Is Insider Trading Legal for Congress? Explained

Introduction 

The question of whether or not is insider trading legal for Congress has been a topic of discussion for many years. Although it seems like an open and shut case, the truth is that the answer is far from straightforward. Insider trading is the practice of buying or selling securities based on material, nonpublic information, and it is illegal in most cases. But when it comes to Congress, there are some special rules in place. In this blog post, we’ll explore what those rules are and answer the question: is insider trading legal for Congress?

What is congress insider trading?

Congressional insider trading is the practice of using nonpublic, market-sensitive information to buy and sell stocks or other securities. This type of insider trading is illegal in most cases because those who possess nonpublic information have a unique advantage over other traders. To prevent congressional insider trading, Congress passed the STOCK Act in 2012, which criminalized it.

To discover information about insider trading, one must first understand what constitutes nonpublic information. Data that has not yet been released to the public is considered nonpublic information. These could contain details about the company’s finances, new product launches, and shifts in corporate strategy that are not yet available to the general public. Members of Congress and their staff have access to this kind of proprietary information through a variety of channels, including briefings given by federal regulators, meetings with company executives, and the review of confidential documents and reports.

If a member of Congress or their staff obtains access to confidential information, they may exploit it to their advantage when trading stocks. This knowledge could help them make lucrative stock trades before the rest of the market is aware of the news. Members of Congress who engage in insider trading benefit from the information they have access to that is not available to the general public.

The STOCK Act

To ban lawmakers from profiting from insider information, the Stop Trading On Congressional Knowledge (STOCK) Act was passed into law in 2012. Members of Congress and their employees were barred from profiting from insider information when making stock purchases or sales and were compelled to report any such activity to the public within 45 days. Consequently, evidence of insider trading by lawmakers was uncovered.

When it comes to stock and other securities transactions, members of Congress now have stricter reporting obligations according to the STOCK Act. It also created the Office of Congressional Ethics to look into possible ethical lapses in the legislature. Insider trading laws are the same for members of Congress as they are for the general public.

The Act has been hailed as a means by which citizens can more easily identify potential conflicts of government interest It’s a great tool for keeping our representatives honest and preventing them from abusing their access to inside information.

Recent cases of insider trading

In recent years, several members of Congress have been accused of insider trading. In 2012, the Securities and Exchange Commission (SEC) charged Representative Spencer Bachus with insider trading. The charges were settled and Bachus was required to pay a $60,000 fine. Similarly, former Congressman Tom Price was accused of using discovered information about insider trading to make investments in healthcare companies. 

The STOCK Act was passed in 2012 to prevent members of Congress from utilizing inside knowledge to make financial transactions. Legislators are not barred from making financial investments in companies that stand to gain from their official acts. The STOCK Act was proposed in 2020 to close this legal void. Any stock trades made by a member of Congress must be reported publicly within 30 days, according to this act. With this rule in place, we can rest assured that our legislators won’t be using discover knowledge about insider trading to make financial decisions.

General, members of Congress who engage in insider trading may face criminal charges. Legislation such as the STOCK Act has been enacted to prevent abuse. It’s crucial that legislators face the same consequences as the rest of us for engaging in insider trading, and that they do it under the same standards. The following are examples of recent cases:

Chris Collins

Rep. Chris Collins (R-NY) was indicted for insider trading in August 2018. The indictment documents state that Collins obtained proprietary information on a failed treatment trial conducted by Australian biotech firm Innate Immunotherapeutics. Allegedly, he passed the intelligence along to his son, who used it to make profitable stock trades and spare the family almost $800,000.

Nancy Pelosi

The case against former House Speaker Nancy Pelosi for alleged insider trading began in 2011, and it has yet to conclude. There was an allegation made by the Securities and Exchange Commission (SEC) in 2011 that Pelosi and her husband, Paul Pelosi, had made stock trades using insider knowledge from their position in Congress. It was claimed by the SEC that Pelosi and her husband had made investments in Visa and Apple using insider knowledge obtained through her position in Congress.

The Pelosis claimed that they did nothing wrong and that their trades were legal under House guidelines. The SEC, however, claimed that Pelosi had broken the law by trading on nonpublic information. The Pelosis paid a total of $285,000 in fines and other costs to settle the case in 2017.

Although Pelosis was ultimately cleared of any wrongdoing, the case did prompt some to wonder about the morality of insider trading. It has brought into focus the need for more openness and accountability in Congressional proceedings, as well as the need for stricter regulation of insider trading. Likewise, it has served as a timely reminder of the significance of avoiding conflicts of interest and acting lawfully.

Duncan Hunter 

A grand jury indicted Representative Duncan Hunter (R-CA) in August 2018 on charges that he misused campaign funds to pay for personal expenses. Throughout his campaign, Hunter allegedly spent over $250,000 on lavish excursions to Italy, Hawaii, and Las Vegas. He allegedly spent the money on computer games, lavish meals, and other luxuries for himself.

Tom Price

Rep. Tom Price (R-GA) was charged with insider trading in October 2018. There were rumors that while serving in Congress, Price had invested in a firm called Innate Immunotherapeutics. He avoided a loss of $300,000 by buying shares at a discount, which he claims was made possible by insider information he obtained about the company.

David Schweikert

David Schweikert, a Republican from Arizona in the House of Representatives, was charged with embezzling campaign cash in June 2019. It has been reported that Schweikert has used campaign cash to pay for his travel, dining out, and other personal costs. According to the allegations, he had spent the money on vacations for himself and his family, including plane tickets, hotel rooms, and restaurant tabs.

Michael Grimm 

In April 2019, Representative Michael Grimm (R-NY) was charged with insider trading. According to the indictment, Grimm had received confidential information about a company called Osteria Group. After receiving the information, he allegedly used it to buy shares in the company, avoiding over $100,000 in losses.

Conclusion

In the United States, insider trading by members of Congress is not illegal. However, lawmakers are still required to follow ethical standards and related laws that regulate their activities, including the STOCK Act. This law requires members of Congress to publicly disclose their financial transactions, including those that involve stock trades. Additionally, they are prohibited from receiving any special treatment or access to non-public information due to their position. Therefore, while insider trading is not illegal for Congress, it is subject to certain regulations that must be followed.