Insider Trading on Capitol Hill?

Few of us have probably ever looked forward with great anticipation to the publication of an article in a financial academic journal. But there's one appearing in the December issue of the Journal of Financial and Quantitative Analysis that may make for gripping reading. It raises a troubling question: Are there financial shenanigans going on on Capitol Hill? Specifically, are (some) senators engaging in insider trading, acting on early knowledge they may have regarding what legislation will be passed when, which companies will be awarded big contracts, and which companies' drugs will be approved?

A Wall Street Journal article last month addressed the forthcoming report, saying, "A study suggests that U.S. senators possess stock-picking skills that even the most seasoned money manager would envy. During the boom years of the 1990s, senators' stock picks beat the market by 12 percentage points a year on average, according to the study. Corporate insiders, meanwhile, beat the market by about six percentage points a year, while U.S. households underperformed the market by 1.4 percentage points a year on average, according to separate studies."

It went on to note, "Looking at the timing of cumulative returns, the senators also appeared to know exactly when to buy or sell their holdings. Senators would buy stocks just before the shares suddenly would outperform the market by more than 25% [and would sell with similar prescient timing]. What explains this miraculous performance? Given that the senators are producing returns that best even such stars as Peter Lynch and [Berkshire Hathaway's (NYSE:BRK.A, BRK.B)] Warren Buffett, shouldn't they go manage mutual funds instead of running the country?"

Something sure looks fishy, doesn't it? But it appears that the Securities and Exchange Commission (SEC), which saw no reason not to go after Martha Stewart Living Omnimedia's (NYSE:MSO) leading lady over less than $100,000 in gains, isn't interested in what might be going on in the Senate. Hmm. could it be that the SEC, which has personnel and budgets approved by senators, doesn't want to bite the hands that feed it?

Stay tuned for more details and developments, fellow investors! And in the meantime, feel free to share your thoughts on our discussion boards. We're offering a free 30-day trial of all of them right now.

Here are some more Fool articles touching on Congress:

• Your Ownership Is Revoked!
• Senate Stalls Swapping Bill
• Congressional Testimony of [Fool co-founder] Tom Gardner
• [Fool co-founder] David Gardner Goes to Washington

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway.