The STOCK Act will soon become law (finally). It will ban insider trading by Members of Congress, who fall through the cracks of current law. The question currently before us is whether it will also bar whistle blowing my government and Congressional employees.
If you want to follow it from the start, you need to begin with an NRO article by two John Berlau and David Bier of the Competitive Enterprise Institute in which they claim that the STOCK Act banning insider trading by members of Congress will also ban whistle blowing.
Next you should read my response: The STOCK Act will not make whistle blowing illegal.
The next move came when Ryan Radia, also of the CEI, offered up A Response to Professor Bainbridge. (Why Berlau and Bier seem to have retired from the field is an interesting question.)
Let's take some of Radia's arguments up more or less in order:
1. Radia claims:
Prof. Bainbridge overstates his case in contending that “[t]he STOCK Act doesn’t change the law applicable to Congressional staffers.” Although the STOCK Act would hardly ban whistle blowing, the law would substantially alter — or, at the very least, meaningfully clarify — the degree to which congressional staffers are subject to liability under the insider trading laws.
As Radia correctly notes, the key operative statutory language "imposes on congressional staffers (and on Members) a 'duty arising from a relationship of trust and confidence . . . with respect to material, nonpublic information derived from such person’s position . . . [for purposes of the insider trading laws.]'"
I consulted with the staffers who came up with that language. It was their intent that that language simply make clear that current law applies to members of Congress. As I explained to them, current law requires a breach of a duty to disclose arising out of a fiduciary relationship or a similar relationship of trust and confidence. Chiarella, 445 US at 228. Under current law, it was unclear whether Members of Congress were party to any such relationship giving rise to any such duty. By creating the requisite relationship and imposing the requisite duty, the crack through which Members fell was closed. In other words, all the statute does is to create a legal basis for holding current law applicable to Members. It does not change the substance of current law defining insider trading.
As key Senate sponsor Kirsten Gillibrand explained:
... the legislation directly corrects the ambiguity in existing laws to ensure that members of Congress, their families and their staffs are fully covered by insider trading laws. The legislation is carefully crafted to not alter existing insider trading law, but to simply ensure that members of Congress, their families, and their staff are fully covered by it.
As applied to staffers, however, the provision is redundant. Employees of Congress are agents of Congress and, as such, stand in a fiduciary relationship with Congress that precludes them from using information they learn as a result of that relationship for personal gain. See Restatement (Second) of Agency sec. 395.
Professor Donna Nagy and I disagree as to whether current law proscribes insider trading by Members of Congress. But Nagy and I are in agreement that "insider trading by a legislative staffer - or any other congressional employee - would violate Rule 10b-5 pursuant to both the classical theory and the misappropriation theory." 91 B.U. L. Rev. 1105, 1161. Nagy continues:
These individuals work for the members of Congress who were elected to serve the public as Senators and Representatives, and their disclosure obligations under Rule 10b-5 are thus both derivative and direct. As agents for public fiduciaries, legislative staffers and other employees of Congress owe the general public (some of whom are investors trading contemporaneously) the same disclosure duties that are owed by the members or congressional committees who employ them, and their failure to disclose material nonpublic facts in a securities transaction would violate Rule 10b-5 under the classical theory. These employees also stand in a direct fiduciary-like relationship with one or more members of Congress and their “undisclosed, self-serving use” of their employer's information would violate Rule 10b-5 under the misappropriation theory as well. As discussed above, even scholars who have questioned the reach of existing law to members of Congress are quick to conclude that legislative staffers and other congressional employees would be liable under Rule 10b-5 based on the well-established employer-employee misappropriation theory precedents.
Professor Thom Lambert likewise opines that:
But to say that current insider trading rules generally don’t reach trades by members of Congress is not to imply that congressional staffers are free to trade on material non-public information they acquire in the course of their jobs. I’ve never worked for a member of Congress, but I assume that staffers agree to keep confidential any material information about legislative developments that might affect the prospects of listed companies. If a staffer does make such a pledge, either explicitly or implicitly, then isn’t trading on the information “feigning fidelity to the source of the information” — i.e., the congressman for whom she works?
Granted, as Radia correctly points out, "no court has squarely addressed the misappropriation theory of insider trading liability as it pertains to congressional staffers." But I think he's wrong to suggest "the academy [has not] reached anything resembling a consensus on the issue." In opposition to myself, Nagy, and Lambert he offers up only an article by Cravath associate Bud Jerke. Jerke makes some valid points, but in the relevant passages (see 1483-87) I think his analysis ends up showing that there are key differences between Members and staffers. In any case, the weight of opino juris is pretty clearly in favor of the proposition that staffers were already covered by current law.
