Insider Trading Inside the Beltway

My new article, Insider Trading Inside the Beltway, has been posted to SSRN. Now it just needs to find a nice law review home somewhere in the top 50.

Abstract: A 2004 study of the results of stock trading by United States Senators during the 1990s found that that Senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to – and were using – material nonpublic information about the companies in whose stock they trade.

Under current law, it is unlikely that Members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.

This article analyzes present law to determine whether Members of Congress, Congressional employees, and other federal government employees can be held liable for trading on the basis of material nonpublic information. It argues that there is no public policy rationale for permitting such trading and that doing so creates perverse legislative incentives and opens the door to corruption. The article explains that the Speech or Debate Clause of the U.S. Constitution is no barrier to legislative and regulatory restrictions on Congressional insider trading. Finally, the article critiques the current version of the STOCK Act, proposing several improvements.

Keywords: insider trading, Congress

JEL Classifications: K22

Download here.

Comments

[Daniel]

The links to the paper are currently broken. One possible reason is that people have been linking to it from popular websites such as this: http://www.reddit.com/r/politics/comments/clltt/insider_trading_inside_the_beltway_in_1990s/

[cavinu]

Hi Professor Bainbridge-

I really like your site. I posted this story to reddit.com. I'm sorry it crashed the server. Great paper.

best,
cavinu

[Steve Bainbridge]

The links are working again.

[chemman]

Members of Congress and their spouses or significant should be required to place any of their holdings in a blind trust for the duration of their service. That would end any appearances of wrong doing.

[Bill]

Oh it might not be illegal, but trust me, if there was a similar loophole private sector citizens were exploiting, there'd be all sorts of gnashing of teeth and cries of impropriety.

Blowhards in Congress are quick to scream about Obscene Profits, if profit can ever be obscene, this is a case where they would be. I'd really be interested in seeing which members of congress specifically made such profits - and compare that to their public rhetoric of criticizing companies for obscene profits and the like.

[Gaston]

I think Hillary Clinton was famously quoted as saying "I thought everyone made a 100 percent return on investment trading in cattle futures"