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Why Congressional Insider Trading Is Legal and Profitable

While research suggests that abnormal member profits declined after the passage of the STOCK Act, there are also concerns that subsequent changes have increased the difficulty of congressional oversight of insider trading. There are discussions about the legality of the “coronavirus deals” made by members of Congress. But if their actions have abused their privileged position, it can be difficult to prove that such actions are actually illegal. At first, the law functioned like a charm. The number of stock market transactions by members of Congress fell by more than 50% between 2011 and 2012. Those who continued to trade had to publish their transactions in a searchable and publicly accessible online database. Enter your email address below to read the rest of this article and reveal why insider trading is legal again in Congress. Is trade by Congress illegal? Should members of Congress be allowed to trade in securities sensitive to private information? The “coronavirus exchanges” of Senator Richard Burr (R-N.C.) and his wife just before the stock market crash of March 20 raise these questions and signal the need for legislative changes. Some proposals go so far as to completely ban trading in shares by members of Congress. The other extreme is to allow total discretion. Between the two is the right solution: officials are only allowed to trade securities on the basis of broad market indices.

But there are even more interesting questions about this shady phenomenon. How can Congress get away with insider trading? And how do you take advantage of this lucrative legal grey area? Many young voters are disillusioned with the state of American politics, and issues such as insider trading are a big part of it. Americans want more jobs and a better life for their families. People are fed up with politicians who speak badly and signal signals of virtue while abusing their position as elected officials to enrich themselves. The compromise we are proposing, which allows officials to trade only securities based on general market indices, such as ETFs, would alleviate the problems that would arise in the two extreme proposals. On the one hand, a total ban on securities trading may discourage qualified candidates from running for office. On the other hand, allowing trade without close scrutiny undermines public trust. Since most of the inside information received by these officials is more likely to affect the prices of individual securities than general market indices, fears about potential insider trading with our solution would be alleviated. Insider trading occurs when a person with access to non-public information uses that privileged knowledge to trade in shares or other securities.

Insider trading is illegal and can have serious consequences for the insider and for people who buy or sell shares based on their knowledge. Current legislation makes it legal for members of Congress or their spouses to profit from their employment by trading shares. A recent example would be when he sold 25,000 shares of Nvidia in July, months before Congress ordered the company to restrict sales to Russia and China. Pelosi`s net income was north of $4 million, and when Congress reduced Nvidia`s sales to China and Russia, the company`s stock fell about $30 from where Pelosi sold at $165 per share. Pelosi`s story of suspicious success dates back to 2008. In fact, insider abuse of knowledge is nothing new in the United States. Over the past 10 years, members of Congress have been scrutinized for using their positions of power for their own unusual stock market gain. We Americans are proud to build a system of government in which no one is above the law, not even the legislators themselves. Except. Well, sometimes they kind of are. As this chart shows, members of Congress have historically performed much better in the stock market than the average U.S. household.

This suspicious outperformance is made possible by the widespread and technically legal practice of insider trading in Congress. In early September of this year, the New York Times reported that at least 97 current members of Congress had bought or sold stocks, bonds or other financial assets that overlapped with their work in Congress, or had reported similar transactions by their spouse or dependent child. This includes the husband of U.S. House Speaker Nancy Pelosi, Paul Pelosi, who bought and sold stocks, options and other financial assets worth $25 million to $81 million between 2019 and 2021. Recently, Congress has been in the spotlight with the upcoming midterm elections. Insider trading in particular was discussed as a topic. This kind of misconduct, however, is not exactly new in Washington. In fact, politicians have been accused of illicit trading on Wall Street since at least the early 1980s. While most of them have been convicted of unethical practices, none have ever been convicted of violating insider trading laws. Some politicians have profited from their stock buying and selling, but who has really made the most money? The obfuscation of insider trading laws is evident in a series of conflicting court decisions over the past decade, while the bar of definition has constantly changed. Given this ambiguity in the definition of insider trading, it is time to correct the law. While our proposal would limit the ability of elected officials to “get lucky,” it would also eliminate their ability to abuse their power for personal gain.

In addition, it would minimize the public costs of monitoring and monitoring the business activities of public servants. Perhaps more importantly, it would help regain lost trust. Fortunately, clear guidelines for new regulation have already been proposed by former federal prosecutor Preet Bharara`s task force on insider trading. However, it is still unclear how this applies to members of Congress and other officials. Although the U.S. passed a law known as the STOCK Act a decade ago to combat insider trading and conflicts of interest between its own members and force lawmakers to be more transparent about their personal financial transactions, it`s difficult to prosecute a member of Congress for insider trading. For members of Congress who don`t fully study law, they offer excuses, including ignorance of the law, typographical errors, and an accountant`s mistakes. So far, in a decade, no congressman has been prosecuted under the STOCK Act. Financial analysis repeatedly points out that it is difficult to constantly beat the market.

Legitimate outperformance is likely to be the result of greater luck or financial capacity, the latter requiring careful attention to the markets. In any case, trade would distract elected officials from fulfilling the mandate of public office. Unethical or illegal outperformance would be due to access to privileged private information, which are exactly the transactions that should be prohibited. To see the inner workings of your representative`s portfolio today, you must now go to the basement of the Cannon House office building in Washington, D.C. and request a printed file. Technically, in a damp DC basement, this file is still a public disclosure. Therefore, your congressman`s trades that beat the market are technically not insider trading. And every few months, a congressman or his spouse seems to make headlines for insider trading. Before an important law is passed, they often act in sectors around the law in question.

Which is understandably frustrating for the average American who doesn`t have access to this advanced inside information. There is an expected division on this issue, so it is not clear if it will ever pass. But it could be a move to close the loophole in congressional insider trading. Issues such as Pelost`s alleged use of inside information for commercial purposes show how lawmakers can stay away from the public. Time will tell if young voters will be able to make their voices heard and use their voices to make changes in politics. Concern about insider trading by members of Congress is not new. Scientific research shows that investment strategies that mimic the transactions of members of the U.S. Senate and House of Representatives outperform the market by more than 6% per year. According to an investigative report that revealed insider trading in Congress, the Congressional Knowledge Trading Stop Act of 2012 (STOCK) passed nearly unanimously by the Senate and House of Representatives. While most politicians in Congress may have made money that could indicate insider trading, there is a certain winner in the one who made the most money from stocks. Some Internet communities have even called Nancy Pelosi the “Queen of Flip-flops,” the “Queen of Stocks,” or the “Queen of Commerce.” The nickname was earned after Pelosi`s stock portfolio largely outperformed the markets.

A fundamental problem in detecting illicit insider trading is the lack of clarity in U.S. securities laws. The history of insider trading tracking shows that the boundaries of illegal insider trading are at best variable over time and at worst blurred. The impact of insider trading in Congress has become clearer as the pandemic approaches.