[Senate Hearing 112-344]
[From the U.S. Government Publishing Office]
S. Hrg. 112-344
INSIDER TRADING AND CONGRESSIONAL ACCOUNTABILITY
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HEARING
BEFORE THE
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
DECEMBER 1, 2011
__________
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri ROB PORTMAN, Ohio
JON TESTER, Montana RAND PAUL, Kentucky
MARK BEGICH, Alaska JERRY MORAN, Kansas
Michael L. Alexander, Staff Director
Troy H. Cribb, Senior Counsel
Jonathan M. Kraden, Counsel
Nicolas A. Rossi, Minority Staff Director
Mark B. LeDuc, Minority General Counsel
Lorinda B. Harris, Minority Counsel
Trina Driessnack Tyrer, Chief Clerk
Patricia R. Hogan, Publications Clerk
Laura W. Kilbride, Hearing Clerk
C O N T E N T S
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Opening statements:
Page
Senator Lieberman............................................ 1
Senator Collins.............................................. 3
Senator Brown................................................ 22
Senator Begich............................................... 25
Senator Tester............................................... 27
Senator McCaskill............................................ 31
Prepared statements:
Senator Lieberman............................................ 39
Senator Collins.............................................. 41
WITNESSES
Thursday, December 1, 2011
Hon. Kirsten E. Gillibrand, a U.S. Senator from the State of New
York........................................................... 4
Hon. Scott P. Brown, a U.S. Senator from the State of
Massachusetts.................................................. 6
Melanie Sloan, Executive Director, Citizens for Responsibility
and Ethics in Washington....................................... 9
Donna M. Nagy, C. Ben Dutton Professor of Law, Indiana University
Maurer School of Law........................................... 11
Donald C. Langevoort, Thomas Aquinas Reynolds Professor of Law,
Georgetown University Law Center............................... 12
John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia
University Law School.......................................... 14
Robert L. Walker, Counsel, Wiley Rein LLP........................ 16
Alphabetical List of Witnesses
Brown, Hon. Scott P.:
Testimony.................................................... 6
Prepared statement........................................... 45
Coffee Jr., John C.:
Testimony.................................................... 14
Prepared statement........................................... 139
Gillibrand, Hon. Kirsten E.:
Testimony.................................................... 4
Prepared statement........................................... 43
Langevoort, Donald C.:
Testimony.................................................... 12
Prepared statement........................................... 126
Nagy, Donna M.:
Testimony.................................................... 11
Prepared statement with an attachment........................ 54
Sloan, Melanie:
Testimony.................................................... 9
Prepared statement........................................... 48
Walker, Robert L.:
Testimony.................................................... 16
Prepared statement........................................... 155
APPENDIX
Robert Khuzami, Director, Division of Enforcement, U.S.
Securities and Exchange Commission, prepared statement......... 164
Bob Edgar, President and Chief Executive Officer, Common Cause,
prepared statement............................................. 172
David Arkush, Director, Public Citizen, prepared statement....... 174
INSIDER TRADING AND CONGRESSIONAL ACCOUNTABILITY
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THURSDAY, DECEMBER 1, 2011
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 2:34 p.m., in
room SD-342, Dirksen Senate Office Building, Hon. Joseph I.
Lieberman, Chairman of the Committee, presiding.
Present: Senators Lieberman, Carper, McCaskill, Tester,
Begich, Collins, Coburn, Brown, and Johnson.
OPENING STATEMENT OF CHAIRMAN LIEBERMAN
Chairman Lieberman. The hearing will come to order. Good
afternoon. A recent book by Peter Schweizer and a story based
on it on ``60 Minutes'' have raised the very serious question
of whether Members of Congress have been using ``insider
information'' to make investments that enable them to make
money they could not have made if they were not Members of
Congress.
The Members of Congress who have been specifically accused
have denied the allegations. Our purpose here this afternoon is
not to determine the guilt or innocence of individual cases.
Our purpose is to determine whether the existing law is
sufficient to prevent and punish congressional insider trading.
Perceptions are very important in public service. That
means that if the law seems to allow Members of Congress to
take advantage of their public position for personal gain, the
trust that needs to exist between the American people and our
government will be further eroded than it already is.
So what is the state of the law governing insider trading
by Members of Congress?
It will surprise most people to learn that there is no
explicit prohibition in our laws against insider trading by
anyone, including Members of Congress. That is to say, the term
``insider trading'' is not mentioned or defined in statute. All
the investigations and prosecutions of insider trading over the
years by the U.S. Securities and Exchange Commission (SEC) or
the Department of Justice (DOJ) have been carried out pursuant
to the broad anti-fraud provisions of the Securities Exchange
Act of 1934, which makes it unlawful, in Section 10(b), to
``use or employ, in connection with the purchase or sale of any
security--any manipulative or deceptive device or contrivance
in contravention of such rules''--this sounds like it was
written not in 1934 but in 1734--``and regulations as the
Commission may prescribe as necessary or appropriate in the
public interest for the protection of investors.''
The specific rules making insider trading illegal are found
in a large body of SEC regulatory activities pursuant to
Section 10(b), that broad anti-fraud statute I just read, and
court decisions interpreting those activities. The rules
against insider trading now clearly encompass not just
corporate ``insiders'' but others who have bought and sold
securities based on material, nonpublic information they
obtained and used in violation of a duty of trust.
Now, I gather that some have said that Congress has
exempted itself from these insider trading rules, but that is
not true. In fact, in a statement submitted to our Committee
for the record for this hearing, Robert Khuzami,\1\ Director of
the Division of Enforcement at the U.S. Securities and Exchange
Commission, makes clear that the Commission has authority to
prosecute such wrongful conduct, declaring that ``trading by
congressional Members or their staffs is not exempt from the
Federal securities laws, including the insider trading
prohibitions.''
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\1\ The prepared statement of Mr. Khuzami appears in the Appendix
on page 164.
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This afternoon, we are going to hear testimony that a
Member of Congress or a congressional staffer who buys or sells
stock based on inside information they obtain as a result of
their job not only violates congressional ethics rules, but
violates the securities laws as well.
On the other hand, we are going to hear testimony that the
law is not as clear as it needs to be and that Congress should
specifically proscribe congressional insider trading.
I am with the second school of thought. In my opinion,
whether or not there is currently clear and conclusive evidence
that Members of Congress or staff members have benefited
financially from insider information and whether or not the SEC
believes it can act against Members of Congress for insider
trading under its existing authority, there ought to be a law
that explicitly deters such unethical, illegal behavior by
Members of Congress and punishes it when it happens.
Our goal today is to sort out the facts and determine
precisely what legal reforms are needed to ensure that
regulators and law enforcers have the tools they need to bring
to justice Members of Congress and our staffs who defy the
public trust by using insider information for personal gain.
Our first witnesses today, who we will call on in a short
while, will be Senator Kirsten Gillibrand of New York and
Senator Scott Brown of Massachusetts, a valued Member of this
Committee, both of whom have taken the lead in the Senate in
introducing legislation to deal with this problem, and that
legislation has been referred to our Committee, which is why we
are convening this hearing today.
The point that we are focused on today is narrow, but it
touches on much broader values and realities. The fact is that
the American people's faith in their elected representatives is
the cornerstone around which our democratic republic was built.
When that faith ebbs, as it now has, to historic lows, we must
increase our efforts to ensure that the people who did us the
honor of sending us to Washington to represent them are
confident that our only business is their business.
I have been reading a lot about George Washington lately,
and as is so often the case, he said something long ago--in
fact, on the first day of our new government--that seems
relevant to our hearing today, ``The foundations of our
national policy will be laid in the pure and immutable
principles of private morality, and the preeminence of free
government [will] be exemplified by all the attributes which
can win the affections of its citizens and command the respect
of the world.''
Adopting a new law that explicitly makes insider trading by
Members of Congress illegal would strengthen the ``foundations
of our national policy,'' in Washington's words, and I hope in
a small way will help to repair the breach that exists today
between our government and our people.
Senator Collins.
OPENING STATEMENT OF SENATOR COLLINS
Senator Collins. Thank you, Mr. Chairman. Unfortunately, I
do not have an eloquent quote to begin my statement to take up
where you left off today, but I do want to thank you for
holding this hearing to examine whether or not current laws are
adequate to prevent Members of Congress from engaging in
insider trading. I very much appreciate your inviting our two
colleagues Senator Brown and Senator Gillibrand to describe the
bills that they have proposed to address this concern. I am a
cosponsor of Senator Brown's bill, which is known as the Stop
Trading on Congressional Knowledge (STOCK) Act, and I look
forward to learning more about Senator Gillibrand's bill today.
This hearing is an important step in our efforts to ensure that
Members of Congress are not profiting from trading on insider
information.
Recent press reports on ``60 Minutes'' and elsewhere
demonstrate why this Committee must explore the application of
existing laws to Congress and identify what actions may need to
be taken to close possible loopholes that undermine the
public's confidence in this institution.
Elected office is a place for public service, not private
gain. As demonstrated by recent press stories, however, there
are questions about whether lawmakers have been exempt--either
legally or practically--from the reach of our laws prohibiting
insider trading.
The recent allegations come at a time when the public's
faith in Congress is already extremely low. A recent Gallup
poll shows that 69 percent of the American public has little or
no confidence in Congress. Other polls show that Americans rate
Members of Congress at or near the bottom of the list when it
comes to perceived honesty and ethical standards.
This erosion of public trust is not confined to Congress,
but taints the public's entire view of our Federal system. Why
does this matter? Well, with so many critical challenges facing
our country, if the American public does not believe that the
decisions that we are making are in their interests rather than
our interests, it will be next to impossible to tackle the
truly significant problems that we face. And we must address
the concerns that underpin the public's skepticism. We need to
assure the American people that we are putting their interests
above our own.
Seven years ago, economist Alan Ziobrowski published a
study that showed that the stock portfolios held by U.S.
Senators in the mid-1990s outperformed the market by nearly 12
percent per year. Mr. Ziobrowski concluded from his data that
Senators have ``a definite informational advantage over other
investors,'' though he also was careful to point out that his
results ``should not be used to infer illegal activity.'' In
his words, ``Current law does not prohibit Senators from
trading stock on the basis of information acquired in the
course of performing their normal senatorial functions.''
A more recent study by the professor showed similar, albeit
less dramatic, investment returns for stock portfolios held by
Members of the House between 1985 and 2001. At the same time,
however, not all experts who have examined these data share the
professor's conclusions or his legal interpretations.
So the purpose of today's hearing is to analyze the need
for greater clarity in the scope of the insider trading laws. I
am eager to hear the views and recommendations of the witnesses
on the legislation presented by our colleagues to close any
loopholes and also to explore whether this is simply a matter
of insufficient enforcement under the existing fraud laws.
Whatever the problem is, one thing is certain. We should
not be shielding Congress from laws that apply to other
Americans.
Thank you, Mr. Chairman.
Chairman Lieberman. Thanks very much, Senator Collins.
Senator Gillibrand and Senator Brown, thanks for your
leadership here. You really seized the moment and, as soon as
this problem became evident, took real leadership. And it is
because you have introduced the bills that we are here. We take
your legislative proposals very seriously, and it is Senator
Collins' intent and mine to move to a markup as soon as we can.
So we welcome you here today.
It is always a difficult question when you have two
Senators who you call on first. We have researched this matter,
and it turns out that Senator Gillibrand, by a small amount,
has more seniority, although it is clear that Senator Brown is
much older. [Laughter.]
Senator Collins. And he is a Member of our Committee.
[Laughter.]
Chairman Lieberman. Touche. Senator Gillibrand, go ahead.
