November 15, 2011 1:44PM # Congressional Insider Trading: Is It Legal? By [Walter Olson](https://www.cato.org/people/walter-olson) --- SHARE Washington has been buzzing for the past 48 hours over [revelations](http://www.theatlanticwire.com/national/2011/11/how-members-congress-get-rich-through-honest-graft/44928/) 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](http://www.slate.com/blogs/weigel/2011/11/14/spencer_bachus_rogue_trader.html) 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](http://www.thedailybeast.com/articles/2011/11/14/how-visa-courted-nancy-pelosi-hoping-to-forestall-swipe-fee-changes.html). 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](http://www.thedailybeast.com/newsweek/2011/11/13/peter-schweizer-s-new-book-blasts-congressional-corruption.html), 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](http://www.rollcall.com/issues/57_40/donna_nagy_enforce_laws_fight_lawmaker_insider_trading-209378-1.html) 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](http://www.professorbainbridge.com/professorbainbridgecom/2011/11/congressional-insider-trading-errors.html), 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. ##### Related Tags [General](https://www.cato.org/general), [Government and Politics](https://www.cato.org/government-politics) [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/).