ProfessorBainbridge.com

Congratulations to Andrew Verstein on WSJ article re his research

A new research paper co-authored by my friend and UCLAW colleague Andrew Verstein and forthcoming in the Duke Law Journal got a nice write up (albeit without enough Verstein quotes!) in the Wall Street Journal today: Improper ‘Insider Charitable Giving’ Is Widespread, Study Says

The paper is Avci, Sureyya Burcu and Schipani, Cindy A. and Seyhun, H. Nejat and Verstein, Andrew, Insider Giving (February 25, 2021). 71 Duke Law Journal (Forthcoming 2021), UCLA School of Law, Law-Econ Research Paper No. 21-02, Available at SSRN: https://ssrn.com/abstract=3795537

Abstract: Corporate insiders can avoid losses if they dispose of their stock while in possession of material, non-public information. One means of disposal, selling the stock, is illegal and subject to prompt mandatory reporting. A second strategy is almost as effective and it faces lax reporting requirements and enforcement. That second method is to donate the stock to a charity and take a charitable tax deduction at the inflated stock price. “Insider giving” is a potent substitute for insider trading. We show that insider giving is far more widespread than previously believed. In particular, we show that it is not limited to officers and directors. Large investors appear to regularly receive material non-public information and use it to avoid losses. Using a vast dataset of essentially all transactions in public company stock since 1986, we find consistent and economically significant evidence that these shareholders’ impeccable timing likely reflects information leakage. We also document substantial evidence of backdating – investors falsifying the date of their gift to capture a larger tax break. We show why lax reporting and enforcement encourage insider giving, explain why insider giving represents a policy failure, and highlight the theoretical implications of these findings to broader corporate, securities, and tax debates.

Insider Trading Compliance Programs in The Cambridge Handbook of Compliance

The Cambridge Handbook of Compliance has just been released:

Compliance has become key to our contemporary markets, societies, and modes of governance across a variety of public and private domains. While this has stimulated a rich body of empirical and practical expertise on compliance, thus far, there has been no comprehensive understanding of what compliance is or how it influences various fields and sectors. The academic knowledge of compliance has remained siloed along different disciplinary domains, regulatory and legal spheres, and mechanisms and interventions. This handbook bridges these divides to provide the first one-stop overview of what compliance is, how we can best study it, and the core mechanisms that shape it. Written by leading experts, chapters offer perspectives from across law, regulatory studies, management science, criminology, economics, sociology, and psychology. This volume is the definitive and comprehensive account of compliance.

It includes 69 articles by leading experts on various aspects of compliance, both theoretical and practical. Among them is an article by yours truly on insider trading compliance programs.

A Critique of the Insider Trading Prohibition Act of 2021 is circulating to the law reviews and available on SSRN

I have a new article on the Insider Trading Prohibition Act of 2021, which is now circulating to online law reviews (I'm hoping for publication this summer so as to impact Senate consideration of the bill) and is available at SSRN.

Abstract: The Insider Trading Prohibition Act of 2021 has been passed by the House of Representatives and, as of this writing, is awaiting action in the Senate. The Act’s proponents claim that it simply codifies and clarifies existing law. In fact, the Act does neither. It likely will expand the scope of insider trading in undesirable ways and introduce new ambiguities into the law.

The ways in which the Act likely will expand the insider trading prohibition, coupled with the new ambiguities it introduces, threatens the central policy on which the insider trading prohibition rests. The Supreme Court has recognized that the work of market analysts and other investment professionals inherently entails seeking information advantages. In turn, as the Court also recognized, that work is an essential part of maintaining efficient stock markets. By increasing the risk of liability, especially in light of the Draconian penalties associated with insider trading, the Act likely will chill this vital activity, to the detriment of all investors.

When a very similar bill passed the House in the 116th Congress, the legislation died in the Senate. The Insider Trading Prohibition Act of 2021 now awaits Senate action. The Senate would be well advised to let this bill die as well. 

