Highway Robbery on Capitol Hill, Part Deux

"What's good for the goose is good for the gander," or so the saying goes. But what happens when good geese go bad?

Two words: Gangster ganders
A few months back, I described the epidemic of insider trading -- legalized insider trading -- in Congress. Elected officials were snapping up shares of inverse ETFs, shorting homebuilders, and betting against the U.S. dollar at the same time they were approving hundreds of billions in bailouts.

Turns out, though, the problem is bigger than we thought. It's no longer just congressional geese flying foul -- now their salaried congressional staffers are ruffling investor feathers as well. As today's issue of The Wall Street Journal reveals, it's not just Congress-people dipping their hands in the till. In addition to your elected representatives, you see, some 17,000 of their paid and unpaid staffers roam the halls of Congress, and as it turns out, they're all stock market geniuses, too!

According to Journal analysis of publicly disclosed stock trades -- disclosed, of course, long after the fact -- placed in 2008 and 2009, congressional staffers have been caught investing in shares of:

  • Bank of America (NYSE: BAC  ) , during the period between when bank "stress test" results were tallied, and when they were published.
  • Citigroup (NYSE: C  ) , just before Treasury announced a conversion of the government's preferred Citi shares to common.
  • Fannie Mae (OTC BB: FNMA.OB) and Freddie Mac (OTC BB: FMCC.OB ), just two days before Congress authorized emergency funding for the mortgage lenders.
  • Sunpower (Nasdaq: SPWRA  ) and Energy Conversion Devices (Nasdaq: ENER  ) , in the midst of debate over how much "stimulus" funding should go to subsidizing alternative-energy investments.

The list goes on and on -- and it's not even a complete list! These are just a few examples culled from the Journal's study, which polled the data on 1,700 of Congress's highest-paid (up to $170,000 a year) staffers. But another 15,000 staffers do not meet the requirements for even this kind of mealy-mouthed, once-a-year, "I bought somewhere between 10-and-10,000 shares" non-disclosure disclosure. Result: Ninety percent of the staffers on Capitol Hill have no obligation whatsoever to tell the public about their trading.

As I said in May, it's all totally legal. Crazy as it may sound, there's actually no law forbidding insider trading inside Congress, or requiring Congress-people to inform the rest of us of what they're up to. At best, we're given an annual report on what our representatives did ... months after it was done. And while Congressman Brian Baird of Washington and Louise Slaughter of New York have offered a "Stop Trading on Congressional Knowledge Act" to curb insider trading in Congress, only nine of their peers -- your representatives -- have signed on in the House. And none in the Senate.

For now, it seems, the game remains rigged.

Senator Reid? Caesar's wife called. She's not impressed.
Practicing damage control after his own staffer was caught trading Energy Conversion Devices shares on the sly, Sen. Harry Reid's PR spokesman declared yesterday: "[Our] actions must not only follow the law, but must meet the higher standards the public has a right to expect from elected officials and their staffs."

To which I reply: "Amen, brother." But there's a better solution. You're in the business of passing laws, so now pass this one: Henceforth, elected officials and their hirelings should take a page from the disclosure requirements we follow here at the Fool. They should publish their intent to buy or sell stock before placing the trade. Not months after the fact.

The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.


Read/Post Comments (31) | Recommend This Article (98)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2010, at 8:14 PM, dcorley wrote:

    Don't screw with the elites. They are superior.

    They make the rules, we follow them. Elites, not so much.

  • Report this Comment On October 11, 2010, at 8:33 PM, Clint35 wrote:

    The elites are not superior! They only think are! Who says people in congress are elite anyway? Besides them.

    I catch myself saying all the time, "They should be ashamed of themselves." The problem is they rarely are.

  • Report this Comment On October 11, 2010, at 9:10 PM, velcrosalsa wrote:

    This is very disturbing, but not surprising I suppose given human nature. This is no different than other 'elites' [super star performers and athletes, entrenched CEOs] who are used to being treated as special and behave accordingly.

    I believe Congress has exempted itself from other laws and regulations over the years. Weren't they exempt from minimum wage requirements at some point so they could pay low level staff or pages little or nothing? May be wrong about that and am sure someone can correct me if that's the case.

  • Report this Comment On October 11, 2010, at 11:12 PM, ET69 wrote:

    What do you expect from capitalists? When are you going to stop voting for Democrats or Republicans?

  • Report this Comment On October 11, 2010, at 11:56 PM, xetn wrote:

    ET6: What capitalists? They are all socialist. And to top it all off, they always opt out of all the legislation they pass or opt us out if it benefits them. There is no difference between a democrat or republican except the names.

    As for Harry Reid, he, along with the rest of the theives, believe they know best how we should live our lives, invest, teach our children, what we should eat,drink, smoke....

