The Affair
We all are aware that the U.S. Department of Justice recently commenced an investigation into stock transactions involving members of the Senate immediately after they were promptly informed of the Chinese situation by the Health Commission and the International Relations Commission on 24 January 2020.[1]
Richard Burr (R.-N.C.), who already explicitly declared himself against the Stop Trading on Congressional Knowledge (STOCK) Act[2] – which prohibits insider trading for members and employees of Congress – in 2012,[3] and his wife entered into 33 transactions ranging from $628,000 to $1.72 million on 13 February 2020, including the sale of shares in hotel companies, whose value halved in the following weeks.[4] During the investigations, it was further revealed that he had previously sold shares which lost 42% of their worth as a result of a measure taken by President Trump.[5]
On the one hand, by virtue of a constitutional principle firmly grounded in U.S. culture, senators are protected by a general immunity in the performance of their duties. On the other hand, their actions at such a sensitive time were considered as an expression of moral bankruptcy potentially even more detrimental than the economic one: while his constituents were dying, a senator was trading stocks and profiting from the hardships of other people, thereby embodying the characteristics of the “villain” of this epic, almost Tolstoyan, saga.[6]
On the background of a recent Second Circuit decision,[7] probably aiming at irremediably altering the fundamental traits of insider trading on the other side of the pond and the future case law in this field, it is possible to draw some observations with regard to the Burr affair.
Senator Burr would be guilty under the STOCK Act – which likened the status of senators to that of corporate officers and directors, the fiduciary duty of the former being intrinsic to the assumption of their office – for employing material information for many large transactions. In addition, he would be subject to the Code of Ethics for Government Service[8] and the Ethics in Government Act of 1978,[9] as well as the provisions relating to wire fraud;[10] the conversion of governmental property, an asset reserved for the community, into an individual interest in personal gain or profit;[11] securities fraud,[12] a residual provision that is disruptive and overwhelming in scope as it successfully meets the fiduciary duties test required by Dirks v. SEC[13] for the application of Rule 10b-5.
Critical remarks
The situation calls for two sets of remarks:
The first one concerns the trend, as early as in the months prior to the pandemic, to expand the range of schemes aimed at committing fraud with the contested bill of August 2019, the Insider Trading Prohibition Act.
The second one concerns the need to identify the sanctions applicable to that misbehavior of senators. Recently, one author suggested that we should oppose congressional insider trading[14] in the following ways: (i) reinforcing the ex ante disclosure of investment plans (including cancelled ones) provided for in Rule 10b-5, even publishing them online (shortening the period within which they must give notice of executed trades, currently unreasonably far more generous than that provided for corporate insiders), and the subsequent one in the terms of ex post disclosure regime; (ii) requiring disclosure under the FD regime to be made on a periodic, non-annual basis and the disgorgement of short-swing profits already provided for in Section 16(b) of the Exchange Act; (iv) extending the scope of disclosure to mutual funds and ETFs; (v) placing restrictions on the shares that directors may hold, intervening in the Congress rules.
The proposal seems agreeable in its overall content, especially about disclosure and disgorgement of profits if illicit, but it also raises concerns. The ownership restriction does not sound reasonable, as the imposition of the shares’ sale by those who intend to serve their own country does not seem to be justified: (i) this would discourage established businessmen and people with relevant experience from taking on such a position; (ii) the shares could also be sold to family and friends, without actually settling the issue, given that Congressmen already frequently share value-relevant private information with their families and professional brokers; (iii) it would be impossible to ask the senators in office to sell the shares in their portfolios; (iv) the penalization in the absence of a “liquid” market would be too burdensome; (v) this solution does not match any other comparative experience; although the notion of politically exposed persons – applicable for the purposes of the anti-money-laundering regime – includes individuals who occupy public offices (or ceased to less than a year ago), as well as their families and relatives, thus including deputies, senators, ambassadors and senior officials of international organizations and persons bound by business or affection.
