Henry Blodget has posted on the Congressional insider trading scandals. His post is wrong in at least three respects. First, he claims:
The fact that many members of Congress appear to have traded on non-public information in their personal brokerage accounts during the financial crisis is outrageous. But since this bombshell news broke on Sunday night, the excuse has been that, however ridiculous it may sound, insider trading is legal for Congress.
(a) The argument that Congressional trading is legal under current law is not offered up as a defense of what the members of Congress allegedly did. It is being made in the context of criticizing this glaring--even obscene--loophole in current law. Of course, Congressional insider trading is wrong...and it ought to be illegal.
Insider trading is just as illegal for members of Congress as it is for the 300+ million Americans, Indiana Law Professor Donna Nagy argues.
(b) Well, yes, but I and most other commentators think Professor Nagy's wrong on this issue. See, among others, this post explaining why and the comments section thereto.
The definition of insider trading is trading while in possession of material non-public information.
(c) No it isn't. The relevant definition of insider trading is trading while in possession of material nonpublic information in violation of a fiduciary duty of confidentiality and loyalty to the source of the information. It is precisely because (Prof. Nagy's arguments to the contrary notwithstanding) members of Congress owe no such duty to anyone that their trading--while reprehensible--falls outside the legal definition of insider trading. It's also why the definition needs to be changed to capture Congressional insider trading.
And then there's this whopper from Mr Blodget:
Even if this behavior is not judged to be illegal, it's certainly unethical. At the very least, the SEC should launch a full investigation.
Worse yet, in an earlier post, Blodget dared opine that one of the alleged Congressional inside traders should "resign in disgrace":
Rep. Bachus should return whatever money he made by betting on the direction of the markets (or anything else) in the fall of 2008. He should apologize for his behavior and jaw-dropping lack of judgement. He should urge his fellow members of Congress to immediately enact legislation that defends the fairness of the markets by holding Congress to the same insider trading laws as everyone else. He should then resign in disgrace.
Wow. For the benefit of those of you who weren't paying attention back during the Enron era, the Wikipedia entry on Mr. Blodget will get you up to date:
Henry Blodget (born 1966) is an American former equity research analyst, currently banned from the securities industry, who was senior Internet analyst for CIBC Oppenheimer during the dot-com bubble and the head of the global Internet research team at Merrill Lynch. ... In 2002, then New York State Attorney General Eliot Spitzer, published Merrill Lynch e-mails in which Blodget gave assessments about stocks which conflicted with what was publicly published.[4] In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission.[5] He agreed to a permanent ban from the securities industry and paid a $2 million fine plus a $2 million disgorgement.[6]
For Henry Blodget to accuse anybody of unethical stock market behavior and call for them to be investigated by the SEC, let alone to call on them to resign in disgrace--no matter how deserving the objects of his calumny may be--takes a degree of chutzpah that I can't imagine possessing.
It's the flip side of the proverbial boy who was convicted of murdering his parents and asked for leniency on grounds that he was an orphan.
Indeed, come to think of it, it's a bit like Eliot Spitzer calling for somebody to be investigated for soliciting prostitutes.
If anybody ought to be hiding under a rock in disgrace, instead of lecturing others on stock market ethics, it's Henry Blodget.
