The Biggest Insider Trading Scheme of All Time

Lawmakers (and their relatives) are the masterminds of trading. 

Just ask Nancy Pelosi’s husband, who cashed in his options for Alphabet shares days before the House Judiciary Committee passed an antirust bill to rein in Big Tech.

Sen. Richard Burr and his brother-in-law have a sharp nose for market turns, too. A week ahead of the Covid crash, they sold off their portfolios and dodged a 30% haircut.

Meanwhile, Sen. Kelly Loeffler backed up the truck with remote work-driven stocks that would later blow up on lockdowns – lockdowns imposed by the government.

Go figure.

If there was a hall of fame for the best-timed trades, these officials would dwarf even the top hedge fund managers, including Michael Burry from The Big Short.

Yet, coincidentally, their success has nothing to do with investment acumen…

Today we’ll look into the biggest insider trading scheme of all time. 

And how members of Congress use classified information to front-run the markets and bag millions of dollars using their government position.

Abnormal Returns

Federal government actions have a huge impact on the markets.

And knowing what lawmakers are up to before the news breaks can make (or save) you a lot of money.

For example, after the classified briefing on Covid, Sen. Kelly Loeffler offloaded $18 million worth of Intercontinental Exchange stock in a series of trades.

After the first sale, the news broke, and the stock plunged 16%… 

Then she and her husband quickly rebalanced their portfolio to profit from lockdowns.

The couple sold off stocks that were later hit by the pandemic, such as Ross Stores and retail athletic-apparel company Lululemon. And as luck would have it, they loaded up on stocks like Citrix that blew up during Covid.

Except those well-timed trades aren’t luck nor coincidence. 

In 2004, researchers did a broad study on the performance of trades made by senators between 1993 and 1998. 

Long story short: they found the stocks that senators bought beat the market on average by 8.5%. And vice versa, stocks that senators sold during that timeframe lagged the market.

The study clearly proves that elected officials exploit classified information to flip stocks. And with this privileged knowledge, they successfully front-run other investors.

By every definition, these actions would be considered insider trading and a serious crime for regular citizens. But the laws don’t equally apply to everyone, do they?

Double Standards

Since 1934, corporate insiders have been barred from trading stocks based on information not available to the public. 

If you make such a trade or “tip-off” anyone, you can go to jail for up to 20 years. 

Even if you aren’t exploiting any scoops, you still have to follow a strict protocol when trading your own stock.

For example, directors and officers must pre-clear all their trades and file a public form at least a quarter before the first trade.

That means every investor can see their trades in advance and piggyback on them before they even get to make them.

But such scrutiny doesn’t apply to those who made these rules. 

Until recently, members of Congress were under no restrictions for trading stocks, even those directly affected by their duties. They didn’t even have to disclose their trades.

Then in 2011, a CBS 60 Minutes investigation took the lid off this insider trading scheme and set off a public outcry.

In response, Congress passed the STOCK Act.

At last, the law banned lawmakers from insider trading (well, at least in theory.) It also bound Congress to disclose all trades made by its members accessible on the internet.

But after the dust settled, Congress quietly rewrote a big part of the bill. 

First, they took out its key disclosure rule and turned it into a window-dressing law that’s practically impossible to enforce.

Via NPR:

“The whole process took only 30 seconds. There was no debate…

To understand how the law changed, I asked Holman to meet me in the basement of the Cannon House Office Building.

“This is where the public records are kept, for those who can handle traveling to Washington, D.C.,” Holman explained.

That’s right. If you want to look up the financial disclosure forms filed by high-level congressional staffers — say, to find out whether they’ve been using the privileges of their positions to make well-timed stock trades — you have to come to this office.

The STOCK Act was supposed to make this task significantly easier. Records for members of Congress, the executive branch and their staffs were supposed to be posted online in a searchable, sortable and downloadable format.

If you wanted to see who traded health care stock just before a committee acted on a health care bill, it would be easy. No trips to the basement required.”