2. Radia suggests that the SEC will have problems under current law proving liability when congressional staffers disclose information with the express or implied consent of the Member for whom they work." (His emphasis.) That's true. It's called authorized trading/tipping and it is (or, at least, should be) legal under the misappropriation theory. See my post on the subject. Along with the brazen misappropriator loophole, authorized trading/tipping was one of the major loopholes created by the logic of the Supreme Court's misappropriation theory. As I've discussed in an earlier post, however, the lower courts have gutted the brazen misappropriator theory. There's no telling whether they wouldn't similarly find a way to gut the authorized trading/tipping loophole.
In any case, Radia goes on to say that the STOCK Act will make it easier to impose liability on staffers who make authorized tips.
The STOCK Act would absolve the SEC of this burden by imposing on congressional staffers a universal duty of trust with respect to all “material, nonpublic information derived from such person’s position . . . or gained from the performance of such person’s official responsibilities.”
Problems: (1) Are you sure you want to allow authorized tips? (2) Berlau and Bier got into hysterics because the STOCK act presumably would ban staffers from blowing the whistle on, inter alia, their bosses. So how does authorized tipping come into the picture at all? (3) Under the STOCK Act, you still need a breach of the duty to disclose arising out of the relationship of trust and confidence. Authorized tipping would not breach that duty.
3. Radia next takes up the personal benefit requirement:
Prof. Bainbridge, citing the leading treatise on insider trading, points out that a staffer who “tips” is unlikely to face insider trading liability under the misappropriation theory if the staffer receives no personal benefit.
Fair enough—but what constitutes a “personal benefit” as far as insider trading laws are concerned? As the Supreme Court held in Dirks v. SEC, the “desire to expose fraud” is not a personal benefit, so whistle blowers who disclose inside information for the purpose of shining light on illegal activities aren’t liable as tippers. Under Dirks, therefore, congressional staffers who disclose material nonpublic information to expose wrongdoing by their colleagues or bosses have nothing to worry about, even if the STOCK Act is enacted.
But what about congressional staffers who disclose material nonpublic information to advance their careers as legislative aides, to make their Member look good in the press, or to further efforts to defeat a bill opposed by party leadership? Such disclosures are commonplace in Washington; in my capacity as a think tank analyst, I and my colleagues often receive nonpublic information from staffers, some of which might rise to the level of materiality. Would a court conclude that a staffer who disclosed material nonpublic information for political purposes intended to personally benefit from the disclosure?
It is true that the personal benefit requirement gets amorphous at the edges, but let's try to stay serious. Whistle blowers often have mixed motives. In Dirks itself, for example, Secrist and the other Equity Funding insiders may well have hoped that helping to bring the fraud to light would help them avoid liability. Hence, as Professor Richard Booth notes (73 Wash. U. L.Q. 539, 556):
A whistleblower might derive considerable satisfaction from disclosure, and indeed might derive greater satisfaction if disclosure does more damage to the corporation's interests. And even if the whistleblower's motives are lofty, it still may be that he derives a personal benefit from being or being seen as a highly moral person. Nonetheless, we tend to draw the line at benefits that are economic or readily capable of being valued in dollar terms.
If Radia's concern is preserving whistle blowing, that observation should assuage his concerns. At times, however, it seems that Radia is really concerned with perpetuating the system of leaks, off the record talks, and the whole incestuous relationship between the Hill, K Street, and the media. I don't think the securities laws are an appropriate way of dealing with the cess pool that permeates DC, but I confess that I will lose no sleep if they have a chilling effect on Congressional staffers using leaks to improve their street cred so they can get better jobs or whatever.
4. Speaking of chilling effects, what I don't understand is how Radia--like Berlau and Bier--wholly ignores the First Amendment and the Speech or Debate Clause. Using the securities laws to police political intelligence trafficking--especially whistle blowing--would raise serious Constitutional issues. The SEC knows this. The SEC also knows that its budget depends on Congressional good will. (Why do you think there has never been a case, after all? The SEC is terrified of taking on Congress.) There is zero prospect that the SEC would dare use the STOCK Act to punish whistle blowers and less than zero chance that a court would holding doing so was permissible under the Constitution.
In sum, I don't know why the good folks at the Competitive Enterprise Institute seem bound and determined to throw a monkey wrench into the STOCK Act's progress, but to date they haven't come up with a single valid argument for changing or delaying the bill.
Social Media