Throw Them All Out

1980s, Wall Street Journal reporter Foster Winans was the subject of a probe for taking money in exchange for stock tips. He was passing information in not-yet-published columns to a broker who traded on the information. Winans reportedly made less than $30,000 on the scheme. Nonetheless, the SEC said the reporter 'violated [the law] by reason of his failure to disclose to readers of his column his financial interest in the securities about which he wrote and his intent to profit from the rise or fall of the market in such securities following the publication of the column in the [Wall Street] Journal.' Winans spent eight months in jail.⁸

There has been a proliferation of ethics rules in the decades since Watergate, beginning with the Ethics in Government Act of 1978. At the same time, Congress, the SEC, and the Supreme Court have strengthened insider trading laws. So it is perplexing that, despite all the ink spilled to address ethics in government and insider trading, members of Congress and their staffs have floated above the fray. Politicians understand both the specific issue of insider trading and the larger issue of conflict of interest—when it suits their purposes. When U.S. District Judge Martin Feldman ruled to overturn the Obama administration's six-month moratorium on deep-water drilling in the Gulf of Mexico, six senators asked for an investigation. Judge Feldman owned stock in Exxon at the time.⁹ In another instance, senators went after medical researchers who were given government grants for pharmaceutical research while also receiving research money from drug companies. The senators questioned the ability of the researchers to be impartial. Of course, these senators said nothing about their colleagues (or themselves) trading these very same stocks while writing energy or health care policy.¹⁰

When it comes to lawmakers applying the conflict-of-interest standard to themselves, everything changes. Congress writes the laws and polices itself. Or doesn't, as the case may be.

The U.S. Constitution gives authority to the House and Senate individually to 'determine the rules of its proceedings, punish its members for disorderly behavior, and, with the concurrence of two thirds, expel a member.'¹¹ Congress has taken this paragraph and run with it. A 2011 ethics report prepared for Congress begins by boldly stating that the House and Senate each have 'sole authority to establish rules ... punish and expel Members.'¹²

They have legislated themselves as untouchable as a political class.

Members of Congress and their staffs are effectively considered exempt from many of the laws they define for the rest of us, and from executive-branch regulation. We ask our legislators to share power with the executive branch, and that means we do not let the latter rule over the former. Thus the Securities and Exchange Commission has a Division of Enforcement to go after private-sector insider trading (among other crimes), but the SEC cannot touch members of Congress. A former senior counsel with the SEC's Enforcement Division says of congressional insider trading, 'It may be unethical, and it may be unseemly, but it's not illegal.'¹³ The four- and five-hundred-page House and Senate ethics manuals are silent on the matter of insider trading. The idea of using market-moving, inside-government information and trading stocks based on that information is simply not mentioned. (The senate manual does have an entire chapter on the use of the mail and Senate stationery for personal purposes, however.)¹⁴

The Senate pretends to take conflicts of interest seriously. When Senator Tom Coburn of Oklahoma was elected to the Senate in 2004, he asked to be able to continue to serve as a family physician, part time, on the side. The Senate Ethics Committee ruled that this would pose a conflict of interest and told him to shut his office down. God forbid we should have a senator making a little money as a doctor.¹⁵

The House ethics manual notes that there may be cases when legislation may affect the price of stock shares owned by a congressman, but adds that a member should not necessarily recuse himself from a vote, since by doing so he might be 'denying a voice on the pending legislation.'¹⁶

In other words, when a member of Congress trades stock based on information not yet shared with the public but revealed to him as part of congressional business, it is legal. It is even deemed 'ethical.' It can also be very, very lucrative.

Some economists argue that insider trading laws should be abolished. Professor Henry Manne, for example, makes this argument in his classic book Insider Trading and the Stock Market. Manne contends that insider trading gives corporate executives 'positive incentives' to increase stock values. Whether you agree with Manne or not, however, not even he believes that such latitude should be extended to politicians. In an e-mail to the website Procon.org, Manne writes: 'In my 1966 book I said unequivocally that insider trading by any government official on information received in the course of their work should be outlawed. We do not want them to receive extra compensation or outside compensation for doing their job. And, of course, all too frequently their access to this information is merely another form of a bribe, and that sure as hell is not legal.'

In Manne's mind we have it exactly backward in our current laws: corporate executives can't do it, but politicians can.

In fact, politicians and their staffers not only can trade on inside information they passively receive, they can do the equivalent of an athlete betting on his own game. They can and regularly do introduce legislation and then buy or sell stock in companies that will be affected by that legislation.

'It is difficult to imagine a more obvious betrayal of the public trust,' writes Andrew George, discussing this practice in the Harvard Law and Policy Review. 'It is even more difficult to imagine that such behavior could be completely legal.'¹⁷ As Stephen Bainbridge, a law professor at UCLA, puts it, 'Congressional insider trading creates perverse legislative incentives and opens the door to serious corruption. Yet, both Congress and the SEC have turned a blind eye.'¹⁸ Congresswoman Louise Slaughter adds, 'Congress and the federal government are now so enmeshed in the operations of our financial markets that the potential for abuse by members of Congress, congressional staff and federal employees is staggering.'

So are there any limits on this bad behavior by our lawmakers? If you ask a member of Congress, he or she will insist that financial disclosure requirements are sufficient. Politicians must disclose their financial transactions once a year for the previous year. In practice, however, as we have seen, it's nearly impossible to link their trades with contemporaneous legislative activity at such a distance. They can, and often do, file for extensions, meaning that their disclosures come, in some instances, eighteen months after they traded shares. Transactions are also reported in broad general ranges, making it difficult to establish volume price and profitability. Then there is the added problem that many politicians submit incomplete forms, obscuring either the dates or the amounts of their transactions.

Disclosure statements may actually encourage conflicts of interest and embolden politicians who believe that since they report a certain transaction, it becomes okay to do it. Indeed, several studies by behavioral economists demonstrate that disclosures may make things worse, by producing 'perverse incentives': once politicians sign a form, they may believe they are free and clear to do what they want.¹⁹

***

So much for insider trading. What about broader conflicts of interest?

There are conflict-of-interest rules that apply to everyone in the executive and judicial branches of government, from the file clerk to the truck driver to judges to the secretary of defense. They are supposed to apply to the President too, and when it comes to personal finances, it does. But it is not illegal for a President to put fundraisers in charge of dispersing grants and loans to contributors and friends. Were a school superintendent to do this, he or she would be charged. But for a President? That's okay.

But these rules do not apply to legislators. They have their own. For the U.S. Senate, when it comes to raising conflict-of-interest concerns, the bar is set amazingly low: as long as a senator can prove that at least one other person besides himself benefits from a particular decision, he can pretty much use taxpayer money to enhance his own financial interests. The House rules are even worse. There is no such requirement.²⁰

What this means on a practical level is that politicians can and often do use taxpayer money to help their own businesses and enhance the value of their own real estate. They can procure federal funds to develop a site where they own a sizable chunk of real estate. As long as it also benefits a neighbor, this is entirely acceptable. A member of Congress can secure federal transportation money and extend a light rail transit system right in front of her own commercial building and it is acceptable. Were a corporate executive to do this with corporate funds, she would more than likely be in trouble.

If you work anywhere in America—a corporation, the government, or the nonprofit sector—there are