TESTIMONY OF HON. KIRSTEN E. GILLIBRAND,\1\ A U.S. SENATOR FROM
THE STATE OF NEW YORK
Senator Gillibrand. Thank you, Mr. Chairman. I am very
grateful for your leadership. Senator Collins, thank you for
your leadership. I appreciate your holding this extremely
important hearing and inviting me to offer my testimony this
afternoon. Your strong leadership together is a shining example
of how important it is to shine light on an issue as important
as fundamental fairness, and it is a very important step
forward on the path to restoring Americans' faith in our
government, just as you said, Mr. Chairman.
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\1\ The prepared statement of Senator Gillibrand appears in the
Appendix on page 43.
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Like millions of Americans all across the country, I was
very surprised to learn that insider trading by Members of
Congress, their families, or their staff using non-public
information gained through their congressional work is not
clearly and expressly prohibited by law or by the rules of
Congress.
The American people need to know that their elected leaders
play by the exact same rules that they play by. They also
deserve the right to know that their lawmakers' only interest
is in what is best for the country, not what is best for their
own financial interests.
Members of Congress, their families, and their staff should
not be able to gain personal profits from information to which
they have access that everyday middle-class American families
do not. I simply believe that this is not right. Nobody should
be above the rules.
I have introduced a bipartisan bill in the Senate with 15
of our colleagues. Senators Rubio, Snowe, Johanns, Tester,
Stabenow, McCaskill, Klobuchar, Durbin, Blumenthal, Bill
Nelson, Reed, Cardin, Kerry, Sherrod Brown, and Baucus have all
offered this bill to close the loophole.
This STOCK Act legislation is very similar to the
legislation that was first introduced in the House by
Congresswoman Louise Slaughter and Congressman Tim Walz. So I
want to thank them for their longstanding commitment to this
issue and to the advocacy on it. I also want to recognize my
colleague Senator Scott Brown for requesting today's hearing
and for his very strong work on this issue as well.
Our bill, which has received the support of at least seven
good-government groups, covers basic important principles:
First, it says that Members of Congress, their families,
and their staff should be barred from buying or selling
securities on the basis of knowledge gained through their
congressional service or from using that knowledge to tip off
anyone else. The SEC and the U.S. Commodity Futures Trading
Commission must be empowered to investigate these cases. To
provide additional teeth, such acts should also be a violation
of Congress' own rules to make clear that the activity is not
only illegal but inappropriate for Members of Congress.
Members should be required to disclose major transactions
of $1,000 or more within 90 days, providing dramatically
improved oversight and accountability from the current annual
reporting requirements.
Last, individuals doing political intelligence work--
contacting Members of Congress, their staffs, and other
individuals to gain information to help with investment
decisions--should have to register as lobbyists to provide
additional oversight of this industry.
There are those who do not want us to succeed and pass this
common-sense legislation the American people expect. Some
critics will say that the bill is unnecessary or already
covered under current statutes. I have spoken with experts
tasked in the past with investigations of this nature, and they
strongly disagree. We must make it unambiguous that this kind
of behavior is illegal.
Others may say that the legislation is too weak, so let me
be very clear. Our mission here is to pass a strong bill with
teeth in it that will make any and all insider trading clearly
illegal and a violation of our congressional rules for all
Members of Congress, their entire families, and their staff. As
we move forward, there will be technical changes in the
language to improve the bill and to ensure that the final
product meets this goal. Anything less is unacceptable.
As my home State newspaper the Buffalo News recently noted,
``The STOCK Act would ensure that it is the people's business
being attended to.'' This is a step that we must take to begin
to restore America's trust in this very broken Congress.
Thank you again, Senators Lieberman and Collins. I am very
grateful that you held the hearing today.
Chairman Lieberman. Thanks, Senator Gillibrand.
Senator Brown, in fact, as our colleague said, requested
this hearing and asked us to do it as soon as we could, which
is why we are here today.
Senator Brown, it is all yours.
TESTIMONY OF HON. SCOTT P. BROWN,\1\ A U.S. SENATOR FROM THE
STATE OF MASSACHUSETTS
Senator Brown. Thank you, Mr. Chairman and Senator Collins.
Being new here, until the ``60 Minutes'' piece came out, I had
no knowledge that something like this was even allowed. And as
a result of that, I wanted to do something about it to try to
make a difference.
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\1\ The prepared statement of Senator Brown appears in the Appendix
on page 45.
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There was a ``60 Minutes'' piece that featured a segment
about Members of Congress and their alleged insider trading
advantage, which garnered widespread public attention, as you
referenced.
You know, it is interesting. When you even have to hear
about things like this that happen apparently in Washington,
there is clearly something wrong. And you referenced it, Mr.
Chairman. There is a breakdown of trust. We need to re-
establish that connection and let people know that we are
subjected to the same laws and rules that they are. We should
not pass laws and then not have to adhere to them. And the
American people's trust in Congress is at an all-time low, and
that is disturbing.
It is more important than ever to have Members of Congress
affirm that we live by those very same laws that we pass for
everyone else in our country. We should be held to the same
and, quite frankly, I think a higher standard than the members
of the general public and should not be able to profit based on
nonpublic information.
That is why I introduced the STOCK Act of 2011, and I
greatly appreciate your jumping on it. It does not surprise me
at all that both of you would move quickly to address something
that affects our body in such a dramatic way. This obviously
affects Members and employees of Congress as well as the
Executive Branch employees from using nonpublic information
obtained through their public service for the purposes of
investing or otherwise making a personal financial gain.
Consider this: A Member of Congress hears during a meeting
that a program will be cut or something dramatic is going to
happen, and then he either buys or sells his stock to score a
profit or avoid losses when the news breaks. And under current
law, the Congressman would likely walk away with a fatter
investment account. For everyone else, it would mean jail time,
and that is not right.
Some scholars argue that the current law already applies to
Members of Congress, as you referenced in your opening
statement, and that we do not need it, but I disagree. If it is
in effect, then why have they not done something about these
sorts of things? There has not been one prosecution. If the SEC
has all this power, why have they not used it?
The mere existence of this debate is enough to show that we
must clearly define the blanket affirmative duty that we have
as Members of Congress to the American people pertaining to
confidential nonpublic information. Not defining this duty will
leave an absolute gap--and it is clear that it has left a gap--
of uncertainty that invites abuse, intentional or otherwise,
and contributes to a breakdown of trust among the American
people. And that is just not right.
This legislation is directly aimed at correcting this
problem that academics such as Professors Alan Ziobrowski and
Stephen Bainbridge have identified. In his work, Professor
Ziobrowski found that Members of Congress' investments may have
benefited from an informational advantage over members of the
general public. And in his recent book, ``Throw Them All Out,''
author Peter Schweizer, a fellow at the Hoover Institute,
reports that Members of Congress are making a killing in real
estate by approving the use of Federal funds for projects that
will enhance the value of buildings or lands that they actually
own. And that is not right.
As Members of Congress, we all know we have access to
information that the public does not--through classified
briefings, closed conference reports, and personal
conversations with government officials. All of these sources
can give us nonpublic information that we could find of
significant value and trade accordingly. Not only do we have
that access, we create information and policy as well, and we
can influence things that way.
When we act on legislation or negotiate legislative
language, frequently that legislation has real financial
consequences to many different industries in this country. And
because we have that access and we create information, we
absolutely must not betray the public's trust in everything
that we do for our own personal gain.
I believe--and I know you two do, and everybody on this
Committee does--that diminishing public trust is why you called
the hearing today. I suspect we will hear from witnesses today
who say that the existing laws and rules are sufficient--
Senator Gillibrand referenced it; you did, Mr. Chairman--and I
respectfully disagree. I say, ``Like really?'' Then, once
again, why are we here? Why was the piece run? Why has
something not been done? Basic questions. There has been no
successful prosecutions of Members or their staff, and I
believe the uncertainty that exists around the legal framework
provides an excuse for enforcement officials and agencies to
avoid the politically difficult task of policing Congress,
especially when we control the purse strings of many of those
agencies. We must absolutely close this loophole.
I believe that the vast majority of the Members and staff
of Congress are here to serve their constituents' best
interests. They are people of good will, and they are not here
to line their pockets. But by explicitly prohibiting the use of
material nonpublic information for personal gain, we will
vastly increase the transparency that everyone always talks
about here, but sometimes it just does not get done.
The legislation I have introduced is similar to the
bipartisan legislation that has been introduced in the House
for many years now. Back in the 109th Congress, I know that
Congresswoman Slaughter and Chairman Brian Baird actually filed
the STOCK Act, and now Congresswoman Slaughter and Congressman
Walz have continued their effort in this regard, and it is
getting more and more support. So I want to thank them for
their efforts.
The media attention has obviously brought a good eye to
this, and the American people are watching what we do. They
watch more than ever, especially with all the new media
opportunities out there.
I am not afraid of acting in the public's interest, and
that is why I introduced this legislation. It is critically
needed. And there are differences between our two bills. Mine
does not amend the ethics rules. It does not need a 67-vote
threshold. It needs 51 votes. It makes it a lot easier to get
it through. We can do the Senate resolution side by side.
I would suggest and request that you take the best of both
bills, put them together, have us all join together in a
clearly bipartisan, bicameral manner, and get this thing done.
The American people deserve it. We will see if politics will
play a role in it or not. And it is up to us.
So I look forward to sitting in that Committee chair on the
dais and asking some questions. Thank you.
Chairman Lieberman. Thanks very much, Senator Brown, and
thanks for your closing comments about the process. I will note
for the record that Senator Gillibrand was nodding her head
affirmatively, which is that there are some differences between
your two bills, but there are many more similarities. And I
hope that the two of you will be able to work with Senator
Collins and me to come up with a joint bill. We may want to
separate them. As you said, we will probably want to have a
separate resolution on the Senate rules so that it will be
separate from the legislative proposal. I am going to set a
standard that may be hard to meet, but if we work intensely, it
would be great if we could bring this before a markup of the
full Committee in December before we break for the holidays. We
tentatively have scheduled a markup for December 14, so let us
set that as the goal and, informed by the second panel, see if
we can put this together.
Thank you both very much.
Senator Gillibrand. Thank you, Mr. Chairman.
Chairman Lieberman. We will now call the second panel:
Melanie Sloan, Executive Director of Citizens for
Responsibility and Ethics in Washington; Donna M. Nagy,
Professor of Law at Indiana University Maurer School of Law;
Donald G. Langevoort, Professor of Law at Georgetown University
Law Center; John Coffee, Professor of Law at Columbia Law
School. I am having flashbacks to those terrible days at law
school. But, remember, here I am the one who asks the
questions. [Laughter.]
It was not that way in law school.
And, finally, Robert Walker, Counsel at Wiley Rein and
former Chief Counsel and Staff Director of both the Senate and
House Ethics Committees.
Thanks to all of you for being here on relatively short
notice. You bring in various ways a wealth of experience and
information.
Ms. Sloan, we will begin with you. Your organization has
one of the best acronyms in Washington--CREW, Citizens for
Responsibility and Ethics in Washington. I know you have worked
together with a number of other public interest groups that
advocate legislation to deal with this insider trading problem.
Please proceed.
TESTIMONY OF MELANIE SLOAN,\1\ EXECUTIVE DIRECTOR, CITIZENS FOR
RESPONSIBILITY AND ETHICS IN WASHINGTON
Ms. Sloan. Chairman Lieberman, Senator Collins, and other
Members of the Committee, thank you for inviting me here today
to join such a distinguished panel.
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\1\ The prepared statement of Ms. Sloan appears in the Appendix on
page 48.
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No disrespect to any of you intended personally, but the
fact is America does not trust you. A full 46 percent of
Americans believe Congress is corrupt. Stories like the one on
``60 Minutes'' a few weeks ago become such big news because
they confirm what so many people already believe: That many of
your colleagues use their positions not for the public good but
to feather their own nests.
