August 9, 2018

Insider Trading: Congressman Allegedly “Tipped” Sellers

Yesterday, a federal grand jury indicted Congressman Chris Collins (R-NY) on a variety of fraud-related charges arising out of alleged insider trading in an Australian biotech company for which he served as a director. He was also charged with making false statements to the FBI. Parallel civil securities fraud charges were filed by the SEC (for the newbies out there, the SEC only has the authority to bring civil charges; not criminal).

According to the indictment, Rep. Collins disclosed to his son the negative results of a clinical trial for a drug being developed by his company.  In turn, Collins’s son, along with his future father-in-law, allegedly sold shares in the company on the basis of the non-public information about the trial results & tipped other persons who also traded. Both of those men were also indicted.

Rep. Collins’s involvement with this company has been the subject of an investigation by the House Ethics Committee. He has denied the charges made against him.

Members of Congress have long demonstrated uncanny abilities as stock pickers – particularly when it comes to industries for which they have oversight responsibilities. In 2012, Congress enacted the STOCK Act, which was intended to combat legislative insider trading.  But according to this “Washington Post” editorial, its results have been mixed.  The number of trades by legislators has declined sharply since the statute was enacted, but as this excerpt notes, problematic trading practices remain:

Of the senators who remain active in the stock market, they have a high propensity for trading stocks in businesses they directly oversee from their committees. From these perches, members of Congress often are privy to information that could directly affect the value of stocks, posing a serious conflict of interest when trading in those markets.

Politico found a similarly disturbing trend in both chambers of Congress. Politico identified about 30 percent of members of the House and Senate who are currently active in the stock market. Several of these members play in the markets over which they have some direct legislative responsibility — in some cases, even sponsoring legislation that could have a direct bearing on their stock investments.

Regardless of its outcome, the Collins case is a reminder that insider trading on Capitol Hill remains a live issue – and that there’s still a lot of work necessary to drain this part of the swamp.

More On “To Reg FD & Beyond!” – Mr. Musk, We’d Like a Word With You. . .

In what may be the least surprising development in the history of securities regulation, the WSJ is reporting that the SEC has come knocking on Tesla’s door to discuss Tuesday’s series of extraordinary events:

Securities regulators have inquired with Tesla about Chief Executive Elon Musk’s announcement that he may take the company private and whether his claim was factual, people familiar with the matter said.

The SEC has asked the company whether Mr. Musk’s unusual surprise announcement on Tuesday was factual, the people said. The regulator also asked about why the disclosure was made on Twitter rather than in a regulatory filing, and whether the firm believes the announcement complies with investor-protection rules, the people said.

Meanwhile, there continues to be media speculation about whether Musk’s announcement of a possible Tesla buyout via Twitter violated the securities laws.

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John Jenkins