Wanna Make Money in the Market? Get Elected First.
I've been quietly working on a book about financial industry compliance. Except when I'm screaming, but other than that, quietly. I had planned to start posting pieces of the book here, and my research into the effect (or lack of effect) of regulatory fines is part and parcel. I have a definite order of publication in mind, and there's one more analysis graphic coming--and it's in color, with up and down arrows, and I am very pleased with myself for figuring out how to do that in Python.
But it will have to wait because the news moves faster than I can.
Anyway, here's that book excerpt.
An Aside About Congress and Insider Trading
A funny aside about insider trading. If you trade on nonpublic information you can pay fines, civil and criminal, and you can go to jail for years. In 2022, Raj Rajaratnam from Galleon got $150 million in fines and 11 years in jail–although he was released to “home confinement” in 2019. Maybe you think that was too harsh, or you agree with Raj that he was the fall guy “for the feds' failure to convict any prominent bankers following the 2008 financial crisis.” I don’t know if you wept when you read his book, Uneven Justice. And we all known Martha Stewart, her patterned wool sweaters, excellent gingerbread houses, and dubious trading on biotech stock.
Martha Stewart with replicas of the nativity scene she made while in jail. You can buy them. I refuse to link to it.
Regardless, the rules I’m talking about are for mortals such as me, and again, I don't know about you, we've established that. But if you work at an investment bank, chances are you are required to preclear any trades before you make them. That is, you can't trade until the bank can verify that you aren't involved with the associated company per the "Personal Account Dealing" policy. Some firms go so far as to simply prohibit any trading of named stocks by employees period. And you have to report all your accounts to the scarily named "Control Room."
While it may be true that most fines don't affect a bank's bottom line (see my other posts), it is true that nobody likes going to jail. You can't get your shirts dry cleaned, there is no view of Central Park from the lunchroom, and you are incarcerated. It's the last one, I think, that motivates people.
However, if you are a maker of the rules, like, um, Congress, then you didn’t have to worry about knowing too much information when you bought and sold. It wasn't until the STOCK act of 2012 that US legislators had to report their trading activity, even if there weren't a lot of limitations on said activity. And even now, years later, there haven’t been anything like the financial and criminal penalties meted out to private individuals given to legislators.
Happen to have bought a lot of stock in the biotech company right before they have, say, an antiviral drug coming out during a pandemic? Well you did report it? No? You forgot to? But did file the paperwork after that mean article in the lamestream media? Well then, $200 fine for you buddy. I mean, that’s totally hypothetical and I am not suggesting anyone Google “Kentucky senator stock act” or just “stock act violation”. You’re in Congress, you’re the definition of ethical. Right?
To be fair, the SEC has brought one case against a Congress member, Chris Christie, and one against a former representative, Stephen Buyer. The settlement for Mr. Christie was:
The three defendants consented to the entry of final judgments that would resolve all claims and permanently enjoin them from violating antifraud provisions of the securities laws. Christopher Collins consented to be permanently barred from acting as an officer or director of any public company. Cameron Collins and Stephen Zarsky agreed to disgorge their avoided losses with prejudgment interest, totaling $634,299 and $159,880, respectively.
Definitions of wrists and slaps may vary, so I leave it to you how severe being barred from being an officer or director of a public company and giving back the money earned through insider trading is.
Just to put all of our minds at ease, Congress is debating stopping all personal stock trading by representatives and senators, and they will continue, I’m sure, debating it. And I don’t even need to Google.
I wrote the previous sentence in July 2022. It is now October 2022, and I read in the NY Times that “House Puts Off Vote to Limit Lawmakers’ Stock Trades, Casting Doubt on Prospects.” So, yep.
Here’s a link to an article entitled: 72 members of Congress have violated a law designed to prevent insider trading.