President Obama Signs Law That Could Make Congressmen Guilty of Insider Trading

Recently, President Obama signed the STOCK Act, ensuring that members of Congress who did insider trading would be guilty of a federal crime.

The STOCK Act — or Stop Trading on Congressional Knowledge Act — was designed to prevent members of the House and Senate from profiting from knowledge that came from working on committees that dealt with certain businesses — knowledge that was not available to the general public. Normally, profiting from insider knowledge about a company’s profits, or other financial information, is considered insider trading and is a white collar crime. But it might not shock anyone to know that Congressmen were able to profit without consequences.

Congressmen like Representative Spencer Bachus of Alabama. In 2008, while the economy was crumbling and Congress was readying a $700 billion bailout, Bachus traded on insider information more than three dozen times. Bachus is now chairman of the House Financial Services Committee and claims that he did nothing improper.

That’s because it wasn’t improper then. Not until Congress was embarrassed by an expose on 60 Minutes, which mentioned several names in connection with insider trading. Public outrage ensued, and members of Congress rushed to redeem themselves. The STOCK Act will allow the public to see more of government officials’ financial transactions. The Act requires that any public report of new transactions of more than $1,000 be posted online — either 30 days after the individual was notified of a transaction in his or her account, or 45 days after the transaction. The new law applies not only to Congressmen and their staff, but also to the president, vice president, cabinet members, and 28,000 other senior government officials who already must file public disclosures. The House of Representatives already posts disclosure information over the Internet, but the Senate requires those who seek the data to come to a Senate office.

As icing on the cake, the law also blocks bonuses to Fannie Mae (FNMA) and Freddie Mac (FMCC) executives while each company remains under government conservatorship.

One can only express grim satisfaction that Congressmen and other government officials might actually be held to the same laws that they wrote for everyone else. All the same, it is unlikely that if they are caught insider trading, they will receive the penalty that a regular person would receive for the same offense. It is frustrating, and as any criminal defense attorney knows, it shows that crimes are only crimes when committed by certain people.

The point at which one’s activity becomes a white collar crime isn’t always easy to pinpoint anyway. There are always the obvious crimes, like breaking into people’s computers and stealing financial information, or setting up a scam where people send you money. However, insider trading can be somewhat ambiguous. The Securities Exchange Act of 1934 is meant to prohibit what are called “short swing” profits — profits made by corporate directors, officers, or shareholders owning more than 10% of a firm’s shares from any purchases and sales within any six-month period. Sounds simple, right? But what if your stock holdings are on the very edge of 10%? You might not even be in charge of your stock portfolio, might not know that you own that particular stock. Should you still be in trouble? Some critics have argued that it makes no sense to deny people with the most information about a certain area the opportunity to trade on that information, especially when it is legal in other markets, like real estate. Maybe once Congress is forced to deal with the same ban, these issues might receive greater consideration.