Regulating Congressional Insider Trading: The Rotten Egg Approach

29 Pages Posted: 18 Nov 2023 Last revised: 21 Jan 2024

Date Written: November 28, 2023

Abstract

A 2004 study revealed that the stock portfolios of members of Congress were consistently outperforming those of the investing public. The financial success of federal lawmakers was statistically correlated to the use of nonpublic information obtained in connection with the performance of legislative responsibilities – reasonably characterizable as insider trading. Cries of dismay over such profiteering by lawmakers have been echoing in the public domain since Samuel Chase, Maryland’s representative in the Continental Congress, cornered the flour market in 1788 after learning that copious quantities of the product would be purchased by the government to support the Continental Army. Notwithstanding efforts to apply insider trading law to curb this behavior and the enactment of the Stop Trading on Congressional Knowledge (“STOCK”) Act, fortuitous securities transactions by members of Congress continue to occur in connection with headlining national events; it was recently observed with respect to news of the financial collapse of certain regional banks.

While there is scholarly and political support for laws that would effectively ban such rotten egg behavior, this Article proposes that the conduct be regulated under the statute created with rotten eggs in mind – the Securities Act of 1933. The Securities Act creates speedbumps for persons in a control relationship with issuers who want to sell the issuer’s securities in the secondary market. The speedbumps require both public disclosure and broker inquiry. This article asserts that senators and house representatives are in a control relationship with issuers such that they transcend the status of ordinary investor in the securities law regime and must navigate the obstacles established under the Securities Act for such persons before selling their securities in the secondary market. This approach eliminates the legal and evidentiary challenges of insider trading theory, provides a disclosure mechanism that is vastly more effective than that provided by the STOCK Act, and deploys broker-dealers as gatekeepers to ensure that such trades do not undermine the maintenance of fair markets.

Keywords: insider trading, Congress, fraud, Rule 10b-5, STOCK Act, Rule 144, affiliate, control person, lobbying, disclosure, speech or debate clause, lawmaker, legislator, underwriter, issuer

Suggested Citation

Williams, Sarah, Regulating Congressional Insider Trading: The Rotten Egg Approach (November 28, 2023). forthcoming Cardozo Law Review, Vol. 45 (2024), Available at SSRN: https://ssrn.com/abstract=4609167 or http://dx.doi.org/10.2139/ssrn.4609167

Sarah Williams (Contact Author)

Penn State Dickinson Law ( email )

150 S. College Street
Carlisle, PA 17013
United States

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