Bainbridge, Stephen Mark, A Critique of the Insider Trading Prohibition Act of 2021 (June 17, 2021). UCLA School of Law, Law-Econ Research Paper No. 21-08, Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3869222 

SEC Chairman Gary Gensler to Finally Tackle Rule 10b5-1 Reform: I Offer a Few Suggestions

The WSJ reports:

Speaking Monday at The Wall Street Journal’s CFO Network event, SEC Chairman Gary Gensler said he is seeking to revise rules that govern the arrangements, known as 10b5-1 plans. Insiders set up plans ahead of time and use them to schedule future trades. The arrangement gives executives a defense against insider-trading claims that would stem from having undisclosed material nonpublic information at the time of a trade.

I suspect that I will be opposing most of Chairman Gensler's proposals over the next few years, but on this issue I am in complete accord. I discuss Rule 10b5-1 planes in my book Insider Trading Law and Policy (Concepts and Insights). As I explain therein, Rule 10b5-1 plans are widely abused:

There is growing evidence that many executives are abusing Rule 10b5–1 by establishing or amending trading plans while in possession of material nonpublic information on the basis of which they proceeded to trade while using the plan for cover.

I also discuss a number of best practices that could be mandated so as to reduce the current ease with which Rule 10b5-1 plans are abused:

• Corporate insiders should have only one Rule 10b5-1 plan in effect at any given time. Insiders with multiple Rule 10b5–1 plans with overlapping execution terms, can game the choice of plans to take advantage of material non-public information.
• Plans should have a term of at least one year, because short-term plans are more likely to be have been motivated by inside knowledge.
• Require the issuer's board of directors' Compensation Committee take responsibility for overseeing Rule 10b5-1 plans by the Named Executive Officers.
  
  • Adoption by an NEO of new Rule 10b5–1 plans, plan amendments and plan terminations should be pre-cleared by the committee.
• Adoption by an NEO of new Rule 10b5–1 plans, plan amendments and plan terminations should be pre-cleared by the issuer's internal audit function or its compliance office.
• Rule 10b5–1 plans should be adopted, modified, or terminated only at times when the corporate insider can buy or sell securities under the company’s insider-trading policy, such as during an open trading window or soon after an earnings announcement (when material non-public information will be communicated to the public).
• Bar corporate insiders from adopting new Rule 10b5–1 plans for six months or a year after a plan termination.
• Bar insiders from taking in the issuer's stock outside of a Rule 10b5-1 plan.
• A Form 8-K should be filed whenever an NEO adopts, modifies, or terminates a Rule 10b5-1 plan.
• With respect to Section 16 officers, their Form 4 disclosures should specify whether the trade was made pursuant to a Rule 10b5-1 plan.
• There should be a waiting period of 30 trading days between adoption of a plan and execution of the first trade pursuant to the plan.

If burning the American flag is protected speech, why isn't (at least some) insider trading?

The titular question occurred to me while reading a post by John P. Anderson, in which he explains that:

There is evidence that at least some of the recent social-media-driven “meme” trading in stocks such as GameStop is being driven by motives other than profit seeking. In fact, many of the retail traders involved in the recent short-squeeze frenzy have stated publicly that they are buying and holding their positions as a form of social, political, or aesthetic expression. ...

An expressive trader does not trade for profit but rather to send a political message or produce a social or aesthetic effect. Social media has made expressive trading practicable for retail market participants by allowing a large number of small investors to coordinate their trading in real time to deliver their desired message in the form of a measurable impact on the targeted stock’s price.

One consistent theme for expressive traders in GameStop has been to protest the Wall Street elitism that motivated the Occupy Wall Street movement in 2011. In contrast to that movement, however, expressive trading has had very real economic consequences for the movement’s perceived hedge-fund villains. ...

GameStop retail traders frequently quote Heath Ledger’s Joker character from “The Dark Knight” on their trade-related posts: “It’s not about the money; it’s about sending a message.” ...

Censorship of expressive trading may be justified in some instances, but the broader implications of any such regulatory action should be carefully explored in advance.