My organization, CREW, has focused on misconduct of Members
of Congress for many years. We have seen and complained of
numerous legislators abusing their positions to earmark
projects to increase the value of their personal real estate
holdings, buying into companies that soon thereafter surged in
value, urging agencies to take actions to financially benefit
themselves or family members, pushing through legislation in
apparent exchange for campaign contributions, and, finally,
even trading on inside information.
As others have said, at no time in history has the public's
view of Congress been quite so dismal. The jobless rate is sky
high, and a wide swath of the country is suffering severe
economic hardship, but Members of Congress have never been
richer. Sixty-six percent of Senators and 41 percent of House
Members are millionaires. Members have significant stock
portfolios, but only some maintain their assets in blind
trusts. Whether or not it is accurate, there is a widespread
public perception that Members of Congress are abusing their
positions to enhance their personal wealth.
Members are also willing to accept benefits, like generous
pensions and health care coverage, that most Americans only
dream about, while at the same time Congress exempts itself
from laws like those governing whistleblower protections,
workplace safety, and perhaps insider trading that are applied
to everybody else.
Notably, presidential appointees requiring Senate
confirmation often have been required by the Senate to divest
themselves of interests in companies they will oversee as part
of the Executive Branch. But Senators are under no such
restrictions. For example, the Washington Post found between
2004 and 2009, 19 of the 28 Senators on the Armed Services
Committee held assets in companies that did business with the
Pentagon. The Senate has refused to require Senators to file
campaign finance reports electronically, all the better to stop
the media and watchdogs from comparing campaign contributions
with legislative actions. And Congress, particularly the House
counsel's office, has been advancing a very aggressive
interpretation of the Speech or Debate Clause that allows
Members who have engaged in serious crimes like bribery to go
unpunished.
Congress frequently refuses to enforce even its own limited
ethics rules, failing to police the conduct of Members except
when it is so egregious it becomes fodder for sensational,
wall-to-wall, 24-hour news coverage.
I am not an expert on securities law, so I will leave it to
all these other esteemed panelists who are leaders in this
field to discuss whether and to what extent insider trading
laws already on the books apply to you. But given that there
has been no prosecution of a Member of Congress for insider
trading and only one Member of the House way back in 1976 has
ever been disciplined for any even remotely related conduct, it
is imperative that Congress pass a STOCK Act soon. Members of
Congress need to demonstrate to America that you take our
concerns about your ethics seriously.
Undoubtedly, there are cases in which the Speech or Debate
Clause of the Constitution might prevent a prosecution such as
where a Member traded on confidential information received
pursuant to a committee inquiry. As a result, not only should
the STOCK Act provide a role for the SEC and the Department of
Justice in addressing such conduct, but the House and Senate
should also amend their standing rules to make clear that such
conduct is prohibited and subject to specific disciplinary
action, perhaps including a financial penalty of three times
the amount of a profit obtained or a loss avoided.
Disclosures of trades also must be a key component of any
legislation. The 90 days permitted under the bills that we have
seen is far too long and should be cut back dramatically. After
all, electronic confirmations of trades are often
instantaneous, making such significant time delays unnecessary.
Members of Congress should post information about trades in
an electronic searchable database. Further, as with personal
financial disclosure reports, the willful failure to disclose
such information should be punishable under the False
Statements Act.
The bottom line is that Americans are becoming increasingly
frustrated with a Congress viewed as part of the 1 percent and
more concerned with preserving that status than in working to
improve the standard of living of the remaining 99 percent.
Passing a STOCK Act would be a good first step toward changing
that image.
Thank you.
Chairman Lieberman. Thank you, Ms. Sloan. And now Professor
Nagy from Indiana University Maurer School of Law.
TESTIMONY OF DONNA M. NAGY,\1\ C. BEN DUTTON PROFESSOR OF LAW,
INDIANA UNIVERSITY MAURER SCHOOL OF LAW
Ms. Nagy. Chairman Lieberman, Senator Collins, and Members
of the Committee, I am honored with the invitation to testify.
My name is Donna Nagy, and I am the C. Ben Dutton Professor of
Law at Indiana University Maurer School of Law. In my 17 years
as a professor, I have co-authored a treatise on insider
trading, and I have written many articles, including one
published last May, on the precise topic of today's hearing.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Nagy with an attachment appears
in the Appendix on page 54.
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The articles sought to debunk what at the time was becoming
an urban myth: That Congress had exempted itself or was somehow
immune from the existing law that prohibits insider trading.
Congress in no way has sought to immunize or exempt itself.
Beyond that, the article concludes that congressional insider
trading is already illegal under existing law.
Based on my research, I would expect a court to hold a
Member of Congress liable for any securities trading that is
based on material nonpublic information obtained through
congressional service if the SEC or DOJ successfully proved the
facts alleged. I acknowledge, however, that many distinguished
securities law scholars see shades of gray, and some believe a
court would rule likely the other way.
The controversy surrounding the application of existing law
to Congress stems from the fact that Congress has never enacted
a securities statute that explicitly prohibits anyone from
insider trading. A STOCK Act would only address one
manifestation of this much larger malady.
In the absence of an express statutory prohibition, the
offense of insider trading has been prosecuted as a violation
of Section 10(b) of the Exchange Act and Rule 10b-5. These
provisions prohibit fraud ``in connection with the purchase or
sale of any security.'' The Department of Justice also
prosecutes insider trading as a criminal violation of either
Rule 10b-5 or the Federal mail and wire fraud statutes. Thus,
in the vast majority of instances, insider trading is illegal
only insofar as it can be deemed an act of fraud.
Because the term ``fraud'' is not defined in these
statutes, the formidable task of determining illegal insider
trading has defaulted to the Supreme Court and lower Federal
courts. And in literally hundreds of cases, courts have imposed
liability where the traders were decidedly not insiders of the
issuer whose securities were traded.
For example, courts routinely impose liability in so-called
outsider trading cases involving family members who trade on
information entrusted to them by spouses or relatives.
Other outsider cases would include Federal and State
officials who trade on information obtained through government
service, including a Food and Drug Administration chemist who
pled guilty last month and now awaits a likely prison sentence.
In misappropriation cases such as these, as in all insider
trading cases, the liability linchpin is a securities trader
who has breached a fiduciary-like duty of trust and confidence
by secretly profiting from the use of material nonpublic
information that rightfully belongs to somebody else.
The Constitution refers repeatedly to public offices being
``of trust.'' Members also take an oath of office to faithfully
discharge their duties. So there should be little doubt that
Members' undisclosed, self-serving use of congressional
knowledge constitutes a misappropriation that would defraud the
United States and the general public, among others.
For a court to conclude otherwise, it essentially would
have to view nonpublic congressional knowledge as a perk of
office belonging to an individual Member to do with as he or
she wished. Such a view would be strikingly inconsistent with
the tenets of representative democracy.
I recognize that a Member of Congress has never been
prosecuted for insider trading based on nonpublic congressional
knowledge. But the DOJ has used the Federal mail and wire fraud
statutes to successfully prosecute congressional officials for
defrauding the United States and the public through the
undisclosed misappropriation of congressional funds and
tangible property. And the Supreme Court has dictated that
material nonpublic information constitutes intangible property.
In sum, congressional insider trading violates the broad
anti-fraud provisions in Rule 10b-5 and the mail and wire
statutes.
My final point relates to one possible consequence of a
STOCK Act. I applaud and endorse the motivation behind the
proposed legislation, but I am concerned that in the absence of
a modification to its wording, a STOCK Act could be viewed as
the only insider trading law that applies to Congress. This
risk is troubling because the proposed legislation fails to
reach a host of possible insider trading scenarios that would
almost certainly fall within existing law.
Thank you very much for giving me this opportunity to share
my thoughts.
Chairman Lieberman. Thanks very much, Professor. That was
very helpful, and we will come back with some questions.
Next, Professor Donald Langevoort, Professor of Law at
Georgetown University Law Center. Thanks very much for being
here.
TESTIMONY OF DONALD C. LANGEVOORT,\1\ THOMAS AQUINAS REYNOLDS
PROFESSOR OF LAW, GEORGETOWN UNIVERSITY LAW CENTER
Mr. Langevoort. Thank you, Chairman Lieberman, Senator
Collins, and Members of the Committee. My testimony today
strongly supports legislative efforts to explicitly proscribe
insider trading by Members of Congress and their staffs, as
intended by the various STOCK Act bills recently introduced in
the House and Senate.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Langevoort appears in the
Appendix on page 126.
---------------------------------------------------------------------------
There is no current exemption from the main thrust of U.S.
insider trading law for either Members or staff, and many forms
of trading or tipping by such persons are adequately proscribed
under existing legal authority. Indeed, as Professor Nagy has
just told you, it is possible that courts would rule that
current insider trading law adequately proscribes all abusive
trading in securities on Capitol Hill. I hope they would. But
there is sufficient doubt, especially in light of how courts
recently have been reading Section 10(b) and Rule 10b-5.
The primary weapon against insider trading cases like
this--the misappropriation theory--requires a showing that the
trader was in a fiduciary-like relationship to the true owner
of the information and deceptively stole information entrusted
to them. As applied to legislative activities on Capitol Hill,
this theft of someone else's secrets concept does not fit
neatly.
Yet the idea that Members of Congress or their staffs can
freely step ahead of ordinary investors to profit from
information acquired as a result of their legislative roles is
disturbing, to say the least. Congress should, therefore, act
to eliminate any doubt and state clearly that both trading and
tipping apply to Members and staff.
An insider trading case against a Member or even a powerful
staff person will always be a matter of great political
sensitivity, likely to be brought only to the extent that the
case factually and legally is very strong. The external
pressures to bring such cases, or not bring them, will
inevitably be great when any suspicions arise. Leaving any
ambiguity as to the question of whether, and to what extent,
insider trading on Capitol Hill is unlawful is hardly an
encouragement to those matters that deserve to be courageously
investigated and pursued.
It would be extremely unfortunate were the SEC or
prosecutors to bring an action and have the Member or staff
person raise the defense, which they surely would, that service
in Congress carries with it no fiduciary-like duty with respect
to government confidences. That would be the last headline
Congress should want to see.
While I fully support the intent behind the STOCK Act
bills, the legislative language must be carefully crafted to
assure that legislation does not create the very problem it
seeks to address: The perception that Congress has exempted
itself from insider trading law. If read as an exclusive
statement of Congress' insider trading restrictions, it is at
times too narrow, at times overbroad.
I am more than happy to work with the Committee and its
staff to resolve these problems, which I do not believe at all
reflects the true intent of the drafters. Thank you.
Chairman Lieberman. Thank you, Professor. Let me
immediately accept your offer of assistance.
We have a purpose, I think, most of us on the Committee,
but this is a field of law with a lot of precedent and a lot of
complications. So in trying to fix this problem, we do not want
to create other problems or create other appearances, as you
said. So I look forward to the question-and-answer period.
Next, John C. Coffee Jr., is a Professor of Law at Columbia
Law School. We have quite a distinguished panel here. Thank you
for being here.
TESTIMONY OF JOHN C. COFFEE JR.,\1\ ADOLF A. BERLE PROFESSOR OF
LAW, COLUMBIA UNIVERSITY LAW SCHOOL
Mr. Coffee. Thank you, Chairman Lieberman, Senator Collins,
and other Members of the Committee. I am delighted to be here
because I agree almost completely with my predecessor,
Professor Langevoort. I am going to edit out much of what I was
going to say in support of what he was saying and make just
four points.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Coffee appears in the Appendix on
page 139.
---------------------------------------------------------------------------
Point one, I believe Congress should act, but narrowly, and
I want to underline the words ``but narrowly.'' While
reasonable people and reasonable professors can disagree--and
reasonable professors almost always do disagree--I think there
are clearly enough ambiguities in this field that you need
legislative action.
