by Dimitri Donas ‘22
In the American stock market, individuals trade stocks (or “shares”) in public companies with the hope that fluctuations in share prices will net them a financial gain.
Using various portfolio management strategies, individuals pay attention to economic, political, and technological news in order to predict market volatility and, accordingly, buy and sell shares, stock options, and other financial derivatives.
The Securities and Exchange Commission (SEC) is responsible for protecting the integrity of the stock market by both monitoring criminal behavior in the markets and enforcing regulations that combat financial fraud and abuse. Among the most serious offenses is insider trading, or when an individual uses a company’s confidential or non-public information to trade its stock or securities.
A famous occurrence of insider trading is the case of the pharmaceutical company ImClone. In December 2001, it was made public that the FDA would not allow the sale of Erbitux, the company’s new cancer treatment. Despite the massive dip in the value of ImClone, CEO Samuel Waksal and his associates avoided financial losses.
Among these associates was Martha Stewart, a famous businesswoman and television personality. It was soon discovered that Stewart, having sold her shares in ImClone just days before the FDA’s announcement, had acted on confidential information disclosed to her by her broker.
Because she used non-public information to her advantage, Stewart was found guilty of insider trading and sentenced to both five months in prison and a $30,000 fine. As CEO, Waksal was given a harsher sentence for his involvement, receiving seven years in prison and a $4.3 million fine.
The United States Congress has tremendous influence over the stock market as it is responsible for regulating trade, borrowing money for government spending, and passing laws.
With this in mind, the Stock Act of 2012 was passed with the goal of preventing congressional insider trading; it is clear, however, that dishonesty and corruption continue to plague both the Senate and the House of Representatives.
In response to a question about the participation of Congress members in the stock market, Speaker of the House Nancy Pelosi (D- CA) said, “We’re a free-market economy. They [congresspeople] should be able to participate in that.”
However, Pelosi’s desire for congresspeople to have the same trading opportunities as the average American is problematic, as it increases the likelihood of insider trading.
As a congresswoman, Pelosi earns a salary of about $200,000 USD. Her net worth, however, is an astonishing $115 Million USD as both she and her husband run the venture capital firm Financial Leasing Services.
Pelosi’s concurrent positions as Speaker and businesswoman raises the question: With access to top-secret government information, how is Pelosi (and numerous other politicians) allowed to engage in free stock trading?
To be clear, elected officials cannot know for certain the status and future movements of a given stock; however, they are directly responsible for laws and regulations that will heavily influence the future of the market.
For example, members of Congress had knowledge of the COVID-19 threat (and its remarkable impact on the economy) before the American public did. Nevertheless, representatives were free to invest as they pleased—and as a result, their financial portfolios demonstrated remarkable success even as the pandemic sent the United States economy into a downward spiral.
Perhaps even more alarming, though, is how special interest groups can sway politicians to act in their favor. Groups such as environmental advocates or supporters of big business often promise to support elected officials and, in turn, may pressure them to push for legislation that is financially advantageous for that group.
A representative might be discouraged from promoting a minimum wage bill, for instance, due to the influence of lobbyists from big businesses.
Just as athletes cannot bet on themselves or their leagues, neither should elected officials be able to invest in the stock market due to their intimate knowledge of economic, political, and social factors which will lead to movements in the markets.
Ultimately, Congress’ ability to participate in the “free market economy,” as Pelosi calls it, is a blatant violation of the law, and the lack of regulation opens the door for corruption, dishonesty, and the overall degradation of American democracy.