Steinberg on the Saga of SEC v. Cuban

My friend SMU Law Professor Marc Steinberg has published a great article on the SEC's misbegotten prosecution of Mark Cuban:

The Securities and Exchange Commission's (SEC) enforcement action against Mark Cuban for allegedly engaging in illegal insider trading was far from standard fare. Unlike the vast majority of SEC enforcement actions that are settled pursuant to the consent negotiation process, whereby the defendant neither admits nor denies the Commission's allegations of misconduct, Mr. Cuban declined overtures of settlement and proceeded to trial. After years of contentious litigation, where he incurred legal fees of $12 million, Mr. Cuban emerged victorious with a favorable jury verdict. The Commission's case against Mr. Cuban raises questions regarding the scope of our insider trading laws, the strategic decisions made, the high costs of defending one's good name, and the appropriate limits of governmental prosecutorial discretion.

The author was retained as an expert witness on Mr. Cuban's behalf in the litigation. The article is based on the author's 2019 William Marshall Bullitt Memorial Lecture in Law at the University of Louisville, Brandeis School of Law.

For even more details on this notorious lawsuit, see Marc's book:

For my coverage of the Cuban case, see these posts:

The SEC Appeals Brief in the Mark Cuban Insider Trading Case

In July 2009, a federal district court threw out an SEC civil insider trading case against Dallas Mavericks CEO Mark Cuban. (Full disclosure: I co-signed an amicus brief in support of Cuban's position.) BNA reports: In a long-anticipat...

Continue reading "The SEC Appeals Brief in the Mark Cuban Insider Trading Case" »

Posted at 11:01 AM in Insider Trading | Permalink | Comments (1)

SEC v. Mark Cuban

Mark Cuban's insider trading trial is underway at last: The insider-trading lawsuit against Mark Cuban will continue after a federal judge turned down the billionaire Dallas Mavericks owner's attempt to dismiss the government's case a...

Posted at 04:20 PM in Insider Trading | Permalink | Comments (0)

Reading the Fifth Circuit Opinion Reinstating the Mark Cuban Case

I've now had a chance to read the Fifth Circuit's opinion in SEC v. Cuban, which reinstated the insider trading charges against Cuban. (See earlier post.) Here's the money quote: While O’Hagan did not set the contours of a relation...

Posted at 10:38 AM in Insider Trading | Permalink | Comments (1)

FT and me on the Cuban Case

Financial Times: Litigation experts have exposed weaknesses in the Securities and Exchange Commission?s insider trading case against billionaire investor Mark Cuban, saying current securities laws are ambiguous about whether he would ...

Posted at 04:14 PM in Insider Trading | Permalink | Comments (0)

In July 2009, a federal district court threw out an SEC civil insider trading case against Dallas Mavericks CEO Mark Cuban. (Full disclosure: I co-signed an amicus brief in support of Cuban's position.) BNA reports: In a long-anticipat...

Mark Cuban's insider trading trial is underway at last: The insider-trading lawsuit against Mark Cuban will continue after a federal judge turned down the billionaire Dallas Mavericks owner's attempt to dismiss the government's case a...

I've now had a chance to read the Fifth Circuit's opinion in SEC v. Cuban, which reinstated the insider trading charges against Cuban. (See earlier post.) Here's the money quote: While O’Hagan did not set the contours of a relation...

Financial Times: Litigation experts have exposed weaknesses in the Securities and Exchange Commission?s insider trading case against billionaire investor Mark Cuban, saying current securities laws are ambiguous about whether he would ...

The SEC Appeals Brief in the Mark Cuban Insider Trading Case

In July 2009, a federal district court threw out an SEC civil insider trading case against Dallas Mavericks CEO Mark Cuban. (Full disclosure: I co-signed an amicus brief in support of Cuban's position.) BNA reports: In a long-anticipat...

SEC v. Mark Cuban

Mark Cuban's insider trading trial is underway at last: The insider-trading lawsuit against Mark Cuban will continue after a federal judge turned down the billionaire Dallas Mavericks owner's attempt to dismiss the government's case a...

