Ethical questions raised again after recent stock sales by lawmakers

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Recent and miraculously timed stock sales by members of Congress have dredged up long-standing ethical questions. What did they know that everyone else did not? There are rules about this sort of thing. For a review, Federal Drive with Tom Temin turned to Project on Government Oversight policy analyst, Dylan Hedtler-Gaudette. You can read the full analysis here.

Interview transcript:

Tom Temin: Mr. Gaudette. Good to have you on.

Dylan Hedtler-Gaudette: Hey Tom, thank you for having me. Glad to be here.

Tom Temin: Now, insider trading as it were, or trading on knowledge like this, is already outside of the rules for Congress already, correct?

Dylan Hedtler-Gaudette: Yeah, that’s right. Members of Congress and basically anybody who holds some kind of public office or office with the government, they were always and always have been subject to insider trading laws.

Tom Temin: All right. So what do you think might have happened in these recent tradings? I think Richard Burr now has submitted to a Senate ethics inquiry, and he’s one of two or three of them that have sold stock right before the crash. What might they have known that they should not have traded on? Or what do we really know about this at this point?

Dylan Hedtler-Gaudette: Yeah. So what we know is, and in your lead in you called it miraculous well timed I believe, and that is a good way to put it because the timing around these transaction by multiple members of Congress was all too coincidental. For example, Senator Kelly Loeffler from Georgia. It appears as though she started to sell off some stocks on the very same day, January 24, that she attended a private confidential briefing on the extent and severity of the coronavirus, and that was not information that the broader public had access to. Now the difficulty here, whether it’s Senator Burr, Senator Loeffler or anyone in a situation like this is it’s really hard to prove a direct causal link between information gained in a confidential setting and some kind of a transaction that happened after that, even if the timing like in this case is really really suspicious.

Tom Temin: For example, they could I guess, we’d more data points, they could be selling or buying regularly at the same time on the same day, every week as part of their strategy.

Dylan Hedtler-Gaudette: Yes, that could be a mitigating circumstance as well. But it does appear as though in the cases of the local Senator Loeffler and Senator Burr that these particular transactions were not a part of a pattern that we’re able to discern because of their previous reporting on their financial transactions. For example, Senator Burr, he made 33 transactions and every single one of them was a sale, which is a bit of a red flag, because usually there’s some kind of a mix of purchases and sales that would happen. And in this case with the other Senator from Georgia, like 27 of her 29 transactions were sales. And one of the two purchasers was in a company that just so happens to be heavily involved in the teleworking space, which as you can imagine, is pretty relevant right now.

Tom Temin: And you’ve written a pretty detailed essay about this. And one thing I’m discerning from it is, this seems to be a bipartisan problem here.

Dylan Hedtler-Gaudette: That’s true. Yeah, that’s actually right. It’s not a thing that only concerns Republicans or Democrats. You see it happening over the years from people of both parties, and it happened in administration’s of Democrats and Republicans. This is not a partisan issue. This is about conflicts of interest and public trust really at large.

Tom Temin: And I’d forgotten this, but you point out that besides existing insider trading laws, there’s something called the Stop Trading On Congressional Knowledge Act, STOCK Act, that goes back to I guess, that was passed and enacted during the Obama administration. What does that do, specifically beyond what the regular insider trading laws do?

Dylan Hedtler-Gaudette: Yes. So the STOCK Act, what that did is it basically reiterated the fact that members of Congress and federal government officials do in fact have to comply with insider trading laws. It was never the case that they had exempted themselves from those laws, but that was a common perception that had sprung up around this time for some reason. So one major thing the STOCK Act does is it says no, you know explicitly we have to reaffirm the fact that we all have to comply with insider trading laws. But what it also did is it made it a requirement for people who would be ordinarily covered under the requirement to disclose annual financial disclosure, they also have to submit what are called periodic transaction reports. anytime they make a transaction of over $1,000 in securities, which is typically stocks and bonds and things like that, they have to disclose those transactions immediately. And that disclosure requirement is actually how we’ve learned about these recent transactions. On one hand, you can say the STOCK Act is working kind of in the way it was intended, although it didn’t make those transactions not happen in the first place.

Tom Temin: Right. They did the deed and then reported in any way. And where do these reports go? Are they publicly accessible in general?

Dylan Hedtler-Gaudette: That’s a good question. They are and they aren’t. So they are required to be posted online on the websites of the House and the Senate and in the Office of Government Ethics. The problem is that the portals that these reports are filed to are very un-user friendly, very counterintuitive, very clunky, and they don’t reflect modern standards of how websites are supposed to function. So it’s actually pretty difficult to track me down, it should be a lot easier than it currently is.

Tom Temin: I guess you would expect to go there and click on a name and see transactions in the last 30 days, but it doesn’t quite work that simply does it?

Dylan Hedtler-Gaudette: That’s right, you would expect to be able to do that. And it’s not difficult to make a platform that would work that way. We see them all the time in other spaces. But for whatever reason, the people who manage these databases just don’t seem to want to make it easy to access.

Tom Temin: And what about those in the executive branch? I mean, a lot of federal agencies in the course of proposing regulations or enforcement actions, whatever the case may be, also know things in advance that might give them an advantage in the stock market. What types besides the insider trading laws? Are there special laws that apply to them like there is that STOCK Act for Congress?

Dylan Hedtler-Gaudette: Yes, actually, even though the STOCK Act refers specifically to congressional knowledge, all of the STOCK Act requirements do also apply to executive branch officials. So If you’re the President, the Vice President, if you’re a Senate confirmed cabinet member, you still have to admit these periodic transaction reports. And you’re still covered under all the provisions of the STOCK Act.

Tom Temin: And in looking at this, I know POGO in general looks at this kind of thing all the time, do you think there is a requirement for further ethics rules or procedures? Or is there enough there on the books if only people would follow it?

Dylan Hedtler-Gaudette: Well, ideally, we would have a world in which anybody who enters public service would be of sterling character and would never give in to the temptation to use insider information to enrich themselves, but we are dealing with human beings and their human tendency towards trying to gain advantages whenever you can. And what these recent kind of events show us is that the current matrix of insider trading laws and STOCK Act and other rules and regulations around conflicts of interest, they aren’t sufficient to stop people from doing these things. So it’s one thing to make someone disclose when they have one of these transactions in stock, but it’s entirely another to make it so that they wouldn’t do it in the first place, or where they can’t do it in the first place. So one thing that I’m particularly keen on is having some kind of a blind trust requirement where basically if you are a covered individual in the context of the STOCK Act, so if you’re a member of Congress, if you’re a congressional staffer, if you’re someone in the executive branch, if you’re a cabinet secretary, so on, you don’t have a choice. But as soon as you take office, as soon as you start being on the public payroll, and as soon as taxpayers start paying your salary, you have to put all of your assets into a blind trust. And the blind trust is a good vehicle here because what it does is it allows you to own whatever kind of financial assets you want to own, whether it’s stocks or bonds, or mutual funds or anything like that, but they’re in a trust that is managed by a person that you do not have the option of contacting. And that person, the trust manager still has to manage those assets with an eye towards maximizing profits and maximizing returns which means that your assets will still grow, you’ll still be able to plan for your financial future. But you as a person who has insider information just won’t be able to make any decisions about those assets.

Tom Temin: So you can’t call up Sam and say, ‘sell sell sell!’

Dylan Hedtler-Gaudette: That’s right. That’s right. That’s exactly right.

Tom Temin: Dylan Hedtler-Gaudetteis policy analyst at the Project On government Oversight. Thanks so much for joining me.

Dylan Hedtler-Gaudette: Yeah, thank you, Tom, happy to do it.