A number of witnesses addressed that question at today's Senate hearing. Professor John Coffee testified that:
As you are no doubt aware, there has been a spirited debate among academics and journalists about whether Members of Congress can trade on the basis of material nonpublic information that they learn in the course of their duties.1 Some have argued that they cannot be held liable (at least in most cases), while others have replied, just as fervently, that they can. I must note that the participants in this debate have all been respected academics, knowledgeable in this field, and nothing in my comments is meant to imply disrespect for either side in this debate. Rather, because insider trading is not defined by statute, the contours of unlawful insider trading are shaped by a maze of decisions, about which reasonable experts can disagree.
Nonetheless, I believe that there is a correct answer to the question whether Members of Congress can engage in what the public would consider to be insider trading. That answer is: SOMETIMES. ... [He lists some such situations.]
It should be obvious that these examples cover only the minority of cases. Thus, I am in general agreement with those (including Professor Stephen Bainbridge) who argue that Members of Congress are not clearly covered by the prohibition on insider trading.
1 Compare Stephen Bainbridge, Insider Trading Inside the Beltway, 36 Iowa J. Corp. Law 281 (2011) with Donna Nagy, Insider Trading, Congressional Officials and Duties of Entrustment, 91 B.U.L. Rev. 1105 (2011). See also, Stephen Bainbridge, The Stop Trading on Congressional Knowledge Act (available at http://ssrn.com/abstract=1449744) (2011).
Basically, Professor Coffee thinks that SEC Rule 10b5-2 captures some instances of insider trading by members of Congress. In turn, that implicitly assumes the Rule is valid. For discussion of these issues, see my article Insider Trading Inside The Beltway.
Professor Don Langevoort testified that:
The SEC’s challenges in making [an insider trading case againnst members of Congress] are easy to spot. Under the misappropriation theory described above, it would have to prove that the senator breached a fiduciary or fiduciary-like duty owed to some person or entity who entrusted that information to him or her, “feigning loyalty” while in fact acting corruptly. But as elected officials, members of Congress are not employees or agents in any conventional sense, and so it becomes difficult to identify a separate owner of the information to which they owe a legally enforceable fiduciary duty of loyalty. Under our constitutional system, duly elected Members have a status separate and distinct from that of partner, agent or employee, far different from those with whom in mind the misappropriation theory was devised. Information they glean from their own legislative activities does not necessarily belong to someone else, and existing insider trading law does not prohibit a person from taking advantage of his or her own information. Because of this, a number of commentators have concluded that existing insider trading prohibitions do not reach this sort of trading or tipping on Capitol Hill.8
8 See Bainbridge, Insider Trading Inside the Beltway, JOURNAL OF CORPORATION LAW, vol. 36, p. 281 (2011). Similar views can be found in a number of other writings. See, e.g., Macey & O’Hara, Regulation and Scholarship: Constant Companions or Occasional Bedfellows?, YALE JOURNAL ON REGULATION, vol. 26, p. 86 (2009); Jerke, Comment: Cashing In on Capitol Hill: Insider Trading and the Use of Political Intelligence for Profit, UNIVERSITY OF PENNSYLVANIA LAW REVIEW, vol. 158, p. 1451 (2010).
He goes on to note the arguments to the contrary made by himself and Professor Donna Nagy (my frequent sparring partner on this issue both here and elsewhere). But then he notes a series of cases in which the US Supreme Court has said that Congress should determine the scope of liability under Rule 10b-5, not the courts, concluding that "I can readily foresee a similar response to Congressional insider trading." Accordingly, he supports passage of clarifying legislation.
Speaking of Professor Nagy, she ably testified to her view that "congressional insider trading is already illegal under existing law."
All three law professors gave excellent, scholarly testimony. Reading all three will give you a great overview of the issues.
I wish I could have attended the hearing. Unfortunately, end of semester law school duties kept me in Los Angeles.