Senator Brown asked this point earlier: Why has there not
been enforcement? I think even very responsible U.S. Attorneys
would not prosecute criminally, would not indict, if there is
any uncertainty in the law. You do not indict in a case where
the law is 50/50, so that is a reason they may have restrained
their hands in cases where they could have gone forward. So
that is point one, that there is ambiguity, and I think you
should act, and Professor Langevoort already said that.
Point two, which he alluded to, but I want to say it a
little bit more fully, the proposed legislation has language
that does not quite work. I want to say this respectfully, but
one of the key concepts in both the proposed bills is that the
information that you receive has to relate to pending or
proposed legislation before there is liability. Unfortunately,
that is not the most common case that we are likely to see. I
can imagine a Department of Defense official calling a
congressman and saying, ``You know that bill you have been
pushing us for 2 years to pass to give that defense contract to
that contractor in your district? That defense contract will be
announced tomorrow for $5 billion.'' There is no legislation
there. There is nothing that under the existing language would
make that criminal. Frankly, congressmen spend much of their
time exercising oversight, and that oversight function does not
fall within the pending or proposed legislation. That is flaw
one.
Flaw two, there is a reference that you cannot trade in
securities of an issuer. Well, frankly, the most likely trading
that you are likely to see would be in options or futures or
stock index products, which are not securities of an issuer.
They are issued by financial dealers in the market. They are
not particular companies you are buying into. You have to play
with that language.
I think there is a difference in the two bills with regard
to whether tipping--as opposed to yourself receiving
information--by the congressman is covered. I think that should
be reconciled.
There are several places where you need to talk a little
bit about directly or indirectly because there could be a chain
of four or five people, and there could be a distance between
the congressman and the tippee. I think you want to cover those
situations. These are all small points that I will not go
further into.
Let me go to my third point. Doing less is more. Rather
than attempting to write a detailed code that would codify
terms that have well-recognized judicial meanings, like
``material'' and ``nonpublic,'' it might be better to write a
very simple one-sentence statute. For example, such a one-
sentence statute could say, ``A Member of Congress is a
fiduciary with respect to all material nonpublic information
that such person acquires in the performance of such person's
duties or that such person receives because of his or her
status as a Member of Congress.''
That one sentence does it, and it does not require you to
define terms like ``material'' or ``nonpublic.'' You would just
say that in interpreting this statute, the courts should use
the existing meaning under the Federal securities laws of these
terms.
If you attempt to do more, ambitious as it is, and have a
universal legislative statute, Congress has tried that before
and it has proven to be a disaster. I testified in this field
30 years ago, in the 1970s and 1980s, and Congress wisely
backed off from writing a universal statute and just changed
the penalties and insider trading sanctions. I think that is
wiser because if you adopt legislation with new terms, the
Federal courts will spend 10 to 15 years resolving what those
new terms mean. There will be conflicts in the circuit. None of
us needs that confusion.
Also, if you try to adopt comprehensive legislation, I am
afraid that every special interest group in the United States
will want a safe harbor for what they do, and you will find
that the statute will go from short to page after page of
proposed safe harbors. You do not need to do any of that to
deal with the real problem that concerns you, which is Members
of Congress. So I think you should keep it short and simple.
Last point: Members of Congress will face some illiquidity
if such a statute is adopted. That is a necessary cost. But I
want to advise you that I do not think the problem of
illiquidity is as great as you might think. There are some
special rules that the SEC already has, most notably Rule 10b5-
1, that permits anyone, including Members of Congress, to adopt
what is called a Rule 10b5-1 trading plan. This is different
than a blind trust. You can give very detailed instructions to
a fiduciary, a broker or a bank, advising the broker or bank
exactly what you want done if stock prices fall, if different
things happen. I think that would solve most of these problems.
In addition, you could even instruct the SEC to give no-action
letters to you. And, finally, I think that you can rely on the
advice of counsel that if you get an opinion from a lawyer with
experience in the securities laws that you are not engaged in
using material nonpublic information, I believe that no
enforcer will proceed against you where you have a reliable
defense-of-counsel defense. Thank you.
Chairman Lieberman. Well, thank you. Again, very helpful.
We are not accustomed to drafting legislation as brief as you
suggest, but it is a very constructive recommendation.
Robert Walker, as I mentioned at the outset, comes to us
with the unusual and very helpful experience of having been
Chief Counsel and Staff Director of both the Senate and House
Ethics Committees. Thanks for being here.
TESTIMONY OF ROBERT L. WALKER,\1\ COUNSEL, WILEY REIN LLP
Mr. Walker. Thank you, Chairman Lieberman, and thank you,
Senator Collins and Members of the Committee. Thanks for the
opportunity to address the important issue of insider trading
and congressional accountability.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Walker appears in the Appendix on
page 155.
---------------------------------------------------------------------------
I am not here to advocate against or for any version of the
STOCK Act. I will say, however, that in my view current Federal
insider trading prohibitions do apply fully to Members and
employees of Congress under the misappropriation theory. And I
will also say in my view as a former Federal prosecutor, the
law is more than 50/50 on that.
There are substantial proof problems in making out an
insider trading case in the congressional context, however; in
particular, proof that information traded upon was truly
nonpublic may be an obstacle, probably would be an obstacle,
given the continual swirl of information in and around the
Capitol.
There is also a unique complicating factor to prosecuting
insider trading cases, at least some insider trading cases, in
the congressional context. As already alluded to, under the
Speech or Debate Clause of the Constitution, certain
congressional actions and activities cannot be cited or used as
proof in legal actions against Members brought outside of
Congress. But even the most sweeping conceivable legislation
against congressional insider trading could not trump
constitutional speech or debate privilege.
Within Congress itself, existing standards of conduct do
capture and do provide the basis for sanctioning a
congressional individual for profiting from securities trades
based on material nonpublic information gained through his or
her official position. Most directly, paragraph 8 of the Code
of Ethics for Government Service states that a person in
Federal Government service should ``never use any information
coming to him confidentially in the performance of governmental
duties as a means for making private profit.''
Insider trading based on confidential congressional
information would be a clear violation of this provision, and
the mechanism for enforcement would be the congressional ethics
process. Having said this, it cannot be said as clearly exactly
what information would be considered confidential within
Congress for purposes of enforcement of this code provision.
Under the rules of the House and Senate, there is no
blanket duty of confidentiality on the part of Members and
staff. Senate rules, for example, basically leave it to each
committee and office to determine what information before them
is confidential. But relatively few committees of the Senate or
of the House actually have specific rules imposing duties of
confidentiality on their Members and staffs. So paragraph 8 of
the Code of Ethics does not provide a systematic tool for
addressing allegations of congressional insider trading. Use of
this provision for pursuing insider trading allegations within
Congress requires a case-by-case analysis.
The current focus on insider trading in Congress does
provide the opportunity for the Senate and the House and each
of the committees to take a hard look at their rules with
respect to the definition, scope, and duties relating to
confidential information.
Apart from paragraph 8 of the Code of Ethics, allegations
of insider trading in Congress may be addressed under the fail-
safe standard of conduct, which enjoins Members and staff never
to engage in conduct that may reflect discredit on the House or
Senate. If credible allegations of securities trading by a
Member or employee based on material nonpublic information were
to come before the Senate Ethics Committee, the House Ethics
Committee, or the House Office of Congressional Ethics, and
these allegations were more than mere insinuation, the
allegations would be pursued by the Ethics Committee as
potentially conduct reflecting discredit on the institution,
and they would be so pursued and investigated, regardless of
whether any other specific law or rule were applicable.
Finally, let me turn to the issue of whether Members of
Congress may trade in or hold securities of companies or
industries that fall within the jurisdiction of their committee
assignments. As you know, recusal and divestment are viewed in
Congress as extraordinary and disfavored remedies to potential
conflicts of interest. The preferred approach to monitoring and
policing potential conflicts in the Legislative Branch is
through public financial disclosure. The provisions of the
proposed STOCK Acts that would require public disclosure of
securities transactions within 90 days are consistent with and
would extend this approach. There would, of course, be a
compliance burden on Members and staff, but there would also be
a substantial increase in the accessible pool of information
based upon which a Member's constituents could form their own
ultimately conclusive and unappealable judgments as to the
appropriateness of the Member's financial transactions and as
to the propriety overall of the Member's conduct. Thank you.
Chairman Lieberman. Thank you, Mr. Walker.
We will go forward with questioning now, and we will have
7-minute rounds for each Senator.
Based on the research that I did before I came into the
hearing today, I reached a tentative conclusion, informed by
the SEC testimony filed with the Committee today, that under
existing law the SEC would have the authority to pursue and
prosecute Members of Congress or staff for insider trading.
Based on the testimony that the witnesses have given, I
think now I come to a different kind of conclusion, which is
that there is genuine ambiguity in the law. My original feeling
was that we should legislate to make clear that Members of
Congress are included within laws against insider trading
because, obviously, as we have said earlier, insider trading is
not mentioned or defined in the existing state of the law. You
have to take a two- or three-step jump to get there.
But now you convinced me that there is ambiguity that has
to be resolved, and if I am hearing you correctly, particularly
Professor Langevoort and Professor Coffee, it goes particularly
to this question of fiduciary duty. And as I understand it, as
you mentioned, Professor Nagy, the Supreme Court really has set
the law here because it has required the interpretation on up,
a person can be found to have committed insider trading if the
person trades on the basis of material nonpublic information,
but only if the person is breaching a fiduciary duty, which, as
I understand it, normally is to shareholders or the source of
the nonpublic information.
So the normal reaction--but the normal reaction does not
necessarily prevail in courts of law, in other words, there is
a separate vocabulary--would be, ``Well of course, Members of
Congress have a fiduciary duty.'' We have a duty to our
constituents and to the law. But your testimony leads me to now
feel that is ambiguous because Members of Congress and our
staffs are in such a different relationship to this nonpublic
material information.
So I want to ask Professors Langevoort and Coffee, and
Professor Nagy, too, to weigh in on the nature of the duty that
must be established. Is it a fiduciary duty? If so, how do we
define it? Or is it a broader duty of trust and confidence,
which is the kind of language that we normally would use or
that we think we have. Professor Langevoort, please go first.
Mr. Langevoort. The courts are still working out the answer
to that question. The Supreme Court established the
misappropriation theory in the context of a case involving a
partner in a law firm who misappropriated information belonging
to the law firm and the firm's client. That is a quintessential
fiduciary relationship. A firm has a clear-cut right to sue a
partner for breach of fiduciary duties, such as duties of
loyalty and care.
As you move away from settings in which there is an
employer, a boss, a principal who would be able to file a
breach of fiduciary duty action against the person in question,
the ability to make the argument that the misappropriation
theory clearly applies grows weaker.
As I said, I would hope that a court would make that leap,
but I am not confident.
Chairman Lieberman. Yes. Professor Coffee.
Mr. Coffee. Let me just add a word on that same line. In an
en banc decision of the Second Circuit--and ``en banc'' means
every judge on that circuit participated--they ruled that
husbands and wives are not fiduciaries to each other. That will
really surprise you. What more sensitive relationship is there
than husband and wife? But they were not fiduciaries because
the Second Circuit ruled that to be a fiduciary, there has to
be a relationship with discretionary authority on one side and
dependency on the other, and the more it was equal, it was not
a relationship that was fiduciary in character.
Now, the SEC partially overruled that with respect to
husbands and wives, but that definition that a fiduciary
relationship only exists when there is discretionary authority
on one side and dependency on the other is a very high standard
that neither Professor Langevoort nor I want to see applied. No
one wants to see it applied. But that is why there is this
ambiguity, and we think that because there is ambiguity, there
is no downside in passing this legislation and considerable
upside.
Chairman Lieberman. Right. So if I remember your one-
sentence proposal, it dealt exclusively with this question. Am
I right?
