Tag: ethics

Congressional Insider Trading: Is It Legal?

Washington has been buzzing for the past 48 hours over revelations that some of Capitol Hill’s best-known lawmakers have been making fortunes speculating in the stocks of companies affected by official actions, typically while in possession of market-moving inside information. Rep. John Boehner (R-OH), Senatorial wife Teresa Kerry and others made bundles trading in health companies’ stocks shortly before Congressional or executive-branch action affecting the companies’ fortunes. After closed-door 2008 meetings in which Fed chairman Ben Bernanke briefed Congress on the gravity of the financial collapse, some lawmakers dumped their own stockholdings or even placed bets that the market would fall. Rep. Nancy Pelosi (D-CA) got access to highly desirable IPO (initial public offering) stock placements, some in companies with business before Congress. And so on. Studies have found that lawmakers as a group reap far above-average returns on their investments—suggesting either that these politicians are among the world’s cleverest investors, or else that they are profiting from inside information. All this has been turned into a front-page issue thanks to Throw Them All Out, a book by Hoover fellow Peter Schweizer, whose findings were showcased the other night on 60 Minutes.

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

It is tempting to approach the new revelations the way an ambitious prosecutor might, trying to stitch together a test-case indictment from, say, the penumbra of the mail and wire fraud statutes bulked up with a bit of newly hypothesized fiduciary duty here and a little “honest services” there. But that’s not how criminal law is supposed to work: for the sake of all of our liberties, prohibited behavior needs to be clearly marked out as prohibited in advance, not afterward once we realize it doesn’t pass a smell test. But we are still free to deplore the hypocrisy of a Congress that has long been content to criminalize for the private sector—often with stiff jail sentences—behavior not much different from what lawmakers are happy to engage in themselves.

Free Deirdre McCloskey E-Book from University of Chicago Press

Every month, the University of Chicago Press offers a free e-book from its catalog of thought-provoking titles. This month it’s Deirdre McCloskey’s The Bourgeois Virtues: Ethics for an Age of Commerce (2006).

We discussed her follow-up volume, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (2010), in last month’s Cato Unbound. Back in 2006, Cato Policy Report gave a short summary of McCloskey’s argument in The Bourgeois Virtues.

Her argument as I understand it is that commerce and virtue can be mutually reinforcing. Obviously they aren’t always so, but this positive feedback loop has governed much of world history in the modern era, helping to create the world we see around us today. I’d encourage anyone who takes interest in the intersection of markets, virtue, and modernity to take a look. And best of all, it’s free.

Obama on Human Rights in America

I’ve just sent a short post to ”The Corner” at NRO on the Obama State Department’s new report to the U.N. Human Rights Council on human rights conditions in the U.S.  In a word, we’ve got problems, especially concerning women, minorities, etc., but we’re trying to live up to the expectations of other human rights exemplars on the council – Russia, China, Saudi Arabia, Cuba.

Read and weep.

Watch-Lister to Review Watch-Listing

White House ethics counsel Norm Eisen’s conclusion that John Brennan should participate in the reviews of the attempted bombing of Northwest flight 253 is interesting.

Currently serving as assistant to the president for homeland security and counterterrorism, Brennan formerly worked at the Analysis Corp., a contractor that helped develop the watch-list system, one of many security measures that did not prevent the attacker from boarding a flight into the United States.

In my review of some of the security systems involved in the failed attack, I agreed that watch-listing failed, but I am at a loss to imagine how it could succeed.

On the merits of the ethical issue, Eisen cites Brennan’s long experience and the importance of this matter to national security as reasons that Brennan should be granted a waiver from the general two-year ban on political appointees having involvement in matters involving former employers and clients.

But these factors cut equally well, if not better, in the other direction: Long experience can bring a person too close to the problem to see solutions. And national security is too important to let insiders review their own work. 

I have no reason to doubt his good faith, but Brennan’s substantive judgment is likely to be obscured by familiarity with, and sympathy for, watch-listing. He will be unlikely to give sufficiently close examination to the question whether it provides security value given its failure here and its costs in dollars, constitutional principles, and privacy.

Kudos are due the White House and Norm Eisen for posting the ethics waiver on the White House blog. Brennan’s assessment of watch-listing should get similar airing so that the public can review his work aware of his probable sympathies. An outside review may lose something in inside knowledge, but make up for it with gains in substance and credibility.