Politician Trading: If You Can't Stop Them, Join Them

Reprinted with permission from Law.com, October 2, 2024. © 2024 ALM Global, LLC, All Rights Reserved.

Introduction

For years, public advocates have questioned securities trading by members of Congress, who have access to nonpublic information. In 2012, Congress passed the STOCK Act, which prohibits U.S. senators and representatives from trading on information they learn in their official capacities and requires frequent financial disclosures. But the STOCK Act has its fair share of issues. The reporting requirements allow weeks to pass before members of Congress must publicly disclose securities transactions, compliance with the act has been difficult to discern, and enforcement has been seemingly nonexistent. Indeed, no charges have ever been brought against a senator or representative under the act. At the onset of the COVID-19 pandemic, however, reports of congressional lawmakers selling significant amounts of their stock came to light, raising legal and ethical concerns about the strength of and compliance with those insider trading laws. However, additional efforts to prohibit members of Congress from trading individual stocks have failed.

Now one company, Autopilot, is taking advantage of Congress members' advantage with a method for Joe Q. Public to trade like a politician.

Recent Concerns and Current Safeguards

Insider trading laws and the 2012 STOCK Act do not prohibit lawmakers from trading on the public stock market. It's no secret, however, that congressional lawmakers have access to nonpublic information about corporations and national industries that intersect with their legislative duties. Enacted in April 2012 with bipartisan support, the STOCK Act made clear that members of Congress are prohibited from trading on material, nonpublic information and substantially broadened reporting requirements for U.S. representatives and senators, as well as senior executive branch officials. Those reporting requirements, however, do not require real-time disclosure of securities transactions. Instead, they require the officials to publicly disclosure all securities transactions valued at over $1,000 within 30 days of receiving notice of the transaction, and within 45 days of the transaction date. The act's requirements also apply to most trades by spouses and dependent children. Prior to enactment, Congress and senior executive branch officials were only required to report securities transactions annually. In March 2020, news reports highlighted that trades by lawmakers in both parties started spiking at the start of the COVID-19 pandemic, during and after private senate briefing sessions on the then-new pandemic. After an all-senators briefing on COVID-19 on Jan. 24, 2020, and additional briefings in mid-February 2020, Republican Sen. James Inhofe sold between $180,000 and $400,000 of his stock holdings, on Jan. 27, 2020, in Brookfield Asset Management, which later dropped from a share price of $68 to $43. And Democratic Sen. Dianne Feinstein's husband reportedly sold between $1 million and $5 million in shares of Allogene Therapeutics on Feb. 18, 2020, at $24 a share, which later dropped to $20. But, both senators publicly claimed that their trading decisions had nothing to do with the private intelligence they learned through public briefings. As the stock market suffered significant losses at the beginning of the pandemic, trades like these drew significant skepticism.

Critical press coverage of congressional stock trading did not end with the pandemic. In March 2023, certain lawmakers reportedly sold large amounts of stock held in banking corporations in the midst of a possible national bank crisis. On March 10, 2023, an investment account owned by Rep. Jared Moskowitz's children sold between $65,000 and $150,000 in shares of Seacoast Banking Corp., after Moskowitz had attended a bipartisan congressional briefing on the banking crisis, and just days before Seacoast's shares fell nearly 20 percent. Rep. Dan Goldman sold shares of First Republic Bank days before it received a $30 million government bailout, avoiding significant losses as First Republic's stock price steeply declined.

Nancy Pelosi may be the most prolific trading member of Congress. She and her husband have similarly faced rising scrutiny over their trading patterns, which have resulted in significant personal financial gain. In 2022, Pelosi's husband acquired over $1 million in Nvidia call options just one week before the congressional vote on providing subsidies to the chip manufacturing industry. Just this year, it was reported that Nancy Pelosi took a large position in Nvidia. Since that time, her position had grown by 93%, amassing nearly $4 million in gains.

But successful (and curious) stock trading is truly bipartisan. In 2023, for example, Rep. Michael McCaul, who sits on the House Foreign Affairs and House Homeland Security committees, where he has access to highly sensitive and critically important information about the tech and defense industries, purchased tech stocks in over 140 separate transactions. In the same year, he sold $10.4 million in technology stocks, over $9 million in communications services and financial services stocks, and over $6 million in both consumer cyclical and health care stocks. These recent reports and studies have raised concerns over the strength and efficacy of the 2012 STOCK Act in curbing lawmakers' potentially problematic investments. For example, although the STOCK Act imposes a small fine on lawmakers who fail to timely make required financial disclosures, investigations have noted the difficulty in verifying whether those fines have actually been paid.

And although the STOCK Act prohibits congressional trading on insider information, the knowledge that members of Congress gain through their legislative duties, private briefings, and meetings with corporate executives and constituents undoubtedly raises ethical dilemmas.