Mr. Coffee. Simply, you are a fiduciary with information
you receive in the course of your work or your status in
Congress. The advantage of that is only that if you start
defining in legislation what ``material'' and ``nonpublic''
means, there are going to be efforts by defense counsel to say
that is different and it was not satisfied in this case.
Chairman Lieberman. Yes. So it would not be enough, for
instance, if we avoided the issue of fiduciary duty altogether,
for whatever reason, and simply declared in law that Members of
Congress may not trade on the basis of material nonpublic
information, which they obtained only because they were Members
of Congress?
Mr. Coffee. You could possibly do it that way, but what you
just said would not cover the tipping problem. You want to
cover both the tipper and the tippee who is a Member of
Congress.
Chairman Lieberman. Professor Nagy, do you want to get into
this?
Ms. Nagy. Yes, I do. Thank you, Mr. Chairman.
With respect to the Chestman decision that Professor Coffee
just mentioned, the Securities and Exchange Commission has made
perfectly clear its view that the Second Circuit unduly
narrowed what the Supreme Court had set out in its Chiarella,
Dirks, and O'Hagan decisions as the requisite relationship of
trust and confidence. And in direct response to the Chestman
decision, the Securities and Exchange Commission promulgated
Rule 10(b)5-2. Professor Coffee mentioned one aspect of that
rule: It creates a rebuttable presumption that family members--
parents, children, siblings, and spouses--owe duties of trust
and confidence to each other. But the rule has two other
provisions, and one references ``histories, patterns, and
practices of exchanging confidences'' that create the requisite
duty of trust and confidence.
One other point: If courts routinely were applying the now-
discredited Chestman analysis to the insider trading
prosecutions brought by the Securities and Exchange Commission
or the Department of Justice, we would see far fewer government
victories and far fewer settlements. There have been outsider
cases including one involving a nonmartial relationship where
one partner misappropriated information from the other.
Although clearly not a spousal relationship, the result was a
criminal sentence for the boyfriend who had misappropriated
from his attorney girlfriend.
Certainly the Chestman standard--a very high standard for a
fiduciary relationship--would not have supported a criminal
sentence in that case. According to the SEC, a relationship of
trust and confidence is what triggers the requisite disclosure
duty.
I would ask you to imagine a situation where a district
court is faced with this a case involving a Senator or
Representative. If a district court were to conclude that a
Member of Congress does not owe a duty of trust and confidence
to the United States and to the American people, I would be
mightily surprised. We could all anticipate what the headlines
the next morning would be on that ruling. To avoid all that, a
district judge would likely find the requisite duty of trust
and confidence under existing law.
Chairman Lieberman. Very interesting. Obviously this is
important because we want to get this done, but we are not, if
I can use a metaphor from a different area of activity,
painting on a blank canvas. There is a lot on the canvas in
existing law and Supreme Court rulings.
The other conclusion I have, Senator Collins, is more
personal. I have actually understood what the three law
professors have said today, which says to me that I am more
prepared to go to law school now than I was when I went.
[Laughter.]
Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Professor Coffee, you made a very important point that
Members of Congress do more than just legislate. We act as
advocates for our constituents. We endorse public funding for
them through grants or contracts. We seek expert advice on
public policy in order to reach the right decisions. I am
thinking of how many of us during the financial crisis in the
fall of 2008 reached out to financial experts for advice.
So I think this is a more complicated issue than it first
appears to make sure that when we do act, we are not having a
chilling impact on the responsibilities of Members of Congress
to their constituents.
So with that preface in mind, let me suggest a completely
different way of looking at this issue, and you actually
started to touch on it in your testimony, Professor Coffee.
Instead of trying to put into law a ban that works to prevent
what we would all think was improper and should-be-illegal
behavior, what if we said that Members of Congress cannot trade
in individual stocks themselves but must either limit their
investments to mutual funds or do as you suggest and adopt a
mechanism approved by the SEC to allow trading pursuant to a
written plan that gives detailed instructions to a person
overseeing the investments, but the Member does not make the
trades, or set up a blind trust if they have enough assets to
have blind trusts? What if we got at it from that perspective?
What would be your opinion of that? I am going to ask the whole
panel this question.
Mr. Coffee. Well, I think that kind of Rule 10b-5 plan is a
means of protection. I think many Congressmen would find it an
imposition if they were told that they had to use blind trusts
or Rule 10b-5 plans, even when they had no information at all.
They might in some cases do this as a matter of pure
precaution, but I think they would find it an unnecessary bit
of overbroad regulation to say you cannot trade at all because
you are a Congressman.
I think if you recognize that you are going to regularly
come in contact with material information, you would be well
advised to use a Rule 10b-5 plan, but the reason you are using
it really is that it might be criminal if you traded in your
own name based on your own decisions. So I think these two
things fit together. You have the prohibition, and then you
have safe harbors. The safe harbor would be a Rule 10b-5 plan
or an opinion of counsel, which I think can often be obtained
in many situations quite quickly. So I think you need both of
them together.
Senator Collins. Does anyone disagree with the professor or
want to add anything to that issue? Professor Langevoort.
Mr. Langevoort. Let me add something besides the reference
to Rule 10b5-1. You mentioned at the outset of your question
the possibility of moving Members of Congress away from single
stocks to other forms of financial instruments. That is very
difficult because we have discovered that insider trading is
possible with respect to nearly every form of financial
instrument, including mutual funds, of which we are aware.
With respect to Rule 10b5-1, it is important to know that
is simply a rule--and Congress would have to face up to this if
it were to go that route--that says as long as you execute
those instructions at a time when you did not possess material
nonpublic information, then the fact that the trade was
executed after you came into possession of such information
does not make you liable. It simply moves the time where we are
looking at what did the person know, when did they know it, and
that does not make all that many hard issues go away.
Senator Collins. Professor Nagy, I would like your comment,
but I want to get to a different issue for you, so if you could
answer that quickly so that I have time for a second issue for
you.
Ms. Nagy. I think blind trusts might well be an effective
response to much of the difficulty here. I will leave it at
that.
Senator Collins. Mr. Walker.
Mr. Walker. You are right, Senator Collins. Blind trusts
are really a mechanism basically only for people who have
substantial assets because there are administrative costs, and
they are not blind as to what you put into them initially. They
are only blind really if you put in cash or after a period of
time if the assets have been sold down to a particular level,
you are notified that you do not have those anymore. But they
are really not blind as to what you put into them.
And as to limiting investment opportunities for Members and
staff, I would be concerned that you would be perhaps making it
harder to attract the best and the brightest or really even the
pretty good and the fairly smart into government service.
[Laughter.]
Senator Collins. Well, I will try not to be offended by
that as a person with no assets and who could never qualify for
a blind trust.
Mr. Walker. I do not mean the blind trust aspect. I mean
limiting stock trades.
Senator Collins. No. I understand.
Professor Nagy, you testified that you feel confident that
congressional insider trading is already illegal under existing
law. Even if you are correct, is there an advantage to Congress
making it crystal clear by passing such a law? I mean, I
realize we have to be careful how we draft it.
Ms. Nagy. One potential disadvantage, though I concede this
could be cured by careful drafting, is that by legislating
directly, some courts could infer a congressional intent that
the STOCK Act is the only insider trading law that applies to
Members of Congress. As Professor Langevoort testified, that
can be cured by a simple statement that the STOCK Act builds on
top of existing law. Rule 10b-5 and the Federal mail and wire
fraud statutes would be there then as the floor, and the STOCK
Act would come on top. So I think that potential risk could be
eliminated, and I would be happy to help in that effort.
There is, though, another risk that I think we should think
through relating to public perception. As I mentioned, the
controversy surrounding the application of the Federal
securities laws to Members of Congress stems from the fact that
Congress has never enacted an express statutory prohibition of
insider trading for anybody. And so everybody now must navigate
through what has often been described as ``a maze'' of court
decisions.
The boyfriend has to decide whether he can trade on
information or whether he would be breaching a duty of trust
and confidence owed to his girlfriend. Sometimes that analysis
is hopelessly confusing. If an express statutory prohibition
applies to Congress and Federal employees, when all the dust
settles from all of this, everyday, ordinary people might well
begin saying, ``Why do they get an express prohibition and we
have to suffer through the maze of what it means to defraud in
connection with the purchase or sale of securities?'' I think
that is a troubling risk that might not be all that apparent
now.
Senator Collins. A valid point, and in the next round or
for the record, a question that I want you to be thinking of is
whether we should have a law, if we are going to venture into
this area, that applies explicitly to the Executive Branch
officials as well since, frankly, I think a Treasury Secretary
has access to far more confidential nonpublic information than
any Member of Congress.
Chairman Lieberman. Thanks, Senator Collins.
In order of appearance, we will go to Senator Brown,
Senator Begich, and then Senator Tester. Senator Brown.
OPENING STATEMENT OF SENATOR BROWN
Senator Brown. Thank you, Mr. Chairman.
I appreciate all the examples about boyfriends,
girlfriends, and relationships. We are not talking about that.
We are talking very specifically about Members of Congress. If
I am in a top-secret meeting and I find that we are going to
drop a weapons system and by doing that the company stock is
going to go down dramatically, and I walk outside and I pick up
the phone and I say, ``Hey, sell XYZ Company's stock,'' that is
what we are talking about. We are not talking about all the
classroom examples that you are using. We are talking very
specifically about real-time, real-world situations that have
been brought to our attention.
I went to law school, too, and it reminds me of a law
school class. And, quite frankly, I want to start to do
something because you indicated that the courts still have not
decided what to do. Well, if not now, when? I mean, that is why
we are here. That is why the Chairman and the Ranking Member
asked for this very important hearing.
I want to go to Ms. Sloan first since you have been kind of
left out of all the fun. If you are looking at this type of
situation, would you think it would be a good idea in our
ethics disclosures to just be more specific in maybe a more
periodic update as to the stocks we own, the stocks we trade,
when we bought them, when we sold them, and the exact amount of
monies we purchased and sold them for? That way, anybody who is
in the media or the government agencies looking at it will say,
oh, well, Senator So-and-so is on the Armed Services Committee,
and he or she bought X amount of military arms stock when he or
she found out that the contract was going to be terminated.
That is, I think, certainly the initial information that would
be used to establish that prima facie case potentially on
saying that there is an issue we need to look into. Do you
think that is a good suggestion?
Ms. Sloan. I do think that disclosure is a great way to go
because I think there would be a lot of repercussions if you
have quick disclosure. Again, I think 90 days is far too long,
but I think there are people who will be looking at these kinds
of trades very frequently, especially if they are searchable on
an electronic database.
I do want to point out that in the example that you gave
where you learned something in a committee and you immediately
went out and made a call, that is exactly the kind of conduct
that the Speech or Debate Clause would make very difficult to
prosecute because it is something that you learned in a
legislative committee. So no grand jury and no prosecutor would
be able to use that information that you had obtained in a
committee either to obtain an indictment or at trial. So it is
a tricky situation.
Senator Brown. That is why we are here. I mean, the bottom
line is I think the fiduciary responsibility is to the American
people. I mean, that is the relationship that we have.
Professor Langevoort, the Supreme Court has articulated a
severely restrained approach to applying the insider trading
laws, saying it is within Congress' power, not the courts, to
expand Rule 10b-5, as I think you have touched upon. If we
choose to do nothing today or in the very near future, would
Congress be sending a pretty strong message to the Supreme
Court that we do not want to clearly articulate the rule to
hold Members of Congress liable for trading on this material
nonpublic information?
Mr. Langevoort. You are absolutely right, Senator. The
Supreme Court in a number of cases, admitted largely involving
private securities litigation, has said repeatedly it is
Congress' job to push on the statute, to expand it--not the
Court's job--in the absence of clarity. That is the language
that worries me the most in terms of a court coming out the
other way.