No wonder lawmakers don’t even bother complying with disclosures.

This year alone, 48 members of Congress were caught failing to report their trades worth many millions of dollars. As you can imagine, there are many more who weren’t nailed.

Nor are they punished even when caught in the act.

A $200 Fine 

Wait, 200…with two zeros? 

That’s right.

$200 is the first fine for a high-position lawmaker breaching fiduciary duty and trading stocks on classified information.

We are talking about illegally bagging multi-millions. If you did that as an employee of a public company, you’d face up to $5 million in fines (and, potentially, 20 years in prison).

And yet, lawmakers risk getting a bigger ticket for going 15 mph over the speed limit.

What’s worse is that they don’t even end up paying these ridiculously small fines. 

Like clockwork, investigations into their illegal trades break off a few months in.

For example, the Department of Justice closed all probes into senators who cashed in on the pandemic using information from classified briefings in early 2020:

In fact, despite the overwhelming evidence, federal authorities have never charged any member of Congress under the STOCK Act. 

Why are they getting away so easily?

“Shall Not Be Questioned”

There are a few loopholes that give lawmakers near bullet-proof immunity against insider trading charges.

For starters, there’s the Speech and Debate Clause in the Constitution that says “for any Speech or Debate in either House . . . [members of Congress] shall not be questioned in any other Place.” 

In other words, federal authorities can’t question members of Congress about briefings or any affairs that took place in Congress. And those are exactly the places where they source trade scoops from.

Even if prosecutors seize things, such as phones or computers, that contain incriminating evidence, they can’t use those against lawmakers if they were in use for work.

Second, the STOCK act says that the non-public information must be “material.” 

According to the SEC:

“To fulfill the materiality requirement, there must be a substantial likelihood that a fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” 

It may be easy to prosecute a VP of sales at a public company who speculated on its stock a day before the company put out its earnings results. Policy briefings, though, are often too broad and ambiguous to tie to certain stocks.

Of course, it would be naive to think things could be otherwise. 

The ones who make these laws are largely the ones who would bear them. And they conveniently write them in a way so that it doesn’t apply to them.

Besides, it’s hard to sue someone who is at the top of the food chain of enforcement.  

Think about it.

The STOCK Act is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Yet, these agencies are funded and appointed by Congress—the very federal body they regulate. 

Think that’s a bad conflict of interest? Oh, there’s more… 

Pre-IPO Shares as Bribes

Insider trading isn’t the only head-start Congress gets in the stock market. 

Companies often lobby officials with pre-IPO shares as a legal bribe. These privileged (and often discounted) shares let them front-run even most institutional investors—and bag double-digit gains almost overnight.

Via Represent.us:

“Just ask Nancy Pelosi. In 2008, Visa offered congresswoman Pelosi IPO stock access just as legislation, which Visa strongly opposed, arrived at the House.

Apparently fearless of a conflict of interest, Pelosi and her husband bought 5,000 shares of the stock at the rock-bottom price of $44 per share. Two days later, the value skyrocketed to $64 per share, and Pelosi made $100,000 virtually overnight thanks to her Visa IPOs.

The tough new credit card legislation that Visa didn’t want? Pelosi, who was Speaker of the House at the time, never allowed it to the floor for a vote.”

The Game Is Rigged

Last time, I wrote how the elite built fortunes by flipping inflating assets.

But this little trader club of Congress is “the rich get richer, and poor get poorer” on steroids. 

Not only do lawmakers have the money to cash in on growing assets, they know when to buy and sell those assets. And that puts the rest of the investors at a disadvantage.

It’s like playing poker with a marked deck. 

There were a number of calls to ban lawmakers from trading individual stocks altogether. And considering how much market-moving information they access, that would be more than fair. 

And yet, despite scandal after scandal, the biggest insider trading scheme goes on.  

You might as well take advantage and follow these politicians.

-Carlisle Kane