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Insider Trading in Washington: Here We Go Again

Posted by Larry Doyle on April 18, 2013 7:10 AM |

If transparency is the great disinfectant, then the stench emanating from Washington not only remains strong but just got a whole lot stronger. How so?

Recall that the STOCK Act, that is the legislation passed a year ago to outlaw insider trading in Washington, only came into being after a 60 Minutes expose embarrassed Congress to address this racket. Prior to that the legislation sat bottled up in committee for many years.

Well, if you had any real confidence that the STOCK Act would really clean out the insider trading stables in Washington, think again. With both old holes and recent new holes in this smelly piece of legislation, this act should be renamed the Molded Swiss Cheese Act. Thanks to the regular reader who brought this stench to my attention. Let’s navigate. 

While almost no one was looking, a law making it easier for congressional and top executive branch staffers to engage in corrupt trading was signed into law Monday.

The law is a modification of the Stop Trading on Congressional Knowledge (STOCK) Act. The modification was passed by unanimous consent by the House and the Senate last week with no debate or even discussion.

The STOCK Act, which became law just a year ago, was designed to discourage insider trading by members of Congress and top government officials. In addition to outlawing trading based on non-public information gleaned by government officials during the course of their public duties, the law required extensive disclosure of financial holdings by Congressional staffers and 28,000 senior executive branch employees.

The financial disclosures of these officials were to be posted in an online database open to the public.

The disclosure requirements were an important part of the law. They would have allowed researchers to detect abnormally successful trading activity by unelected senior government staffers-just as similar disclosure requirements for Congressmen and Senators had allowed scholars to produce evidence that suggested members of Congress were benefiting from non-public information.

Currently, although the reports of staff financial positions are officially part of the public record, they aren’t readily available. Often they have to be requested from individual agencies using the names of the individuals about whom information is sought. The result is that the public is effectively blocked from learning the information disclosed in the reports.

As if the stench attached to that “keep ‘em in the dark” amendment were not enough to highlight that the crowd in Washington still does not “get it”, check out the smell associated with this specific trade,

A key source for a private report that sent health-care stocks on a tear earlier this month is a former top congressional aide who is now a health-industry lobbyist, according to emails reviewed by The Wall Street Journal.

Mark Hayes is currently an outside lobbyist for health-insurance giant Humana Inc. His email to Washington investment-research firm Height Securities, alerting it to a government decision that will save the industry billions of dollars, was a final piece of confirmation Height received before blasting a news alert to its clients, according to emails and people familiar with the matter.

In this case, on April 1 Height sent a report to clients 18 minutes before the end of trading that predicted—correctly, it turned out—a government agency would drop planned cuts in funding for insurers that offered Medicare Advantage plans.

The report snagged the attention of big hedge-fund firms that placed profitable trades, according to people familiar with the trading activity. Shares in several health-care companies, including Humana, climbed sharply before the market close and again when trading opened the next day.

This specific trade and activity of this sort falls under the heading of trading based on “political intelligence” emanating from Washington. The STOCK Act, heretofore known as The MOLDED SWISS CHEESE Act, does not directly address this stench. In fact, the General Accounting Office released just last week its findings and concluded that,

There are no laws or ethics rules that specifically govern the sale of information by a political intelligence firm.

The allure of the cronyism and dirty money is just too much for those in Washington to resist.

Financial reform? Yeah, right!!

Thank you again to the reader who brought these developments to my attention.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    Equally disturbing.

    “The new law scraps the disclosure requirements for the staffers, leaving them in place only for members of Congress, Congressional candidates, and the President and Vice President.”

  • Tim Favero

    Is anyone really surprised by this? The SEC has never done much to prevent this behavior and I will be surprised if they ever do anything. Yet, they were able to snag Martha Stewart for insider trading that may have saved her only $55,000.00 Oh the priorities for those in Washington….

  • fred

    LD,

    Where’s that 60 minute follow up when you need it.

    As a start, I’d be real curious to know if any congressional staffers bought index options after the Feds “courtesy calls” to congresssional offices diseminating the most recent Fed minutes a day ahead of schedule.

    Personally, I don’t see how anyone can argue that acting upon “political intelligence” isn’t insider trading, the information isn’t publically availible.

    Where’s the outrage, the issue impacts every stockholder, either directly or indirectly, in the form of higher stock purchase prices and lower stock sale prices.

    Can the DOJ petition the SJC for a ruling?






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