I think you can accomplish a lot by that explicit
statement.
Senator Brown. Thank you.
Ms. Sloan, back to you. As you are aware, no Members of
Congress have been successfully prosecuted for insider trading.
Would strengthening the Senate ethics rules be a sufficient
deterrent? And would this reform help rebuild the confidence
that Members are, in fact, held to the same standard and face
the same consequences as everyone else?
Ms. Sloan. No. I think people have very little confidence
in the Ethics Committees in the House and Senate. They have
done a pretty lousy job over the past years. They very rarely
hold Members' feet to the fire except in particularly egregious
cases that have received a lot of press attention. CREW has
filed many complaints for which we have not even received
responses 3 years later. So that is not a solution. I think you
need a dual solution: Going to the Ethics Committee if the
Speech or Debate Clause is going to kill your prosecution, but
also having a very clear prohibition and ability of prosecutors
to go after you.
Senator Brown. Professor Coffee, in its written testimony,
the SEC indicates that it has all the tools it needs, but yet
we have never seen any prosecution, as we referenced, of any
Members of Congress or staff for insider trading. And given
that the SEC recently lost a string of insider trading cases,
as you state in your written testimony, why would the SEC not
want a legal standard that creates without a doubt a crystal
clear framework for the SEC to prosecute Members and staff who
trade on material nonpublic information?
Mr. Coffee. They should want that, and I think both
Professor Langevoort and I are clearly saying, we agree with
you, that Congress should legislate. We are just talking about
little tweaks in what the language should be.
Senator Brown. Mr. Walker, if the existing Senate ethics
rules provide a framework, as I think maybe you have indicated,
for prosecuting Members who trade on material nonpublic
information, why have we not seen any prosecutions then?
Mr. Walker. Well, first of all, I do want to say that there
is the Ziobrowski study that suggests that this practice of
insider trading is somehow endemic in Congress. There is the
Eggers and Hainmueller study that I think says otherwise and
says that, in fact, Members' portfolios perform below the
market, and particularly when you look at the average Member's
portfolio, they do not exceed the market, and they do not meet
market performance. And so I think the question of why have
there not been prosecutions is based on the premise that
somehow this is happening everywhere.
Another aspect of the answer is that the Ethics Committees
do not have an audit function. They do not go from office to
office to investigate what people are doing that has not
otherwise been reported either to them either through a
complaint or through the media. And so it is not a matter of
complaints and allegations coming before the committees that
they are not paying attention to. It just is not that.
Senator Brown. Thank you. I have one more question for
Professor Langevoort and Professor Coffee. Some scholars have
suggested that clearly defining a duty for Members of Congress
would be an easy solution that could be done through a Senate
resolution. Do you agree with that?
Mr. Coffee. I think that passing a statute along the lines
you have suggested, with possible tweaks in the language, would
be an effective solution.
Senator Brown. A Senate resolution?
Mr. Coffee. Oh, no. I meant legislation. I misunderstood
you.
Senator Brown. No. Just a Senate resolution.
Mr. Coffee. That is like a motherhood salute. I do not
think it accomplishes that much.
Senator Brown. I agree. Thank you.
Mr. Langevoort. It takes you one step forward, but only one
small step.
Senator Brown. Well, listen, I appreciate all of your
testimony.
Mr. Chairman, I appreciate you and Senator Collins for
bringing this forward, and I and my staff will make ourselves
available to meet that deadline of December 14.
Chairman Lieberman. Thanks, Senator Brown. Thanks very much
for your work, and we look forward to working with you to move
this quickly.
Senator Begich.
OPENING STATEMENT OF SENATOR BEGICH
Senator Begich. Thank you very much, Mr. Chairman and
Senator Collins, for having this hearing.
I remember when I was on the Anchorage Assembly, we had to
write the ethics code, and at the end of the day, I really came
to the conclusion that you are ethical or you are not. You can
provide all the rules you want, but if you are going to cheat,
you are going to cheat. And so keeping that in mind, one of the
views that I have is disclosure, disclosure, disclosure.
For example, you can go on my Web site and find every
single disclosure form I have ever filled out since 1988 in any
office, any public facility that I have participated in.
Mr. Coffee, I know it is hard for us to do simple things
around here, but actually sometimes simpler is better. And I
like your approach, and so I am going to ask some questions and
get some comments from people. In the Senate, if I ask a
constituent of mine in Alaska to get a copy of my disclosure
form, thank God I have it online because they would have to
come to Washington, DC, or have someone here come down to the
clerk's office and get a copy of it, copy it, and then get it
to them in Alaska.
Neither one of these bills requires an electronic
searchable database. I agree with you that you can file these
things very quickly, and I have done trades, that is all public
disclosure, and that is why I disclose it. So I want your
comment on either both of these bills or any legislation.
Should it be required that any trade, any action be
electronically available to anyone at any time via the Internet
and searchable? I will just go down the list here. Then I have
a different question for you, Mr. Coffee and Mr. Walker.
Mr. Walker. Well, in this day and age, other than perhaps a
shortage of resources in the Office of Public Records that
would be needed to manage it, it is not clear to me why there
would not be and should not be online availability.
Senator Begich. It actually costs us more to do what is
going on now by hand processing when people send in their
forms. Some of these people around here who are very wealthy--I
am not one of them--have big, thick disclosure forms.
Mr. Walker. The fact of the matter is that there are
nonprofit and outside groups that have put them online already,
so the question is: Why should the Senate not put them online?
Senator Begich. Correct. So you are a yes?
Mr. Walker. Yes.
Mr. Coffee. I am definitely a yes, and what you have just
proposed is on page 14 of my testimony.
Senator Begich. That is right.
Mr. Coffee. That it should go on a Web site so a journalist
could immediately find this----
Senator Begich. Or a constituent.
Mr. Coffee. Constituents, too, but journalists would be----
Senator Begich. Because they are the best enforcers.
Mr. Coffee. Well, I think journalists are effective, too.
Senator Begich. I have seen a lot of people lose offices
because of ethical issues, but you are right, journalists add
to it.
Mr. Langevoort. Agreed, and if you are a high-ranking
executive of a public corporation, today you have 48 hours
electronically to file your trades.
Senator Begich. That is right, which we require them to do.
Mr. Langevoort. Exactly. That is right. And that
immediately becomes accessible.
Senator Begich. You are making my point.
Ms. Nagy. I am a yes as well.
Ms. Sloan. Yes, I agree.
Senator Begich. That was a soft ball question, but the
reason I asked this is because we--when I say ``we,'' I mean
collectively here--are so resistant to this for some reason. So
I am looking to the two Members here who are going to do the
markup with the other Members sitting here, this is going to be
an insistent theme on my part, and I will actually ask for an
expansion not only of these forms but our disclosure forms
because they have the annual reports of stock trades. And if
someone wanted to search through that now, you cannot. It is
the most ridiculous system I have ever seen.
So, Mr. Chairman and Senator Collins, I am just putting
that on the record here that if we do not do that, we will pass
another law that will go off somewhere, and we will fill out
forms that will be handwritten and sent in, and then the good-
government groups, a constituent who is mad at you, and your
opposition will be the searchable database people. So I
appreciate that.
Second, to Mr. Coffee, I like your idea about a one-liner,
so I am going to turn to the rest of the four to ask them to
comment on your idea. I am not an attorney. I did not go to law
school. So no disrespect to all the folks here, but simple is
better. The more detail, the more out clauses people have, in
my view. I will not say what my brother says about the bigger
the bill, the more times you will get--I will fill in the blank
later. That is a little concern.
So let me ask what people think of Mr. Coffee's idea.
Mr. Walker. Well, if the idea you are talking about is a
one-liner that says Members of Congress are fiduciaries with
respect to information they learn in committees----
Mr. Coffee. Not committees. Anyplace.
Senator Begich. Anyplace.
Mr. Walker. Anyplace. I think you need to be careful, and
you need to think about the potential consequences to what you
do as Senators beyond financial transactions.
For example, the Privacy Act does not apply to the
Congress, and you are, therefore, able to do certain things
with information that you receive from constituents and others
that may not be consonant with the Privacy Act at any rate. So
you have more freedom to use information than the Executive
Branch. If you create a blanket fiduciary obligation with
respect to congressional information, I think you do want to be
concerned about how it could affect your representative
functions and your oversight function and your function of
communicating with others beyond the financial transaction
area.
Senator Begich. Fair enough.
Mr. Langevoort. I have not seen Professor Coffee's precise
language. I think I could do it in two sentences. But apropos
of what was just said, I think it has to relate specifically to
what insider trading is, which is profiting from----
Senator Begich. Information.
Mr. Langevoort [continuing]. The existence of that
information, without talking about all the other fiduciary
possibilities that could be associated with that information.
Senator Begich. That is good. I see Mr. Walker kind of
nodding but not yet acknowledged, but good.
Ms. Nagy. I would support one sentence. [Laughter.]
Senator Begich. It is amazing how lawyers get down to one
and two sentences. I am very excited right now.
Ms. Nagy. I wholeheartedly agree that simple is better, and
I would encourage avoiding the ``fiduciary'' concept altogether
such that the sentence would be: ``For purposes of Rule 10b-5's
misappropriation theory, a duty of trust and confidence exists
whenever a person is a Member of Congress or a congressional
employee and has learned that information through government
service.''
Congress could possibly authorize the Securities and
Exchange Commission to add that subsection to existing Rule
10b5-2.
Senator Begich. To existing rules, that is right.
Ms. Nagy. Rule 10b5-2 now sets out three nonexclusive
situations in which a trader is presumed to be in a
relationship of trust and confidence with the source of the
information. There is the family member prong; the ``history,
pattern, or practice'' prong; and the ``has promised to
maintain information in confidence'' prong. If Congress were to
authorize the Securities and Exchange Commission to add a
fourth sub-section, that would appropriately clarify existing
law. But going back to my point to Senator Collins, it would
also apply the same law to everybody else. I think that is a
very important principle that should come out of any
legislative action Congress takes in this matter.
Ms. Sloan. I have to defer to the law professors on the
material about insider trading, but I would caution you that
would not really solve your problem of the Speech or Debate
Clause, which would not allow prosecution in an awful lot of
these cases, so I still would go back to--as much as I do not
love the Ethics Committees, sometimes they are really the only
option left.
Senator Begich. Very good. Thank you, Mr. Chairman and
Senator Collins, for having this hearing. I am a big supporter
of the concepts of this legislation. Again, disclosure to me is
really critical, but also ease of use and accessibility are how
we create more enforcement because the public and media become
the enforcers in a lot of ways, so thank you very much.
Chairman Lieberman. Thank you, Senator Begich. Senator
Tester.
OPENING STATEMENT OF SENATOR TESTER
Senator Tester. Yes, thank you, Mr. Chairman. I assume,
Senator Begich, you are on my bill to make sure that campaign
disclosures are filed electronically?
Senator Begich. I believe I am, and if I am not, I will be,
I will tell you that.
Senator Tester. That sounds good.
Senator Begich. I like it.
Senator Tester. That is good.
I, first of all, want to welcome all the panel members. I
appreciate your perceptions and your comments. I can tell you
that I am not as good as the Chairman. I did not understand
everything you said. But that is OK.
Chairman Lieberman. I was not under oath. [Laughter.]
Senator Tester. That is good. And it is ironic because
about 3 or 4 hours ago, Mr. Coffee was in front of the Banking
Committee, and if it was not you, it was your brother because
you look a lot alike. And so this is a day of your testimony,
and we appreciate all your testimony today.
You know, what I did hear, as people talked about the STOCK
Act, is that we need to be careful because there are
potentially some unintended consequences whatever we do. And
those unintended consequences may be something that really
limit our ability to legislate and create policy and do the
things that we need to do as Senators or House Members.