In Europe, given that there are no special rules for Members of Parliament, it is conceivable that any information of which they become aware (regardless of whether it stems from the issuer or from the Senate itself) with an effect on prices, so it cannot be exploited unless it has first become public. It only becomes so when, for example, the issuer gets to know about changes in the law, weighs their impact(s) and publishes the related press release. These phases remain unchanged despite the pandemic, notwithstanding the rapidly evolving economic situation and the hectic series of decrees that impact each company, its internal organization, receivables, and liquidity, increasing the risks of breaches and sanctions.
The case of congressional insider trading discussed here could, nevertheless, call on the EU legislation to consider ad hoc provisions for politically exposed parties in reviewing the Market Abuse Regulation (“MAR”). In the review of the MAR, it would therefore be desirable to provide rules on the point, clearly distinguishing the phenomena of insider trading from those of political intelligence, which implies gathering information and interpreting political dynamics in order to steer investors’ strategic choices. While being aware of the complexity of isolating the latter activities from the former, the EU regulation would, in such a way, show proactiveness and an in-depth knowledge of the current economic and legal scenario should it foresee analogous provisions to those of the STOCK Act and further refine them, inter alia, excluding political intelligence cases. Perhaps, the situation outlined could even prompt closer considerations on the appropriateness of the EU definition of privileged information, which has always been inclined to avoid enumerating the cases in which the information can be defined as such and has to be disclosed beyond doubt, while leaving the rebus solution to the issuers. After all, in claris non fit interpretatio.
[1] Aruna Viswanatha, Justice Department Closing Insider-Trading Investigations Into Three U.S. Senators, Wall St. J., J. Politics (May 26, 2020, 8:15 PM), https://www.wsj.com/articles/justice-department-closing-insider-trading-investigations-into-three-u-s-senators-11590520934.
[2] Stop Trading on Congressional Knowledge (STOCK) Act of 2012 Pub. L. No. 112–105, S. 2038, 126 Stat. 291 (2012). Proposed on January 26, 2012 by Senator Joe Lieberman, the text was approved with 96 votes for and 3 against (by one Democrat and two Republicans).
[3] Nevertheless, the general provision remains applicable to them as well (Rule 10b-5). See Lauren Bell, Despite Past Congressional Action on Insider Trading, Senators’ Stock Trades are Still Business as Usual (Apr. 8, 2020), https://blogs.lse.ac.uk/usappblog/2020/04/08/despite-past-congressional-action-on-insider-trading-senators-stock-trades-are-still-business-as-usual (emphasis added).
[4] Kadhim Shubber, Two US Senators Sold Shares after Receiving Virus Briefing, Fin. Times, (Mar. 2020), https://www.ft.com/content/e3a82b44-6a3f-11ea-800d-da70cff6e4d3.
[5] Robert Faturechi, Senate Intel Chair Sold Dutch Fertilizer Stock in 2018, Right Before a Collapse, ProPublica (Apr. 7, 2020, 5:30 AM), https://www.propublica.org/article/senate-intel-chair-sold-dutch-fertilizer-stock-in-2018-right-before-a-collapse.
[6] See John Coffee, Jr., The Senator Traded While His Constituents Died: A Legal Analysis of Insider Trading by Public Officials, The CLS Blue Sky Dog (Mar. 31, 2020), https://clsbluesky.law.columbia.edu/2020/03/31/the-senator-traded-while-his-constituents-died-a-legal-analysis-of-insider-trading-by-public-officials.
[7] United States v. Blaszczak, 947 F.3d 19 (2nd Cir. 2019).
[8] See Code of Ethics for Government Service, Pub. L. 96-303, 94 Stat. 855 (1980); See also 34 C.F.R. Appendix to Part 73.
[9] See Ethics in Government Act of 1978, 5a (5 U.S.C. §101).
[10] See 18 U.S.C. §1343.
[11] See 18 U.S.C. §641.
[12] See 18 U.S.C. §1348.
[13] 463 U.S. 646 (1983).
[14] See Gregory Shill, Congressional Securities Trading, 96 Ind. L. J. 313 (2020).
