  The trade was executed.  A few weeks later, the SEC had a closed-door meeting with him.  Too funny.  The point is that an “insider” can be anyone with material non-public information based upon which they trade stock.

We have laws against insider trading.  You and me can’t do it – all men are created equal and therefore are responsible equally.  Except, of course, unless you’re a Congresscritter.  Our Representatives and Senators wrote the Insider Trading law and, um, well, excluded themselves.  They can do insider trading, but we can’t.

How do they get inside information?  Testimony on upcoming legislation – writing the new legislation.  A 2004 study showed that US Senators outperformed the market by 12.3%, while actual corporate insiders cranked just 7.4% above the market.  Us commoners?  We under-performed the market by -1.5%.  Well, senators are just smarter at such things, right?  Cut me a break.  I know several senators from a previous life in political writing.  Every one of them is just another girl on the runway – they ain’t special, they ain’t any smarter.  They just use insider information with impunity.

I don’t understand this.

We are a country of laws.  Our criminal laws – and the procedures to enforce them – are a shining beacon to the world.  When we create a class of citizens to whom some of our laws do not apply, we are no better than a country run by a dictator.

What other laws has Congress passed but exempted themselves over the years?  Affirmative action and equal opportunity.  OSHA.  Freedom of Information Act.  The list goes on.

I don’t understand this.  I just don’t.

A crime is a crime is a crime, right?

PS – Congress is feeling the heat on this insider-trading issue, but their corrective legislation (draft at present) falls short.

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About Clyde

Clyde is the lead attorney in the firm. Licensed to practice in 1993, he's also taught Constitutional and Criminal Law for several years at a private university, primarily at the Master's level.

View all posts by Clyde

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