So I want to approach it from a way similar to what was
talked about earlier here today, and that is, from a
transparency standpoint, if we did things like make financial
disclosures transparent, if we did things like make our
schedules transparent and online in searchable databases--all
this stuff has to be done that way--if we required ethics
audits of Senate and House offices. And then I got to thinking
maybe there are some unintended consequences there.
Can you think of anything that we do that should not be
transparent? I believe in transparency. I believe in sunlight.
I think that we should do the maximum to let everybody know
what we are doing, which cleanses all the problems. I believe
the forefathers were right when they said we need to have a
citizen legislature.
Is there any area that you can think of where transparency
might be inappropriate? We will start with you, Ms. Sloan.
Ms. Sloan. No, I cannot see anywhere where transparency
would be inappropriate. I think more transparency is required,
and I also think the Ethics Committee needs to have the ability
to audit Members routinely. They get all these financial
disclosure forms, but all they do is make sure that they are
filled out. There is no auditing to compare them with perhaps a
tax return to see if they are, in fact, jibing together. And if
we saw more of that, I think we might find some problems.
I know that there was a situation in the House Ethics
Committee, for example, where a Member had filled out a
financial disclosure form in one way and a tax return indicated
a far different scenario, and that Member resigned rather than
face the consequences of that situation.
Senator Tester. Ms. Nagy.
Ms. Nagy. I cannot think of a downside to transparency that
would be specific enough to articulate at this time, so I would
say I am in favor of transparency.
Senator Tester. Mr. Langevoort.
Mr. Langevoort. I agree also. If somebody is bent on acting
unethically, they are going to violate the disclosure rules as
well as the substantive rules.
Senator Tester. Fair point.
Mr. Langevoort. Insider trading often takes the form not of
transacting securities in your own account because it really is
so transparent already, but establishing a friendship in a
foreign country with a foreign bank account, laundering money,
laundering ideas----
Senator Tester. But if that was ever found out about one of
us, we would be noodled.
Mr. Langevoort. I have seen clever enough insider trading
schemes that very successfully avoid detection for a long
period of time. All I am saying--I am trying to be responsive
to your question--is if you try to expand transparency not
simply to trades but to the communication of information to
others, which is the route by which profit often comes, you
will run into difficulties with respect to the work you do on
the Hill.
Senator Tester. Fair point. Thanks.
Mr. Coffee. I think that some law professors smarter than
me probably can think of some problem with transparency. The
way to deal with that is to give the SEC exemptive authority.
You could say, ``We have this obligation, and if we find out
there are problems, the SEC is given exemptive rulemaking
authority to carve out safe harbors and exemptions.''
Senator Tester. Super. Mr. Walker.
Mr. Walker. Well, I want to put it on record that I am not
smarter than Professor Coffee, but I do see some concerns with
across-the-board transparency in everything that the Senate and
Congress does, if that is what you are asking.
Senator Tester. That is what I am asking.
Mr. Walker. I mean, certainly there would be many executive
closed sessions that could not be transparent. There would be
many deliberations of Committee Members behind the scenes that
probably ought not to be transparent.
I think there is even less room today for negotiation and
for tradeoffs between Members of different parties than there
has been in the past, and there would be perhaps even less room
if everything were transparent and if everything were
televised.
As far as an audit function for the Ethics Committee, I
think it is a good idea in principle, but obviously it would
require a vast increase in resources for the Ethics Committee,
and whether or not in these days of tight budgets that would be
possible is a real question.
And, also, I would be concerned if all congressional
communications with whomever were to be transparent, I do think
there would be some serious chilling effects.
Senator Tester. Fair point by all.
I do not think either one of these bills deals with
personal real estate, which you brought up, Ms. Sloan, where a
person would increase the value of their own personal real
estate by advocating for policies that would help them in that,
regardless of what that would be.
It seems to me that is much easier to track down than
insider trading. Is that a fair statement? I do not deal with
insider trading so I have very little knowledge of it. I wish I
had enough money to even buy stock, but I do not, but go ahead.
Ms. Nagy. Senator, one possible variation on that example
would be insider trading in real estate: Taking material
nonpublic information and using it in a real property purchase
as opposed to a securities purchase.
Senator Tester. Or purchasing property and enhancing it
with policies that you pass, whether it is----
Ms. Nagy. That is different--although that would be a
conflict of interest problem. But it is not the same problem as
using material nonpublic information that one learns in
government service to actually purchase physical real estate.
The use of information for a real estate purchase could be
prosecuted under the Federal mail and wire fraud statutes much
like insider trading in securities. There is precedent where a
government official, actually a Chicago politician, used
material nonpublic information that he came upon in connection
with his alderman service, and he was prosecuted under the
Federal mail and wire fraud statutes by the Department of
Justice.
Senator Tester. And he used that information to buy land?
Ms. Nagy. To buy, I believe, an interest in an apartment
building that was going to receive a tax abatement.
Senator Tester. What about if you owned land and you
advocated for an appropriation to build a highway over it or
something along those lines that would add value to that
property?
Ms. Nagy. Well, and one could imagine a similar situation
on the securities side where one takes a favorable legislative
action to a company whose stock you own. And so, again, that
could be a conflict of interest problem.
Senator Tester. But this bill would not cover that.
Ms. Nagy. Not that I see.
Senator Tester. Very good. Thank you, Mr. Chairman.
Chairman Lieberman. Do you have more questions?
Senator Tester. Well, I have some more questions, but I
think I hammered out what I needed to hammer out.
I appreciate the panelists' perspectives and
thoughtfulness, and as we look forward--if I might just say
something, Mr. Chairman.
Chairman Lieberman. Please.
Senator Tester. I think that it is very difficult to take a
look at ourselves and say, ``You know what? People think we are
crooked,'' when you do not think you are doing anything wrong
and there is no intent, whether that is dealing with a policy
with the farm program and talking to one of your neighbors
about what you are working on, which may actually impact the
price of wheat or futures, or something like that.
On the other side of the coin, I think that it is
critically important that we operate in a way that is totally
clean--and if there is any way we can do that, we should make
those policies, quite honestly, mandatory. And transparency is
important, and I get your point, Mr. Walker. I do get your
point. But as far as the forms we fill out, they ought to all
be online, they ought to be in searchable databases. Our
schedules ought to be online. We should be letting people know
everything that they should reasonably know online in a way
that they can access, not just online but all searchable.
So I think that we need to be aware of this. What do we
have--an 8- or 9-percent rating? That is probably due to much
more than this, but I do not think this helps a lick. And, by
the way, if somebody in the Senate or somebody in the House
does something crooked, it reflects on everybody, whether they
are honest or not. And that is just the way it is.
So I think we need to address it, but we need to address it
in a common-sense way that really gets to the problem and does
not create more problems than it fixes.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you very much, Senator Tester.
Senator McCaskill, welcome.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you. I apologize. I have been
presiding over the Senate, so I have not been able to be here.
I think it is pretty important that we clarify that this
law applies to Congress. I know that there is one of those good
old-fashioned legal arguments that is great for hypotheticals
in a law school classroom, but for purposes of clarifying to
the public, regardless of what the SEC says, I think it would
be very helpful for us to pass this legislation to make it
crystal clear that the rules that apply in companies and to
CEOs apply just as much to Members of Congress in terms of
their ability to have and use information not available to the
public. And you all may have covered this, and if you have, do
not answer the question because I can move on to another one.
Have you all characterized why you think it might be a
challenge to prosecute these cases in Congress? Has that been
covered?
Ms. Sloan. Senator, I think I talked a fair amount about
the problems with the Speech or Debate Clause that will lead to
some prosecutions being difficult, which is why I think in
addition to Federal law you also need to make it clear that the
Ethics Committee has enforcement over that, too.
Mr. Walker. And I think we addressed certain other
practical problems as well in enforcement in the congressional
context.
Senator McCaskill. Well, as a former prosecutor, it seems
to me that one of the things that makes it easier to prosecute
these cases in Congress is that it is much clearer what is a
public record and what is not. I think it is more murky in
private companies what is in the public domain and what is not.
Here we have hearings and the record is available to the
public. We pass laws and the dates they are passed are
available to the public, and then it is publicly available.
There is a great deal of information that prosecutors could
easily see whether or not this is something that someone who
looked into it could find with some great deal of ease, or
whether it would be more difficult.
Would anybody disagree that these cases might be easier to
prosecute because it is very hard to have inside information in
Congress. I mean, this place is pretty open in terms of what
gets out to the public. But even in a formal context, a great
deal of our work is publicly done.
Mr. Walker. I would not disagree, Senator McCaskill, but I
do think because so much is open in Congress that the issue of
something being material nonpublic information would be an
obstacle to overcome. And if that were alleged in any given
case, I think you would find some pretty rigorous defenses and
attempts to proof and probably successful proof that ultimately
the information in question was public.
Senator McCaskill. Right. I have five things that I have
been told we need to do better in the legislation, and probably
some of them have been mentioned, but I want to determine if
there are disagreements on any of them. First, we need to
expand the covered information because we need to also talk
about regulatory action, grants----
Mr. Coffee. Contracts.
Senator McCaskill. Earmarks, contracts obviously. Second,
shorten the time frame of disclosure, clearly that is
important. I think 90 days is obviously way too long, and we do
have a measure of transparency now that allowed some of the
things to be written even though a lot of the things that were
written were inaccurate. Certainly the fact that purchases were
made and so forth was available to the public because of the
rules we currently have. Third, expand the types of securities
that are covered; fourth, explicitly state that the Members owe
a duty; and finally, specifically lay out in the legislation
that Members cannot give insider tips.
Well, those are the five things that I think we need to put
in the legislation, and I think we have a significant amount of
problems out there with the public right now. I think, Mr.
Chairman, the more quickly we can pass this legislation and
demonstrate to the public that none of us has gone into this
line of work because he thought he was going to receive a great
deal of money for it. I am not arguing that there may have been
some people who have used their positions inappropriately.
Certainly there have been people who have gone to jail in
Congress, but I think all of us want to make sure that the
public knows that we are not using this position in any way to
gain personally from it. And the more we can do to reassure
them in that regard, the better. And I think we need to write
this legislation in a way that does that.
The last thing I would ask is about earmarks. Earmarks are
a tricky area. We have a current moratorium on earmarks, and I
am cosponsoring legislation for a permanent moratorium on
earmarks. But I think that knowing that a Member would have the
ability singlehandedly to put public money in a project
certainly could lead to the kind of information that would
allow someone to benefit from that knowledge since in a pure
earmark, there is nobody that has any say as to whether it is
good, bad, or indifferent, other than that individual member.
Have any of you discussed how earmarks might also lend
themselves to this kind of activity that the public would
obviously disapprove of?
Mr. Coffee. I do not think we have discussed it, but I
think, as I understand what you are saying, it would be a kind
of material nonpublic information. If you know that you are
going to earmark resources for a particular project and it is
going to benefit particular companies and you buy that stock,
that falls easily within the category of misusing material
nonpublic information.
Senator McCaskill. There have been thousands of earmarks
done for research and development into certain types of
technology, and a great deal of that technology has worked
itself into the marketplace. So I think that is one area that
we need to make sure that we cover because that is the essence
of insider information, since somebody singlehandedly can
provide the resources to a company to make that research and
development a reality.
Ms. Nagy. I would certainly agree with respect to earmarks.
As you listed the five fixes, I would encourage you to think of
a sixth or add a sixth to the list: A clear statement that the
legislation builds on the floor of existing law, so that it
would not be read to displace Rule 10b-5 of the Federal
securities laws and the mail and wire fraud statutes in
connection with securities trading by government employees,
congressional officials, and Members of Congress.
Senator McCaskill. Because at the root of all this, these
are good old-fashioned fraud cases, right?