Reading the Fifth Circuit Opinion Reinstating the Mark Cuban Case

I've now had a chance to read the Fifth Circuit's opinion in SEC v. Cuban, which reinstated the insider trading charges against Cuban. (See earlier post.) Here's the money quote: While O’Hagan did not set the contours of a relation...

FT and me on the Cuban Case

Financial Times: Litigation experts have exposed weaknesses in the Securities and Exchange Commission?s insider trading case against billionaire investor Mark Cuban, saying current securities laws are ambiguous about whether he would ...

If firms could authorize employees to inside trade, would there still be a role for government regulation? Recommended Reading

My friend and mentor Michael Dooley's casebook on corporate law makes a better treatise than a teaching tool and I recommend that all corporate law professors track down a copy. In it, he mentioned in passing that the real policy problem with insider trading is that it is undisclosed executive compensation. Proving that great minds run in the same circles, Robert Miller has independently reached the same conclusion and authored a very interesting paper:

Accepting Epstein’s argument that firms wishing to allow their employees to insider trade should be permitted to do so, this article shows that there is still a crucial role for government in regulating insider trading. In particular, allowing employees to profit by insider trading is a form of employee compensation that, in contradistinction from conventional forms of equity compensation, results in unknowable and effectively unlimited costs to the company. Since providing employee compensation in this form causes the company to lose control of its compensation expense, even if insider trading were legal, virtually every company would rely on conventional forms of employee compensation and prohibit its employees from insider trading. But, pace Epstein, companies lack the means to detect insider trading by their employees, and even when they do catch employees insider trading, companies can impose only mild contractual sanctions, generally not exceeding disgorgement of profits and dismissal. As a result, although an efficient agreement between a company and its employee would prohibit the employee from insider trading, this prohibition cannot be effectively enforced by the company. Government, with its usual law enforcement powers, is better able to detect insider trading and can impose more severe sanctions on violators, including criminal penalties. Government should thus enforce a ban on insider trading in those instances, which will be virtually all instances, in which a company prohibits its employees from insider trading. The efficient solution is thus a hybrid system of private prohibition and public enforcement. Such a system is not unusual but the norm. Employers prohibit employees from embezzling their money and stealing their property, and employees are subject to contractual sanctions and dismissal for violating these prohibitions, but we still need statutes against theft to generate an optimal level of deterrence. This is all the more true when the employee misappropriates information, which is much harder to detect than a theft of money or property.

Miller, Robert T., Insider Trading and the Public Enforcement of Private Prohibitions: Some Complications in Enforcing Simple Rules for a Complex World (January 12, 2021). Available at SSRN: https://ssrn.com/abstract=3764835 or http://dx.doi.org/10.2139/ssrn.3764835

Guttentag on Chris Collins' Insider Trading

My friend Michael Guttentag just posted this really interesting article:

On June 22, 2017, Representative Christopher Collins called his son from the lawn of the White House to share confidential information about a public company. In tipping off his son, Collins acted despite significant legal risk and a limited payoff.

This article attempts to make sense of Collins’ seemingly inexplicable behavior by turning to the work of criminologists to identify distinctive features of the crime of insider trading. First, James William Coleman’s research on what motivates white-collar criminals suggests that the absence of readily identifiable victims may contribute to the incidence of insider trading. Second, the work of Lawrence Cohen and Marcus Felson on the opportunity structure of crime suggests how the ease with which those in possession of material non-public information can trade facilitates insider trading.

Guttentag, Michael D., "Huh?" Insider Trading: The Chris Collins Story (October 26, 2020). 15 Tenn. J. L. & Pol. 95 (2020), Loyola Law School, Los Angeles Legal Studies Research Paper No. 2020-28, Available at SSRN: https://ssrn.com/abstract=3719551

Anderson on Verstein on Use versus Possession in Insider Trading

John P. Anderson has emerged as a leading voice in the insider trading debate, with an insightful book and a number of important articles. In a recent blog post, he discusses a new article by my friend and colleague Andrew Verstein. He begins by explaining that:

The courts have interpreted Section 10b of the Securities and Exchange Act as prohibiting insiders from trading in their own company’s shares only if they do so “on the basis of” material nonpublic information. This element of scienter for insider trading liability is sometimes tricky for regulators and prosecutors to satisfy because insiders who possess material nonpublic information at the time of their trade will often claim they did not use that information. The insider may claim that her true motives for trading were entirely innocent (e.g., to diversify her portfolio, to pay a large tax bill, or to buy a new house or boat). Such lawful bases for trading can be easy for insiders to manufacture and are often difficult for regulators and prosecutors to disprove.

