Today, Explained - Should Congress be able to trade stocks?

Episode Date: April 6, 2022

A 2012 law tried to limit lawmakers' ability to make money on Wall Street. It hasn’t worked. This episode was produced by Hady Mawajdeh, edited by Matt Collette, engineered by Efim Shapiro and Paul Mounsey, fact-checked by Laura Bullard and Victoria Dominguez, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Today, today, today. A hearing tomorrow on Capitol Hill will probably command attention because for once, Republicans and Democrats agree on something. Representative Alexandria Ocasio-Cortez of New York thinks lawmakers should not be able to use insider information to game the stock market. It's incredibly important that we ban the ability for members of Congress to direct trades in individual stock. Maybe unsurprising, but you know who agrees with her? Republican Matt Gaetz of Florida. The fact that you've got populists from the widest ends of the political spectrum coming together to say, hey, look, why don't we just make a deal in this country

that you're on one side or the other? You're on the lawmaking side or you participate in the stock market. Banning stock trades by lawmakers, possibly the one thing uniting the right and the left. I'm Noelle King. It's Today Explained. groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Dave Leventhal, Deputy Washington Bureau Chief of Insider, you and your team have done a deep dive into stock trades by lawmakers. How did we get here? We think of everything here in Washington, D.C. in terms of red and blue.

And yet here is an issue where lawmakers have been bipartisan in two very important ways. Number one, as you just noted, they have been bipartisan in their support of the notion that their fellow colleagues in Congress on Capitol Hill should not have the right to buy and sell individual stocks. Well, I don't think members of Congress should be directly involved in trading. I think you should have to turn it over, as I have when I got into Congress, to a third party and not be able to give any direction on the buying and selling. The flip side to that coin is that there has been bipartisanship in the violations that have taken place of a law known as the Stock Act, the Stop Trading on Congressional Knowledge Act of 2012. Lawmakers from both parties bought and sold stocks after receiving closed door COVID briefings before the pandemic began to rage. Which exists to prevent financial conflicts of interest in Congress.

The Stock Act makes it clear that if members of Congress use non-public information to gain an unfair advantage in the market, then they are breaking the law. And provide transparency for the public to ensure that lawmakers are operating in the public's best interest as opposed to their own personal financial interest. That is a good and necessary thing. What is the Stock Act? The thing that says you can't, you got to behave in certain ways? How does it work? non-insider information for their own personal gain so that they could basically make money off of information that they were privy to by virtue of them being a member of Congress, by them being elected to serve in power. We know that during the health care debate, people were trading health

care stocks. We know that during the financial crisis of 2008, they were getting out of the market before the rest of America really knew what was going on. And because of that, there in fact was a sort of bipartisan outrage that came about, largely in part because of a report that 60 Minutes did. While Congressman Backus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. There was some other journalism around it to really show the depths of this phenomenon. So Congress decided to go ahead and pass this law, the Stock Act.

And what the Stock Act entails is that if you are a member of Congress, you can still trade stocks, but you would have to disclose, at least by congressional standards, your stock trades in a pretty rapid clip within 30 to 45 days of making a trade, depending on the type of trade. And what that was supposed to do is provide a great deal of transparency into the process. So, for example, if you served on a particular committee where you might be trading energy stocks but having insider information about that, then you were supposed

to disclose that in a way that would allow the public insight into your financial decision-making as a person, or for that matter, a spouse's financial decision-making, because it extended to members of Congress's family members, wives, husbands, dependent children. And it also patently made illegal the notion of members of Congress engaging in insider trading. So that was basically said in the Stock Act, that that was a total no-no, you can't do it, very, very clear. And it was held by Barack Obama, president at the time, as really an elixir to the pre-existing problems. It shows that when an idea is right, that we can still accomplish something on behalf of the American people to make our government and our country stronger.

What was the punishment supposed to be if a lawmaker got caught doing insider training or if a lawmaker was not making their stock trades public in that set amount of time? Well, I think it's important first to note that there seemed to be, at least at the moment that the Stock Act passed, a certain amount of trust that lawmakers felt like, all right, we've passed this bill, we've passed this law, and we're going to be fine now. Everyone is going to be a professional, everyone is going to be honorable, and we're going to go forward and not have the same types of trouble in the future that we had had in the recent past. I mean, here's a case where a problem was identified that cut directly to the public's faith in their elected representatives. We dealt with it quickly and on a bipartisan basis in both houses of Congress.

