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Outside editorial: Insider trading is wrong for Congress, too

Posted: December 12, 2011 - 5:46am

The following editorial appeared in the San Jose Mercury News:

If corporate CEOs are caught trading stock based on inside information not available to the public, they can end up in prison. So can government employees who trade on privileged information. That’s as it should be.

But if you’re a member of the U.S. Senate or House, the law does not apply: Congress has exempted itself from the normal rules of insider trading.

That’s just wrong. It’s one more reason for people to mistrust the motives of political leaders. Members of Congress need to eliminate the exemption so that the insider trading laws apply to them the same as everybody else.

Say a member of Congress heard about the imminent demise of a proposed public-insurance option that would have competed with private insurance companies. He or she could use that secret information to buy insurance stock and make a pile of money. The rest of us would be breaking the law and facing prison time if we were caught doing the same thing.

Outrageous as this is, there has been no successful attempt to include Congress in insider trading restrictions. As a result, many in Congress have enriched themselves with information that was unknown to others.

The television program “60 Minutes” recently reported that several members of Congress are suspected of using confidential information that they acquired on the job for personal gain. While the connection between privileged information and trading is always difficult to prove, the timing of the legislators’ trades is highly suspicious.

The Journal of Financial and Quantitative Analysis found that U.S. senators who traded stocks beat the market by 12 percent per year. That’s a better record than most hedge fund managers achieve. Of course, they don’t have the legal insider advantage.

Incumbent legislators get the inside information for free, but on top of that, a $100 million political intelligence industry has been fueled by privileged information available in Washington. Former members of Congress and their staffs gather the undisclosed information and sell it to hedge fund mangers. It’s appalling.

Congress is exempt not just from insider trading laws; the accounting, transparency and fraud rules that govern businesses do not apply to legislators.

Back in 2004, former Rep. Brian Baird, D-Wash., and Rep. Louise Slaughter, D-N.Y., introduced the Stop Trading on Congressional Knowledge (STOCK) Act, which would have made it illegal for members of Congress to trade stocks on information not made public. It also would have required legislators to report their stock trades every 90 days instead of yearly.

The bill languished for years with no more than half a dozen co-sponsors. Thanks to the “60 Minutes” expose, the bill suddenly has well over 100 co-sponsors. All lawmakers should be on board with this. Anything less will only fuel the public’s widespread disapproval and disrespect of Congress.

And then members can hope that, by election time next year, voters have forgotten that the reform languished with almost no support for seven years while unethical representatives enriched themselves.

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