"Send me a bill that bans insider trading by members of Congress
and I will sign it tomorrow," President Obama loudly proclaimed in
his State of the Union on January 24, 2012.
After receiving a rousing applause and many many days later after
that speech - a little over two months to be exact - Obama finally
signed the STOCK Act into law on April 4. (STOCK is an acronym for
"Stop Trading on Congressional Knowledge Act.")
The STOCK Act is supposed to prevent Members of Congress from
trading stocks (NYSEArca: VTI) based on the nonpublic information
they obtain in their dealings with business leaders. But the guts
of the Act left out some major things.
A Day Late and a Dollar Short
Interestingly, the original STOCK bill was first introduced back in
2006, during the Renaissance period, by Rep. Louis Slaughter (D.,
N.Y.). The only reason it was even resurrected from way back then
was because of a CBS 60 Minutes news report that exposed House
speaker John Boehner (R-Ohio) and Rep. Nancy Pelosi (D-Calif.) over
trading in their personal investment accounts.
The investment portfolios of congressmen and senators, according
to academic research, consistently beats stocks indexes like the
Dow (NYSEArca: DIA) and the S&P 500 (NYSEArca: SPY).
"We find strong evidence that Members of the House have some
type of nonpublic information which they use for personal gain,"
found a 2011 report titled "Abnormal Returns from the Common Stock
Investments of Members of the U.S. House of Representatives" by
Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J.
Under the new STOCK Act, Members of Congress, their aides and
many members of the executive branch cannot use inside information
they learn on the job to trade stocks or other securities. The law
requires public disclosure of any trades within 45 days and reports
to be made available online in a database that anyone can
The new STOCK Act law also limits members of Congress and
executive employees to participating only in those initial public
stock offerings that are available to the general public. Why this
rule wasn't already a law is closely being studied by legal
students who are planning to be divorce attorneys.
What's most disturbing about the STOCK Act is not so much what it
contains, but what it omits.
When a hedge fund or an influence peddling individual wants
inside information, they can still buy it - by paying members of
Congress or other high level officials for something called
"political intelligence." This rogue but still legal practice of
gathering information from lawmakers and Hill aides is regularly
used by Wall Street to steer money into profitable investments.
It's nothing more than legalized cheating, because he with the most
money and political influence wins.
CASE STUDY: Former US Treasury Secretary, Henry Paulson sold
political intelligence when he tipped off hedge funds about Fannie
Mae's rescue in 2008 while he was serving as the U.S. Treasury
Secretary. Paulson's hedge funds pals made billions in illicit
profits. That type of unethical conduct is still legal under the
"new and improved" STOCK Act.
Here's another gaping omission: The STOCK Act still allows
elected officials to own stock in industries they can affect with
their political power. For example, a senator that owns an energy
stock (NYSEArca: XLE) can still draft and pass laws that benefit
his investment holdings. Isn't it obvious that allowing this kind
of seedy behavior badly waters down the effectiveness of the STOCK
Weak Execution, Weak Legislation
In summary, don't be hoodwinked by news headlines proclaiming the
STOCK Act will end Congressionalinsider trading. Lying, cheating,
and stealing are still legal and the latest legislation is weaker
than previous versions. Worse yet, it still doesn't stop the sale
of political intelligence.
Maybe the real reason the STOCK Act was even passed, was so that
political leaders can make themselves look good when fall elections
take place. No doubt, they'll be using the STOCK Act promote the
misleading idea they are doing everything in their power to stop
high level corruption.
Ron DeLegge is the Editor of ETFguide.com and Author of "
Gents with No Cents: A Closer Look at Wall Street,
its Customers, Financial Regulators and the Media
." (Half Full Publishing Group, 2011)