So the penalties were not terribly onerous. So, for example, if you were late to filing that purchase of AT&T or that sale of Facebook, you might only get a fine of $200 that would be put forth by either the House or the Senate Ethics Committee. Say you engaged in insider trading. that would be activity that would be potentially criminally prosecuted or investigated at the very least. But what we have found with the Stock Act is that when it comes to proving insider trading by a member of Congress, it is incredibly difficult to come to that conclusion. Members of Congress have easy alibis. They can go ahead and say, well, I am just clairvoyant. I got information from reading the news.

I have not used any insider information. I'm just very good at stock trading, which is probably why 10 years on, we have never had a criminal prosecution of a member of Congress under the Stock Act. So at least the Stock Act, in this regard, has not lived up to its billing as something that was going to absolutely defend against conflicts of interest and punish members of Congress for insider trading. Arguably,

some of this stuff has taken place over the past decade, but it hasn't risen to the level where the Department of Justice has been able to say, but it hasn't risen to the level where the Department of Justice has been able to say, absolutely, we are going to spend time and resources pursuing a member of Congress, and we are going to charge and indict them and go forward and try to send them to jail. That just simply has not taken place. Do you have a sense of how many lawmakers have violated the Stock Act in the past few years? Does anyone know? Insider and other media organizations have found 59 members of Congress to be in violation of the Stock Act's disclosure provisions. So we've had members of Congress who've been, in some cases, months or even years late, past the deadline that they themselves have set for themselves and their congressional colleagues. And have done so to the tune of hundreds of thousands and even millions of dollars worth of combined trades that were late.

So what's the problem here? Well, the problem is that if the public doesn't have access to that information, the public cannot make a judgment on whether a member of Congress is engaging in a conflict of interest. So the disclosure provisions of the Stock Act are only as good as the compliance by the members of Congress. If members of Congress don't comply with the Stock Act's disclosure provision, it kind of becomes a house of cards that falls apart very quickly. And at this moment in time, that's very much where we're at. Effectively, we have

one in 10 members of Congress, more than that at this juncture, engaging in illegal activity as it relates to the disclosure provisions of the Stock Act. All right, so it's like one in 10 plus members of Congress not following the law, the law that they wrote. What's the most egregious example you came across of a lawmaker seeming to be using inside information to buy and sell? At the dawn of the pandemic, so we're talking February of 2020 right now, Richard Burr, senator from North Carolina, Republican, he had basically dumped about $1.6 million worth of stock in that month. But he didn't warn the public.

He didn't even disavow an op-ed he'd written just 10 days before claiming America was, quote, better prepared than ever for coronavirus. He didn't do any of those things. Instead, what did he do? He dumped his shares in hotel stocks so he wouldn't lose money. And then he stayed silent. And it was right before the stock market crashed. It was right before the country entered the teeth of the pandemic. And reporting by ProPublica and other news organizations have indicated in the months since that he had not only just dumped that stock by himself that he owned, but he had also called his brother-in-law. According to the court documents, on February 13, 2020,

immediately after he spoke to Senator Burr on the phone, and immediately after Senator Burr had directed his own broker to liquidate his own joint IRA portfolio, the brother-in-law appears to have directed the sale of several stocks. This led to, ultimately, a federal investigation into whether Richard Burr was using inside information to make personal stock decisions. And he wasn't the only one. Senator Dianne Feinstein of California. She has been contacted by the FBI confirming

that Feinstein answered questions from the FBI about stock trades that her husband made. Senator Kelly Loeffler. The Daily Beast found that Senator Kelly Loeffler of Georgia sold off seven figures worth of stock after a private senator's briefing on the coronavirus. She also bought up to a quarter million dollars of stock in a company that offers teleworking software. Senator David Perdue. Records show that Perdue didn't sell nearly that much, but he did purchase between $63,000 and $245,000 worth of stock in Pfizer. So the pandemic really proved to be kind of a flashpoint for members of Congress and trading stocks in the sense that we saw a flurry of activity around that time. So you can see from that that it's sort of a tapestry of permissibility, that almost anything still goes in Congress, and that even if you do something that at least at