He then moves on to Verstein’s forthcoming article, Mixed Motives Insider Trading, (Volume 106 of the Iowa Law Review), which "charts a 'third way' to resolve the ongoing use-versus-possession controversy." 

The SSRN abstract to Professor Verstein’s article follows:

If you trade securities on the basis of careful research, then you are a brilliant and shrewd investor. If you trade on the basis of a hot tip from your brother-in-law, an investment banker, then you are a criminal. What if you trade for both reasons?

There is no single answer, thanks to a three-way circuit split. Some courts would forgive you according to your lawful trading motives, some would convict you in keeping with your bad motives, and some would hand the issue to the jury. Sometimes called the “awareness/use” debate or the “possession/use” debate, the proper treatment of mixed motive traders has occupied dozens of law review articles over the last thirty years.

This Article demonstrates that courts and scholars have so far followed the wrong reasons to the wrong answers. Instead, this Article takes trader motives seriously, drawing on insights and solutions from the broader jurisprudence of mixed motive. This analysis generates a new legal test and demonstrates the test’s superiority.

Professor Anderson points out that he has "argued elsewhere that a strict 'use' test best complies with Section 10b’s scienter requirement" but goes on to observe that:

Professor Verstein’s primary-motive test offers a significant improvement over the strict awareness test reflected in both SEC Rule 10b5-1 and the Insider Trading Prohibition Act recently passed by the House of Representatives. For these reasons, Professor Verstein’s proposal warrants serious consideration as regulators and legislators consider paths to reform.

Verstein on "The Problem with Insider Giving"

My friend and UCLA colleague Andrew Verstein has a post up at CLS on whether an insider can be held liable for insider trading when he donates stock to a charity while in possession of inside information.

Recommended.

Brainstorming re Remote Teaching

On the assumption that some or all of my teaching will be done remotely in the fall 2020 semester, I've been thinking about how to do it better. Here's some preliminary thoughts and some questions for further reflection. Feedback from recent or current law students especially welcome. (Note that I sent the bulk of this post by email to the students I taught remotely in Advanced Corporation Law last spring and to the students who I taught in person last fall in Mergers & Acquisitions. I figure the former can tell me what needs improvement from a pedagogic style perspective and the latter can anticipate how to adapt that course to the remote setting. After all, why not go to the proverbial horses' mouth?)

Preliminary Notes

• I teach exclusively using lecture. A comprehensive PowerPoint presentation accompanies each lecture, although the text on the slides is a pretty bare-bones outline.
• My remote learning base is my home office, which is equipped with a Mac with built-in camera and microphone. Any software or hardware must be Mac-compatible.
• I am familiar with using Zoom to share my desktop so that students can see me, the PowerPoint presentation, the Zoom chat room, and perhaps one other open window at a time.
• My students uniformly turn off their video and mute their audio, so I cannot see their faces and can only hear them when they unmute to ask a question.
• I will lay down a set of class rules about issues like muting microphones, raising one’s hand, and so on at the start of the semester with periodic reminders.

Questions

• Attendance during the remote learning in the spring 2020 semester was low; about 50%. While part of that may have been attributable to various pandemic-related factors, it is also possible that some students—knowing the sessions were recorded and posted to the law school intraweb—may have decided to view the lectures asynchronously.
• Is that cause for concern?
• Do I need to do anything to make sure the lectures are accessible for students with hearing or visual difficulties?
• One common suggestion I have seen for enlivening remote learning lectures is to have a second speaker break in for a short presentation.
• Would colleagues be willing to do that?
• Good idea?

