Closing the Congressional Insider Trading Loophole
Indeed, members of Congress and their staff currently do not owe any “duty of confidentiality” to Congress and can’t be held liable for insider trading based on congressional knowledge under the current laws. Nor is there anything at this time that would prohibit Congressional staffers and executive branch employees from sharing inside information obtained from Congress with their friends—potentially allowing the recipients of such information to use it to make huge trading profits or prevent big losses. That means trading on inside knowledge of upcoming Congressional action is today one of the few forms of legal, repeatable insider trading (see my December 2008 column for a list of the others).
An academic study released in 2004, as well as some other more recent developments, indicates that this Congressional loophole to the insider trading laws isn’t just theoretical. Georgia State University professor Alan Ziobrowski released a study showing that during the 1990s, senators’ stock picks (which must be publicly disclosed periodically) beat the market by 12 percentage points a year on average. By comparison, corporate insiders only beat the market by about 6 percentage points a year, and U.S. households underperformed the market by 1.4 percentage points.
Ziobrowski and his colleagues concluded their findings “suggest that senators are trading stock based on information that is unavailable to the public, thereby using their unique position to increase their personal wealth …” Ziobrowski later was quoted as stating that, in his opinion, “there is cheating going on.”