In its 2022 study, the New York Times found that 13 lawmakers "reported that they or immediate family members had bought or sold shares of companies that were under investigation by their committees between 2019 and 2021," and that "44 of the 50 members of Congress who were most active in the markets bought or sold securities in companies over which their committee assignments could give them some degree of knowledge or influence." Members of Congress themselves have noted the conflicts of interest inherent in lawmaker trading. After reports of trading in the midst of the 2023 bank crisis, Sen. Sherrod Brown expressed his frustration: "As the Silicon Valley Bank was closed, even during that period, there were reports that members of Congress were trading bank stocks," Brown said, noting that, "members of Congress are able, because of our jobs, to know more about the economy."

Ban Congressional Stock Trading Act

In January 2022, Sen. Jon Ossoff introduced the Ban Congressional Stock Trading Act, which would restrict members of Congress, their spouses, and dependent children from buying and selling individual stocks. The legislation was aimed at addressing the perception of insider trading and ensuring that elected officials prioritize their public duties over personal financial interests. In July 2023, Sens. Kristen Gillibrand and Josh Hawley introduced bipartisan legislation—the Ban Stock Trading for Government Officials Act—seeking to ban members of Congress and the executive branch from stock trading, stock ownership and blind trusts. The legislation would "impose heavy penalties for executive branch stock trading," require "reporting of federal benefits," and require "public, searchable databases of personal financial disclosure reports and filings reporting of any financial transactions as required by the STOCK Act." Advocating for the legislation, Sen. Gillibrand explained: "It is critical that the American people know that their elected leaders are putting the public first—not looking for ways to line their own pockets. The landmark Ban Stock Trading for Government Officials Act bars members of Congress, executive branch officials and their families from holding or trading stocks, increases disclosure requirements and imposes harsh penalties on violators."

Most recently, Sens. Josh Hawley, Ossoff, Gary Peters and Jeff Merkley announced the Ending Trading and Holding in Congressional Stocks Act (the ETHICS Act). If passed, the bipartisan legislation would ban members of Congress and their spouses and dependents from trading individual stocks. The bill would require lawmakers to immediately stop buying any new individual stocks and divest any previously owned individual stocks at the beginning of the next session of Congress in 2027. Any lawmaker who fails to timely divest would be fined the greater of either the lawmaker's monthly salary or 10% of the value of the assets the lawmaker failed to divest. The bill also includes a provision requiring the president and the vice president to obtain a certificate of divestiture, increases the penalty for nonreporting to $500, and requires that all disclosures be in public, searchable database. On July 24, the Homeland Security and Government Affairs Committee approved the legislation, advancing it to the Senate floor for a full vote.

Despite garnering bipartisan support, and a rising public demand for increased transparency and accountability, these recent attempts at curbing congressional trading have been unsuccessful, with some opponents arguing that new legislation is unnecessary in light of the STOCK Act and already-existing insider trading laws that apply to lawmakers.

The Rise of Autopilot: If You Can't Stop 'Em, Join 'Em

As reports of lawmakers' successful trading activity increase, technological solutions have emerged to give the average American the same trading advantages: allowing members of the public to observe and copy lawmakers' trades.

One financial start-up, Unusual Whales, tracks notable market activity and in recent years has worked to compile data on lawmaker trading activity. The CEO of Unusual Whales analyzes and publishes data from lawmakers' disclosure forms required under the STOCK Act, and has found that the data has benefits beyond public accountability: "When you're a trader or an investor, you're looking for some sort of edge, and people believe this is a sort of edge." A newer innovation, Autopilot, is an app designed to track and disclose congressional stock trading activity in real-time. Developed by 28-year-old Chris Josephs and his friends, Autopilot compiles publicly available financial disclosure data and notifies users about trades made by legislators. Josephs originally started social media app Iris to benefit casual investors by sharing individual users' real-time trade and portfolio data. But Josephs soon heard from users that they were less interested in what their friends were trading and much more interested in tracking congressional trading activity. Autopilot does just that, publicly launching lawmakers' trading portfolios to the public.

One of Autopilot's most in-demand features is the function that allows users to track the trades of Nancy Pelosi and her husband Paul. The "Pelosi Tracker" informs users about the Pelosis' trades so that Joe Public can track the trades and benefit from whatever information these prolific traders have access to.

Developments like Autopilot have the potential to serve as powerful tools for accountability and deterring potentially unethical behavior; however, the introduction of this technology has also raised important ethical considerations. Autopilot's creator has stated that the point of the app is not just financial gain, but to get politicians banned from trading.

But Autopilot's motto—"If you can't beat 'em, join 'em"—makes a clear statement: If we can't rely on the legislative branch to curb questionable lawmaker trading, then the public should have the same trading advantages.

David Axelrod, a partner with Ballard Spahr, is a first-chair trial lawyer who defends corporations and individuals in government-facing litigation involving the U.S. Securities and Exchange Commission and the Department of Justice. He defends parties sued for defamation.

Hannah Welsh is an associate in the firm's litigation department. Hannah focuses her practice on securities enforcement and litigation and other complex litigation.