Learning Goals

• The lighting in my office is very unsatisfactory.
  • Find someone knowledgeable to assess and recommend lighting, camera, and microphone setups.
• Are there alternatives to Zoom?
• Find out if it is possible to connect an iPad to the Mac to use as a whiteboard.
  • If not, is there a pen-based alternative whiteboard application/technology?
• There is data suggesting that the typical college student’s attention span in class is about ten minutes. I recall seeing data—but cannot now find it—suggesting that the typical attention span of university students in remote learning is about 7 minutes.
  • Note that part of the popularity of TED talks may be the 18 minute limit, which ensures they do not tax the participants’ attention span.
  • Find ways of breaking remote lectures into segments of no more than 10 minutes, with some alternative activity in the breaks.
• I have wanted for some time to include some sort of student feedback during a lecture. (I have planned for years to learn how to use clickers in our classrooms and am ashamed to admit I have let it slide.) Pop ungraded quizzes might be a good way of checking student comprehension and also a segment break activity.
  • Having some sort of feedback is especially important because one cannot see the students’ faces and thus cannot assess their attention level.
  • Learn how to use Zoom’s poll function.
    • Can Zoom’s poll function be incorporated into a PowerPoint presentation?
  • Find out if there are alternatives to Zoom’s poll function that might be a superior way of having students “answer” questions.
  • One possibility I am considering is assigning a few students ahead of each class to each give a 5-minute presentation on a topic relevant to the lecture that day.
• How to deal with students learning asynchronously?
• PowerPoint presentations tend to be static.
  • Find out if there is software available that could be used to create animations (easily) and then embed them in a PowerPoint deck (easily)?
  • If so, learn how to use it.

• In my fall class (Mergers & Acquisitions), there is a great deal of attention paid to looking at specific Word documents (such as merger contracts) and parsing them.
• Is there a better way of showing them than Word or a PDF viewer?
• If so, learn how to use it.
• Some websites recommend building in time pre-class for social chatter and community building.
• Our schedule does not currently contemplate allowing that.

Did Congress trade ahead of COVID-19 news?

Goodell, John W. and Huynh, Toan Luu Duc, Did Congress trade ahead? Considering the reaction of US industries to COVID-19 (May 23, 2020). Finance Research Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3608543

During the ongoing COVID-19 pandemic in the US, there has been considerable media attention regarding several US legislators who traded stocks in late January through February 2020. The concern is that these legislators traded in anticipation of COVID-19 having a major impact on the financial markets, while publicly suggesting otherwise. We consider whether these legislator trades were in a time window and of a nature that would be consistent with trading ahead of the market. Towards this end, we assess the reactions of US industries to sudden COVID-related news announcements, concomitantly with an analysis of levels of investor attention to COVID. Results suggest that, at an industry-level, for legislator trading to be “ahead of the market” it needed to have been done prior to February 26, and involving the 15 industries we identify as having abnormal returns, especially medical and pharmaceutical products (positive); restaurants, hotels, and motels (negative); as well as services and utilities. These criteria are met by many of the legislator trades. Our results help to both parameterize concerns about this case of legislator trading; as well as provide insight into the reactions and expectations of investors toward COVID-19.

Mixed Motive Insider Trading

My friend and forthcoming UCLAW colleague Andrew Verstein has posted a really interesting new paper to SSRN:

If you trade securities on the basis of careful research, then you are a brilliant and shrewd investor. If you trade on the basis of a hot tip from your brother-in-law, an investment banker, then you are a criminal. What if you trade for both reasons?

There is no single answer, thanks to a three-way circuit split. Some courts would forgive you according to your lawful trading motives, some would convict you in keeping with your bad motives, and some would hand the issue to the jury. Sometimes called the “awareness/use” debate or the “possession/use” debate, the proper treatment of mixed motive traders has occupied dozens of law review articles over the last thirty years.

This Article demonstrates that courts and scholars have so far followed the wrong reasons to the wrong answers. Instead, this Article takes trader motives seriously, drawing on insights and solutions from the broader jurisprudence of mixed motive. This analysis generates a new legal test and demonstrates the test’s superiority.

Verstein, Andrew, Mixed Motives Insider Trading (March 21, 2020). Iowa Law Review, Vol. 106, 2020. Available at SSRN: https://ssrn.com/abstract=3558540 or http://dx.doi.org/10.2139/ssrn.3558540

Recommended.

Edwards on Shill on Congressional Securities Trading

The other day I noted Greg Shill's new article on Congressional stock trading. Ben Edwards has now posted a much more detailed assessment of Greg's article.

In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading.  He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives.  This approach should help manage ordinary securities transactions by members of Congress and their staff.  He also advocates for limiting Congressional investing to U.S. index funds and treasuries.  This would reduce the incentive to favor one market participant over another. ...

Of course, we'll still face some implementation challenges.  When and how would we require newly-elected and currently-serving officials to liquidate existing portfolios?  What kinds of exceptions would we make for private-company investments where no ready, liquid market exists?  These implementation challenges strike me as mild compared to the benefits.

I'm not so sanguine about the costs of banning securities trading by members of Congress. But I'm definitely on board with the proposals to adapt Rule 10b5-1 and Section 16(b) to the Congressional context.

Greg Shill on Congressional Insider Trading

I got to know Iowa law professor Greg Shill digitally back when I was on Twitter and met him at AALS20. He's a rising star. I really like his new article on Congressional insider trading, a topic longtime readers will recall I have dabbled in myself. 

Shill, Gregory H., Congressional Securities Trading (April 7, 2020). U Iowa Legal Studies Research Paper No. 2020-11. Available at SSRN: https://ssrn.com/abstract=3570314 or http://dx.doi.org/10.2139/ssrn.3570314

In March 2020, it was revealed that several U.S. Senators had cashed in their stocks after receiving intelligence on COVID-19, sparking both outrage and renewed interest in congressional insider trading. The pandemic trades exposed gaps not only in current law, but in scholarship and leading reform proposals. Congressional securities trading (CST) generates unique challenges, such as the risk of policy distortion, as well as more prosaic ones, like the management of benign trading by insiders. The current framework—which centers fiduciary regulation of theft—is poorly matched to both types. Surprisingly, rules from a related context have been overlooked.

Drawing on SEC regulations that govern public company insiders, this Essay proposes a taxonomy of CST, situates the Senators’ conduct within it, and develops a novel, comprehensive prescription to manage it. Like Members of Congress, corporate insiders such as CEOs engage in securities trading despite possessing valuable inside information. The system designed to manage these trades provides a model. Specifically, Rule 10b5-1 plans (which disclose trades ex ante) and the short-swing profits rule of Section 16(b) (which disgorges illicit profits ex post) should be adapted to the congressional context. Both devices emphasize the management of legitimate trades rather than the punishment of criminal ones (which is already accomplished by other rules).

Rules like these would address policy distortion and unjust self-enrichment by Members of Congress. To reduce those risks further, lawmakers should also be restricted from owning any securities other than U.S. index funds and Treasuries. None of these rules would require new legislation or regulation; all can be adopted by chamber rule. A third risk—the unjust enrichment of third parties—is often conflated with the others, but presents distinct tradeoffs and should be taken up separately. SEC rules provide useful precedent here as well.

I'm on board with the idea of adopting both a Rule 10b5-1 plan system for Congress (tweaked so as to prevent the abuses we've seen in the current version of 10b5-1) and the 16(b) analogy.

I'm not convinced by the proposal to restrict lawmakers from owning any securities other than U.S. index funds and Treasuries. I would hate for Congress to be populated only by career politicians. I'd like to see businessmen and women have a fair shot at it. Should a member of Congress who spent twenty years building a business have to sell it to serve? Should the answer to that question turn on whether the business's legal structure involves securities?

And how about Congressional spouses? Should they be banned from owning a corporation? What if their business is running a huge fund?

With those caveats, however, this is a recommended read. it's short, clear, and thoughtful.