    It is not about safety or protection, it is always about looting the governed, benefiting their friends, and increasing their personal power at the loss of our liberty.

  • Report this Comment On October 12, 2010, at 12:56 AM, TMFDitty wrote:

    @ all: Tuesday's WSJ is reporting Reps. Baird and Slaughter are offering a compromise. No law forbidding insider trading by Congressmen and staffers. Instead, an ethics "rule" that Congress imposes on itself: Said rule would require disclosing stock trades within 48 hours *after* they happen.

    This would certainly be an improvement over what we have now, but is it sufficient? Or should Congressmen and staffers be required to publish their intention to buy/sell stock before taking action? Do we need an actual law to keep them true to their word?

    TMFDitty

  • Report this Comment On October 12, 2010, at 10:59 AM, mtf00l wrote:

    Really?!

    So, if I act on "Insider" information I got to jail just like Martha Stewart. If they let us know 48 hours after they do it, it's an improvement?! Give me a break!!!

    Oh and it an ethics rule? More like guide lines actually...

    They should be subject to the laws they subject the rest of us to, period!!!

  • Report this Comment On October 12, 2010, at 11:53 AM, TMFMurph wrote:

    I would gladly sign any petition to enact a Constitutional amendment that says that Congress has to live under the same set of laws that we do! No exceptions!

  • Report this Comment On October 12, 2010, at 12:11 PM, Brent2223 wrote:

    "Do we need an actual law to keep them true to their word?" - absolutely! I agree with ET69, morality and ethics are inherently absent in capitalism. The role of government should be to overlay appropriate control and regulations to prevent abuse of the system by the "elites" ie anyone who is privy to info not broadly available or understood by the rest of us normal folks.

  • Report this Comment On October 12, 2010, at 12:14 PM, TMFDitty wrote:

    @Murph: The scary thing is that we might ever even have to think *amending the Constitution* is necessary to subject all citizens to the laws. It should've-oughtta been obvious in the first place. Sheesh!

  • Report this Comment On October 12, 2010, at 12:19 PM, TMFDitty wrote:

    @ all: Carefully-vetted-I-am-sure comments from the Congressmen quizzed by the Journal have a common theme: Everybody who has been caught being involved in this kind of trading, from the Congresspeople on down, states unequivocally that they did not use their knowledge of any pending laws in their trading.

    However... I cannot imagine how anyone involved in writing and voting on legislation on a daily basis does not "swim in a soup" of knowledge about where the legislative winds are blowing. (To mix a couple metaphors.) They're steeped in insider knowledge, whether they realize it or not.

    Now, I wouldn't punish them for this by denying them the ability to invest -- that's opposite the Motley Fool creed. But I do believe these people should disclose what they intend to do before they do it. Seems to me that would be more in the spirit of Reg FD than any kind of disclosure after-the-fact.

    TMFDitty

  • Report this Comment On October 12, 2010, at 1:08 PM, lemoneater wrote:

    Transparency of any kind in politics is rare. Full Disclosure should be a requirement for anyone with privileged information. We should all be bound by the same laws. Martha Stewart, me, Barney Frank, etc.

    Keep blowing your whistle TMFDitty!

  • Report this Comment On October 12, 2010, at 2:55 PM, Zade wrote:

    Why are they ABOVE the laws of this country? They should be held more accountable since they get to make those laws. I think they should go to jail for this behaviour. Why does Martha Stewart go to jail but THEY DON'T. Their hypocrisy reeks! It is time for an amendment to the Constitution that makes them abide by the laws of this country and failure to do so will result in the same penalties we all face. If a Congressman committed murder, would they be allowed to get away with it? This is just disgusting no matter how you parse it.

  • Report this Comment On October 12, 2010, at 3:07 PM, mtf00l wrote:

    What Constitutional language make them exempt?

  • Report this Comment On October 12, 2010, at 6:11 PM, venturen wrote:

    How about congress stop spending my money on every pet project. They should be doing energy, mortgage or the thousand of other things they spend my money on...how about let Adam Smith "invisible hand" of individuals. Instead they give big handout to banks that should be BANKRUPT!

  • Report this Comment On October 12, 2010, at 7:22 PM, bigkansasfool wrote:

    I hope the SEC is looking into this now that it's in the WSJ. Afterall many of the congressional aids cliamed their spouse was doing the trading (i.e. non-congressional aids trading on inside information), and I doubt the lower paid aids that aren't required to report are also exempt from Rule 10b5.

  • Report this Comment On October 12, 2010, at 11:14 PM, patk0317 wrote:

    Why can they legally perform illegal acts (such as cheating on taxes with no penalties and insider trading) and not have to submit to Obamacare? etc. etc. I am livid as are millions of other voters who will speak to power in just a few short weeks. Actually I already have as I mailed in my absentee ballot today.

