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Can Rep. Bachus and His Money-Crazed Congressional Colleagues Be Stopped from Insider Trading?

A growing list of legislators use their office to play a game of "Who Wants to Be a Multi-millionaire?" But there is legislation that could potentially stop them.

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Over the years, a version of the STOCK Act has been tossed around and never passed. Members of Congress (surprise!) have not been enthused about applying securities laws to their own trading.

But earlier this month, as the public cried foul, both the House and Senate suddenly seemed open to approving versions of the STOCK Act, and President Obama has vowed to sign such legislation as soon as it hits his desk.

Problem solved? Not so fast. Insider trading is quite difficult to prove. When I spoke to Professor Ziobrowski, one of the researchers on the 2004 study, he observed that you’d pretty much have to have a suspicion ahead of time before you could even make a move against someone. He further noted that there are myriad ways of passing on information, from lunches to golf games, that are nearly impossible to trace. Unless conversations are taped, proving insider trading is difficult at either the corporate level or Congressional level. And what, exactly, qualifies as insider information? If a legislator comes out of meeting sensing which way the wind is blowing on new regulations for the banking industry, for example, does that qualify? The potential for gray area is vast and you can bet that legislators will be taking advantage of this when and if they are indicted.

Then there’s the dismal swamp of the political intelligence industry. Before the 1970s, representatives of various industries would hang around Washington hoping to get a heads up on legislation that might affect business. This tip-collecting then became organized into a formal industry, with players often getting a seat in the room when bills are being discussed and shaped. The result is what you might expect – a system of horse trading where political tips and business tips get circulated to the benefit of everyone except the public. A political intelligence operator gets his or her tip, which could come from a member of Congress or, even more likely, a staffer, and then sells it to a big financial firm. The firm may then offer thanks in the form of donations or insider deals on IPOs and such. There are gargantuan amounts of money involved, and that’s why last week, the political-intelligence industry was breathing a sigh of relief when Republicans chucked a provision from a STOCK bill that would have forced these firms to register their activities like lobbyists.

Finally, any laws that bar members of Congress from insider trading that do not include their staff are also likely to be exploited. “The Capitol Hill reality is that staff go into business, too, either for themselves or with the connivance of their bosses,” political economist Thomas Ferguson told AlterNet. “Any rule that doesn't close that loophole shouldn't be taken seriously. We also need disclosure for spouses, since they are also clearly players in many cases.”

Leveling the Playing Field

The most important aspect of the STOCK Act may be the disclosure rules. Various waiting periods for disclosure have been floated in versions of the bill, some calling for disclosure of transactions within 90 days, others stipulating a 30-day period. Such waiting periods are considered by financial experts to be a huge loophole. Professor Ziobrowski thought that members of Congress should be held to the same time-frame as corporate insiders, who must disclose transactions within 48 hours. After two or three days, he pointed out, “The smoke has cleared and the information on the transaction is of little use to the public.”

But what if the public could observe members betting their money in real time? In such a scenario, you, as a market participant, could make a judgment call on the implications of transactions made by lawmakers. If you see all the members of the Health Committee getting rid of their pharmaceutical stocks all at once, you might not know why they’re doing it, but you may suspect that something bad is going to happen for those stocks.

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