Ms. Nagy. Exactly.
Senator McCaskill. Right. I think that would be important
because we do not want to start a whole new book of precedent.
Not that we do not want all the lawyers to stay busy, but----
Mr. Coffee. In that light, it is rather important that you
not try to redefine established terms like ``material'' or
``nonpublic.''
Senator McCaskill. Right.
Mr. Coffee. They are redefined in this legislation, and
that would raise questions about whether for Congress it is a
different kind of information than it is in ordinary cases. So
if you say you are adopting the existing case law with respect
to all of the terms that go into the prosecution and you have
done that before, I think that gives greater certainty to the
courts.
Senator McCaskill. I think that is a great idea, and I will
share that with the other cosponsors of the legislation because
I think there are three or four of us who are working on this,
and we will look for your input as we get it drafted and try to
improve it and make it as strong as possible. We appreciate all
of you being here today and helping us with this. We want to do
this right.
Thank you, Mr. Chairman.
Chairman Lieberman. Thank you, Senator McCaskill. I
mentioned before you could be here that ideally we will get
something drafted for which we can get a majority of the
Committee before we depart in December.
I have a couple more questions. I think we have gone over
pretty well, and very helpfully to the Committee, what we
should do in response to this problem in making clear in law
unambiguously, if I may say so, that Members of Congress and
our staffs are covered by insider trading laws.
There are two other responses that are possible here. One
deals with Senate ethics. I want to come back to that in a
minute. But first I want to talk about disclosure, which you
have also talked about, and this is more in the way of
prevention, or of course, it may accelerate discovery of a
problem.
So I wanted to start with you, Ms. Sloan. Ideally, how
would you alter the requirements in the Ethics in Government
Act for disclosure? Senator Begich focused on electronic
filing, and I think that is a very good idea. You talked a
little bit about requiring that we file more than once a year,
presumably after transactions, so I wanted to invite you to
spend a little more time on how you would ideally have us
change the Ethics in Government Act with regard to filing.
Ms. Sloan. Well, the personal financial disclosure forms
have very broad ranges of assets.
Chairman Lieberman. Right.
Ms. Sloan. And I think that they could be narrowed
substantially. You would not actually have to, if you did not
want to, change the Ethics in Government Act, which would,
therefore, change the form for everybody. You could do that by
House and Senate rules, if you chose to, so you would not have
to go through that.
Chairman Lieberman. Right.
Ms. Sloan. But the ranges are so wide that it is often
impossible to tell what a person's assets really are and how
much income they have had from those assets. In addition to
that, I understand that they are burdensome, but they are filed
once a year, and they are filed even then 6 months after the
previous year ended. So they are pretty far down the line.
Those forms, too, are not in a form that are searchable. I
spoke with a reporter, for example, who wanted to see if
Members had any specific asset, and you cannot search them for
that kind of thing. And in this day and age, with the
technology that is available, there is really no reason that
these forms are not put on the Web quickly and in searchable
form so that the information is easily accessible, so that if
there is wrongdoing, it can be ferreted out quickly, and often
just the court of public opinion will be helpful here.
Chairman Lieberman. I agree. So one alternative here, I
presume--and let me ask you to respond to it--is that in
addition to having us file the whole form more than once a
year, there could be some requirement to file amendments after
stock trades of a certain amount. Is that a possibility?
Ms. Sloan. I think you should probably have something
separate for stocks so that you do that form once a year, but
file something about the stocks. And I would say rather than
this 90-day period that is included right now, I would get it
down to something like 10 days because, again, I do not think
it needs to be so burdensome. Since this information comes in
an electronic form as it is, there could easily be set up a
database so that somebody only had to hit a button to transfer
it into this bigger database that the Senate, for example,
could maintain of all such information. So it does not really
need to be burdensome once it is set up. And then also, as I
said, I would make clear that lying on those kinds of forms or
willfully failing to disclose that information would be a false
statement, and those kinds of false statements are, by the way,
much more easily prosecuted than anything else we have been
talking about.
Chairman Lieberman. Before I move on to the ethics rules of
the Senate, which would have to be changed by the Senate in
this regard, do any of you have any other ideas on the panel
about how we might alter the existing Senate and House
disclosure rules to prevent insider trading or at least to make
it more discoverable more quickly if it occurs?
Mr. Walker. Well, I do agree that the provisions in the
STOCK Act that would call for public disclosure of stock
transactions within a specific period of time would go a long
way to deterring insider trading where it may be occurring. I
am not sure I agree with the 10-day period for doing that,
simply for the reason Ms. Sloan mentioned. Failure to provide
full information could be prosecuted under the False Statements
Act. I think 10 days is a very short window. Maybe 90 days is
too long, but I do think that kind of more frequent periodic
disclosure does make sense.
Chairman Lieberman. Let us just spend a moment--and it will
be my last series of questions--about our ethics rules of the
Senate and your concern, Ms. Sloan, about the impact of the
Speech or Debate Clause of the Constitution on prosecution of
Members of Congress for using insider information. How would
you change our rules to deal with this problem?
Mr. Sloan. The Speech or Debate Clause only applies if a
Member is being prosecuted, so it does not have any
implications at all for the Ethics Committee, which is why that
works better in some ways.
Chairman Lieberman. Right, for the Ethics Committee and for
Congress itself, pursuant to the Constitution, in fact.
Ms. Sloan. Right, so while a prosecutor would not easily be
able to obtain and sift through, for example, committee files
to see if somebody really had inside information, the Ethics
Committee absolutely could review that material.
Chairman Lieberman. Right.
Ms. Sloan. And so that is why it would be so significant to
make sure that the Ethics Committee does have jurisdiction. But
I think that the ethics rules are not clear enough, and the
House Ethics Committee just 2 days ago issued guidance, but
again, I think it is imperative to make it crystal clear and
lay it out.
And the other problem that we have seen is that the Ethics
Committees are very soft, frankly, on Members of Congress. If
somebody is only going to get a mild reprimand or a letter of
admonition for having done something like this, really that
does not hurt very much, and there is not a lot of
disincentive. But if you included something specific, which you
could, like some kind of financial penalty, such that money
would have to be turned over to the Treasury in some
significant amount--like three times the amount of the profit
or loss--that, too, would be a disincentive.
Chairman Lieberman. So what you would do here is make clear
in our rules that insider trading is a violation of the rules?
Is it as simple as that?
Ms. Sloan. Yes, and that there are certain penalties that
will attach.
Chairman Lieberman. Yes, understood.
Ms. Sloan. Right.
Chairman Lieberman. Mr. Walker, based on your experience,
what do you think of this idea?
Mr. Walker. Well, as I said in my statement, I do think
there are rules that address this. I think a big problem here
in the Senate and in the House with respect to use of paragraph
8 of the Code of Ethics of Government Service is that there
just is not across the board from committee to committee and
office to office specific obligations and rules and policies
regarding what information is confidential. And I think getting
at it at that level is important. I think there are rules in
place. I think if there was a rule crafted that mentioned
insider trading specifically as part of Rule 37 on conflicts of
interest, that would not be harmful, provided it was crafted in
a way, as you are very carefully considering, that would not
have other chilling effects.
Let me just say that as to the notion of the Ethics
Committees' actions perhaps not having sufficient force, I
would perhaps want to ask certain Members whose careers were
ended by receiving letters of admonition whether they think
that is a soft action. The Ethics Committees do pursue
allegations that come before them. They are not criminal
enforcement agencies, but I do think if you chose to strengthen
the rules regarding insider trading within Congress, that would
be a reasonable approach.
Chairman Lieberman. Good. A final question, bringing two
parts of this together, if I may. Ms. Sloan just mentioned this
fact. Two days ago, as you may know, the House Ethics Committee
released a memo to all House Members and staff, stating in
part, and I will quote here: ``House rules prohibit Members and
employees from entering into personal financial transactions to
take advantage of any confidential information obtained through
performing their official government duties.''
I wonder to what extent, if any extent, that kind of
statement by the House Ethics Committee establishes the
necessary fiduciary duty that we have talked about as a
condition of a successful insider trading case against a Member
of Congress.
Mr. Coffee. I think you are going to get different
responses from the three of us here because a fiduciary duty is
a kind of property right. It is a relationship between the
director and the company or the employee, master, principal,
etc. An ethical duty is far more general reaching, ineffable.
Look at it this way: The Boy Scout oath is an ethical duty. I
do not think it gives rise to the kind of relationship that can
support a criminal prosecution. There will be different views.
Mr. Langevoort. I share much of that view. I think to a
judge predisposed to find a fiduciary duty on Capitol Hill,
that simply adds to the case.
Chairman Lieberman. Yes.
Mr. Langevoort. To a judge not inclined, there are all the
ways in the world to avoid it.
Chairman Lieberman. Not enough, so that disinclined judge
would want to see the concept of fiduciary duty spelled out in
law.
Mr. Langevoort. A clear statement, yes.
Chairman Lieberman. Yes. Professor Nagy.
Ms. Nagy. Again, I would encourage the use of the term
``trust and confidence'' rather than ``fiduciary duty'' because
the Supreme Court has made clear that one does not have to
stand in an explicit fiduciary relationship in order to fall
under the classical or misappropriation theory.
I think that Professor Langevoort's response is correct. A
statement would put one more brick on the scale in terms of
whether there is indicia of a duty of trust and confidence.
I should say, though, that many Securities and Exchange
Commission and Justice Department prosecutions are based on
such indicia. Everyday, ordinary individuals are prosecuted,
even though they are not in explicit fiduciary relationships.
The SEC's complaint or the Justice Department's indictment
typically includes ethical language from codes, much like the
Boy Scout code. And that code is put in as a paragraph in the
indictment or in the complaint.
An official statement could be another paragraph in a
complaint, if it came to that.
Chairman Lieberman. Right. Thank you. You have been very
helpful.
Senator McCaskill, do you have other questions?
Senator McCaskill. I just have one question. How do we
address in terms of disclosure purchases and sales within a
managed fund? In other words, if a Member of Congress has a
fund that he buys--whether it is an index fund or whether it is
some other kind of fund--would we be creating a new duty for
the manager of that fund to have to let this particular Member
know when he is buying and selling stocks within the fund? Or
would there only be a duty in your mind to report the purchase
and sale of the overall fund? Do you understand the question I
am asking?
Mr. Coffee. The fund manager has the discretion----
Senator McCaskill. Correct.
Mr. Coffee. It is not a decision made by the Member who
owns shares.
Senator McCaskill. Correct.
Mr. Coffee. I assume the Member has no control or no
ability to influence the decision of the fund manager. It would
be different if he tipped the fund manager.
Senator McCaskill. Right. So, obviously, there could be no
information going from the Member of Congress to the manager,
but whatever decisions the manager had the legal authority to
make internally that the Member had no control over would not
have to be reportable every 10 days or every 90 days. I was
just curious about that.
Thank you.
Chairman Lieberman. Thanks, Senator McCaskill. Thanks very
much to the five of you. You have been an extraordinarily
helpful panel. In some sense, this is like we have been sitting
around the table and saying we have a problem, which I think
all of us acknowledge, and now how can we best solve this
problem legislatively? And I think you have helped the
Committee very substantially in doing that, and you have also
made the mistake of offering to continue to be available to
review the work that we do, so we will take advantage of that.
I said earlier that I hoped we could do something on this
before we leave. December 14 is 2 weeks from today. But we can
do that, and I think we have to find a balance here to make
sure--because this is important and complicated--that we do as
much as we are confident that we have got right on December 14,
and if we hold parts of this over until January when we come
back, that is not terrible either.
We will leave the record of this hearing open for 10 days
for any additional questions and statements. I thank the
witnesses again very much, and with that the hearing is
adjourned.
[Whereupon, at 4:36 p.m., the Committee was adjourned.]
A P P E N D I X
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