its face or in the public's eye would seem really, really bad, lawmakers aren't too terribly concerned about anything beyond just maybe having a news article or two written about them. And, you know, lawmakers really don't have to care about a whole lot in terms of real hard penalties. So we know that they're buying and selling. You got lots of data on that. Are they actually doing well, though? Are they getting rich or richer? There have been studies and indications, some academic, one by an outfit called Unusual Whales, that have indicated that, yes, actually they have been doing much better than, say, the S&P 500 or the Dow Jones Industrial Index. In essence, they're beating the market. And now that's not true in every case. It's not true for every

lawmaker, but it's definitely true for some to a point where it is most curious. And that's really the crux of the concern here, that so long as it's legal for members of Congress to buy and sell individual stocks, the possibility, the specter of them using insider information is going to factor in full or in part to decisions that they make financially speaking. Support for Today Explained comes from Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting

so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp. You can go to ramp.com slash explained, ramp.com slash explained, R-A-M-P dot com slash explained. Cards issued by Sutton Bank, member FDIC, terms and conditions apply. Bet MGM, authorized gaming partner of the NBA, apply. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season.

Raise your game to the next level this year with BetMGM, a sportsbook worth a slam dunk and authorized gaming partner of the NBA. BetMGM.com for terms and conditions. Must be 19 years of age or older to wager. Ontario only. Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge.

BetMGM operates pursuant to an operating agreement with iGaming Ontario. Dave Leventhal, Deputy Washington Bureau Chief of Insider. Okay, here's where we stand. We have 59 members of Congress who are making suspicious trades or who are not reporting their stock trades on time as they should be according to the law. And the question is, how do we fix that? So what we have right now are a number of different bills and even a couple of resolutions that would address this very issue. And I should note that back in December, Insider produced a project called Conflicted Congress. There were more than two dozen stories, and it really shed a lot of light on the situation. So there had been a couple of bills

sponsored by Representative Abigail Spanberger, a Democrat from Virginia, for example. It's not just enough to know what members are buying or selling, it's that they shouldn't be buying or selling. Chuck Roy, who was her Republican co-sponsor. None of this would stop you from being able to engage in free enterprise in the free market and being able to continue to hold your investments. All we're saying is put in a blind trust or be in broadly traded index funds.

You had Senator Mark Kelly, a Democrat of Arizona, Josh Hawley, Republican of Missouri, John Ossoff, a Democrat freshman of Georgia, getting on board with their own bills. Democratic Senator John Ossoff just released a bill tonight that would force lawmakers to put their assets into a blind trust or pay a fine of their entire salary. Each bill kind of had a little bit of a different take. Some want to ban members of Congress and only members of Congress from trading stocks. Others want to extend that ban to family members. It eludes me as a possibility that someone would say to the American people, oh, no, no, no, no. My spouse makes all his own

decisions. Ignore the fact that when a pandemic starting, he's buying stocks and insert pharmaceutical company name. Some have suggested that members of Congress should invest their finances in exchange-traded funds or mutual funds or government bonds, something that is going to be a lower risk and definitely tamp down any possibility that a member of Congress would be buying or selling an individual stock because they had specific knowledge about that company or about the industry in which that company operated. So it's unclear at this point whether lawmakers are going to be able to coalesce around one particular route here. But it is incredibly, insanely rare in this day and age for Democrats and Republicans to agree on anything. So the fact that they are at least in principle getting behind this notion that members of Congress should not be able to engage in stock trading activity in the same way that they do right now is just simply notable in and of itself. We just don't see this in Washington,

D.C. in 2022. But with this particular issue, we do see it. This is why I'm so obsessed with this story, because almost nothing is bipartisan, but this is bipartisan, which has actually made me wonder, the lawmakers that you mentioned, is there something unique to those lawmakers, the ones who are proposing the changes, versus the lawmakers who are saying, I'd really like to keep my privileges. Maybe you guys could just shut up about it. The one thing that they have in common is that they are not House or Senate leaders in the Democratic Party. The leadership of the Democrats, and of course, the Democrats control at this point in time, both the House and the Senate, the leaders of the Democratic Party and the House and the Senate have been very reluctant, if not straight up resistant, to changing the status quo.

