71 Pages Posted: 26 Aug 2009 Last revised: 30 Apr 2011
Date Written: August 24, 2009
Government officials have recently been scrutinized for using information acquired in the performance of their official duties to gain market-trading advantages. Lobbyists have similarly been criticized for collecting material nonpublic political information from Capitol Hill contacts and selling it to their clients - notably hedge funds - who presumably use the information in their market transactions. Is this insider trading? Most likely not. Should it be? A few members of Congress have responded by introducing legislation in the past three Congresses that would bring trading on this “political intelligence,” by government insiders and outsiders, under the umbrella of the federal securities laws. Unsurprisingly, the legislation has failed to garner significant political support. But a renewed fervor for “cleaning up” Washington ushered in by the Obama Administration, coupled with the current economic crisis, has reinvigorated the campaign. The legislation was reintroduced and received a hearing in 2009. In addition, recent academic scholarship is now calling for the passage of this legislation in order to bring trading on political intelligence under the federal insider trading regime.
This Comment takes issue with the insider trading approach. It argues that the federal securities laws are an inappropriate and ineffective legal mechanism for remedying issues of political corruption. First, as it pertains to government insiders, this Comment recommends an ethics approach, such as mandatory blind trusts, to deal with financial conflicts of interest. Second, with regard to outside actors, such as lobbyists and hedge funds, it argues for public disclosure of political-intelligence gathering activities. This Comment argues against prohibiting trading on political intelligence by outside actors because these actors are merely the Washington equivalents of market analysts, whose information gathering functions are perfectly legitimate, if not desirable. Lastly, this Comment warns that insider trading regulation of political intelligence would have two distinct chilling effects: one on democratic process, by hampering dialogue between lawmakers and constituents, and another on market efficiency, by discouraging valuable information gathering.
Keywords: insider trading, federal securities law, political intelligence, hedge fund, lobbying, lobbyist, government ethics, political corruption, Lobbying Disclosure Act, Political Intelligence Disclosure Act, Stop Trading on Congressional Knowledge Act
Suggested Citation: Suggested Citation
Jerke, Bud W., Cashing in on Capitol Hill: Insider Trading and the Use of Political Intelligence for Profit (August 24, 2009). University of Pennsylvania Law Review, Vol. 158, No. 5, p. 1451, 2010. Available at SSRN: https://ssrn.com/abstract=1460858