  • Report this Comment On October 12, 2010, at 11:28 PM, qcw wrote:

    After all the events of the last 5 years, you wonder why the mom and pop investor volume has disappeared.

    Not to worry, nothing lasts forever.

    -Q

  • Report this Comment On October 13, 2010, at 12:00 AM, NationalMatch wrote:

    Talk about hitting rock bottom and starting to dig. Wow, I am beyond disgusted.

  • Report this Comment On October 13, 2010, at 12:03 AM, DonkeyJunk wrote:

    I wondered why there was a huge pop for ATPG yesterday. Then, lo and behold, the moratorium on offshore drilling is kaput, and the stock tacks on a few more percentage points.

    Maybe unrelated, maybe not.

  • Report this Comment On October 13, 2010, at 8:59 AM, wjmwestoak wrote:

    They are all criminals. Every damn one of them. I say vote them all out.

  • Report this Comment On October 13, 2010, at 11:01 AM, TMFDitty wrote:

    @mtf00l: I don't believe it's a matter of the Constitution exempting Congressional staffers from the laws. More like a loophole in the laws, that forgot to include them.

    This may help -- here's an article that discusses where the gap in the law exists, and how we need to plug it: http://www.securitiesdocket.com/2009/03/11/closing-the-congr...

    Hope that helps.

    TMFDitty

  • Report this Comment On October 13, 2010, at 11:18 AM, riche104 wrote:

    I'm with wjw. Vote them all out (won't happen of course), and vote in new people who agree to follow the NEW legislation re: insider info, health coverage, etc. via a pledge they cleary state in any add asking for your vote. Just musing!

  • Report this Comment On October 13, 2010, at 12:34 PM, mtf00l wrote:

    @TMFDitty

    Thanks for the article. I read it. I'm not sure I agree it was an "oversight".

  • Report this Comment On October 13, 2010, at 12:55 PM, StockNewb wrote:

    Geez, I have just decided to go into politics! I wont have to think on my investments side and all ill need to do all day is lie!

    +1 for pathetic practices in politics.

  • Report this Comment On October 13, 2010, at 1:41 PM, jrmart wrote:

    Until we adopt a none of the above choice in the voting booth, we will never change this system of corruption displayed by both parties.

    Large companies fund the reelection campaigns for incumbents. Consequently, all the laws are passed by incumbents to support these large donors.

    WE DO HAVE ANOTHER CHOICE. JUST VOTE OUT ALL INCUMBENTS FROM BOTH SIDES.

    60% of us wanted a public health care option, yet it was eliminated in back room deals in order to satisfy the big insurance companies.

    When you vote this November, send a clear message to incumbents from both sides. We the people elect you and you better enact laws to support us and not the large corporate donors.

    Send letters to your Senators and Representatives stating the following. Don't expect me to vote for you when you pass laws favoring the large corporations, not us.

    You better wake up, corporations can't vote in November.

  • Report this Comment On October 13, 2010, at 4:53 PM, TMFDitty wrote:

    ... Or we could ask Congress to put its llaw-making on hold for a while, and manage our 401(k)s for us instead. I mean, after all, they're investing better than Buffett...

    Seems a shame to waste such obviously natural-born investing talent on mere legislating.

    TMFDitty

  • Report this Comment On October 13, 2010, at 5:47 PM, kalho13 wrote:

    jrmart - I think 60% wanting a public option for healthcare is a far fetched number. Please quote your source for this information.

  • Report this Comment On October 15, 2010, at 2:40 PM, JSMBAPhD wrote:

    Isn't it gross hypocrisy to accuse the staffer of trading shares "on the sly", when what he was doing was completely legal (and, therefore, he was presumably not concealing his actions at all).

    I think that everyone who works in Washington should have their assets placed in a blind trust or into index funds, to weaken the connection between their actions and their personal gain. But when the whole weight of opprobrium for a system that is crooked because American business has corrupted it falls in the back of some staffer, something is wrong.

    Let's face it. Some people in Congress may be selling their services, but some businesses-- especially energy, health, and finance-- are buying.

  • Report this Comment On October 16, 2010, at 12:18 PM, ilovesumm wrote:

    Does rigged even begin to explain this?

    A broker at one of the largest firms told me several years ago that there is massive insider trading that is never prosecuted.

    Hey, if the SEC wouldn't go after Madoff when he was handed to them on a silver platter who were they gonna chase ? Martha Stewart ?

    They should not be allowed to trade on any discussed companies or sectors for 1 week after the information is made public.

    It would be great if we all had tomorrow's newspaper.

  • Report this Comment On October 23, 2010, at 11:24 PM, yosemitebean wrote:

    It does not surprise me at all. The foreclosure nightmare once exposed will make this look like petty cash. Sad, but true.

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