When we asked Nancy Pelosi at a press conference, should lawmakers be able to engage in individual stock trading? She said, This is a free market and people, we are a free market economy. They should be able to participate in that. And this was coming from Nancy Pelosi, who has been turned into the ultimate meme trader of Congress by folks on TikTok and Twitter and whatnot. And would you look at that, literally clockwork.

The U.S. government has an agreement to purchase a supercomputer from who else? NVIDIA. Yep, NVIDIA. The one, yep. The one that Nancy bought back on 7-23-21 in that tweet. The news comes out literally yesterday, like 8-24-21. She knew. And you would have known if you followed her portfolio on Iris. We asked Senate leadership. They were very quiet on this. But after about a month of getting a ton of heat from both sides, the far left, the far right, and the not so far left and the far right, you saw Democratic leadership begin to get squeezed. And you began to see that they were in a pretty difficult situation where this issue of members of Congress and their trading of stocks was not going away. So ultimately, Nancy Pelosi first said, well, I will let a House committee look into this issue of

penalties not being doled out in the way that they should. And then about a week later, she went a step further, which was very surprising to a lot of people who had been following this, to say, I'll actually let a committee go forward and look at advancing legislation that would address this issue. I do believe in the integrity of people in public service. I want the public to have that understanding. We have to do this to deter something that we see as a problem, but it is a competence issue. And if that's what the members want to do, then that's what we will do. to those who have been talking about this issue for a good long while now. People like Senator Elizabeth Warren, people like Representative Alexandria Ocasio-Cortez, who said that this should be just simply illegal. And then it also gave Republicans of a certain stripe a great

opportunity to go and beat up Nancy Pelosi, who, of course, likes to fashion herself as a very moralistic leader of the House. So you saw plenty of Republicans go and start beating her up on this. Well, what I'm wondering is why we're in the fourth year of Nancy Pelosi being speaker, and why is this being done now? This should have been done on day one. Oh, yeah. Suddenly she's a big advocate of the free market when we're talking about enriching and padding her wallet, as opposed to standing with the small businesses that she's destroying with all of her crony capitalism. And it gave other politicians opportunities to say, all right, we're going to do the right thing

here. We've got an opportunity to make right. This is something that should not be controversial and that we truly can be bipartisan about this. Do you think any of these bills will become law? I think it's possible. The fact that you do have members on both sides not only talking about it, but talking to each other, which is a small but subtle but incredibly important detail that leads Capitol Hill observers, especially that I've talked to, to believe that if anything is going to have a chance to be truly bipartisan on Capitol Hill

in Congress in 2022, that this may be the thing and that it could actually happen sooner rather than later. Dave, it depends on what polls you look at, but polls show that a majority of Americans, sometimes it's 60 some odd percent, sometimes it's 70 plus percent, do not think that lawmakers should be allowed to buy and sell stocks. And Americans hardly agree on anything in those kinds of numbers. Do you have any reflections on why there is this one thing that we seem to agree on across partisan lines. When you look at those polls, what's striking about them is there is hardly any statistical difference between the way that Democrats and Republicans and independents feel about this, just a handful of percentage points.

So the vast majority of Americans, regardless of where they fall on the political spectrum and how they would answer any type of other political question about, say, Donald Trump or about Nancy Pelosi or about any issue facing the country, mask mandates, abortion, you name it, they're all basically on the same page when it comes to this issue. And members of Congress

are not blind to that. They read these polls, they understand these polls, and they understand the truth from these polls, which is that if they are supporting the status quo, if they're saying, hey, there's nothing to see here, we don't have to worry about this issue, this is just a whole lot of nothing and being blown out of proportion, then they are out of step with the way that the body politic feels on this issue. So this is definitely a policy-focused issue that has incredible political implications, and it's all beginning to swirl together in a pretty tight spiral at a time when, even though some Democrats would like it to go away, it doesn't appear that it's going to at least any time soon. Today's show was produced by Hadi Mouagdi, edited by Matthew Collette,

engineered by Afim Shapiro, and fact-checked by Laura Bullard and Tori Dominguez. I'm Noelle King. It's Today Explained. Thank you.