A Scandalous Perversion of Trust: Modern Lessons from the Early History of Congressional Insider Trading

59 Pages Posted: 11 Mar 2015

See all articles by Michael Perino

Michael Perino

St. John's University - School of Law

Date Written: March 9, 2015


The Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”) affirms that members of Congress are not exempt from insider trading prohibitions. Legal scholars, however, continue to debate whether the legislation was necessary. Leveraging recent scholarship on fiduciary political theory, some commentators contend that because members owe fiduciary-like duties to citizens, to their fellow members, and to Congress as an institution, existing insider trading theories already prohibited them from using material nonpublic information for personal gain. These arguments, while plausible, are incomplete. They rely on broad conceptions of legislators as fiduciaries, but provide scant evidence that members violate institutional norms when capitalizing on confidential information, a crucial step for fitting their trading into existing legal doctrines.

This Article fills that gap. Like other scholarship on governmental fiduciaries, it examines the foundational norms in Congress, focusing specifically on an episode not previously discussed in the literature. In 1778, Samuel Chase, a member of the Second Continental Congress, used his knowledge of plans to purchase supplies for the Continental Army to reap a substantial profit by cornering the market for flour in his home state. This Article documents the reaction to the Chase scandal and demonstrates that from the earliest days of the institution congressmen expected that members would not attempt to use confidential information for financial gain. Alexander Hamilton and other critics universally concluded that Chase had committed a “scandalous perversion of [his] trust.” This episode and other evidence compiled here strongly suggest that the STOCK Act was unnecessary to hold members of Congress liable for insider trading.

Keywords: Insider trading, Congress, STOCK Act

JEL Classification: K00, K22, K42

Suggested Citation

Perino, Michael, A Scandalous Perversion of Trust: Modern Lessons from the Early History of Congressional Insider Trading (March 9, 2015). Rutgers University Law Review, Vol. 67, No. 2, p. 335, 2014, St. John's Legal Studies Research Paper No. 15-0004, Available at SSRN: https://ssrn.com/abstract=2575835

Michael Perino (Contact Author)

St. John's University - School of Law ( email )

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