The Bipartisan Gravy Train: How Congress Uses Access for Profit
When we covered the lawsuit targeting Keith Kill of GameStop fame in February, it became noticeable that the law seems to apply differently to politicians and other power brokers when it comes to insider trading. Since the Kodak scandal broke out and covid-briefed senators were cleared of charges, insider trading among the political class is now being viewed as something to be expected, or even useful.
Nancy Pelosi – A Lucrative Political Career
After it became public knowledge that Nancy Pelosi bought Tesla calls ahead of the Biden administration’s targets for electric vehicles by 2030, retail traders took this behavior as another tool to add to their trading toolset. Nancy Pelosi became someone to watch out for, serving a similar role as eToro’s CopyTrader.
After all, in the infamous confrontation with the veteran journalist Stephen Kroft of 60 Minutes, the current Speaker of the House failed to offer any response outside of deflection regarding her conflict of interest with VISA shares purchase. That was over 10 years ago. Nothing much has changed since, with Nancy Pelosi continuing to outperform indices by a significant margin.
Now, even dedicated TikTok channels have emerged to copy Pelosi’s husband’s stock trades. If you are wondering why politicians are disclosing their trades so openly, they are required to do so by the Stock Act, enacted in April 2012, to prevent politicians from receiving insider knowledge advantage. This begs the question, what exactly is insider trading and how is it treated legally?
Insider Trading’s Grey Zone
The Securities and Exchange Commission (SEC) defines illegal insider trading as trading securities based on information that is not publicly available.
“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.”
However, you may have noticed the wording “illegal insider trading”. What kind of insider trading can be construed as legal? Peter Schweizer, of the Hoover Institute, wrote a book about it in 2011, lengthily titled “Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison“.
After the passing of the Stock Act, Schweizer noted it is not very helpful as there are a myriad of ways politicians can become wealthy using their positions in legal ways. In an interview to CBS News, he gave a Medicare committee assignment as an example.
“The fact is, if you sit on a healthcare committee and you know that Medicare, for example, is– is considering not reimbursing for a certain drug that’s market moving information. And if you can trade stock on– off of that information and do so legally, that’s a great profit making opportunity. And that sort of behavior goes on.”
Furthermore, the Stock Act imposes an exceedingly tiny fine – $200 on average — which is what a retail daily trader could comfortably dismiss as a cost of high-frequency trading. To exacerbate the problem, the charges are more often than not dismissed by either House or Senate ethics committees.
In the case of Sen. Burr (R-NC), after the FBI seized his phone, he was publicly shamed to resign as the Chairman of the Intelligence Committee. Initially, Sen. Burr claimed to have acted on his stock moves based on news reports.
Later on, in January 2021, the Department of Justice cleared him of all criminal charges for acting on insider covid knowledge.
Who Are the Stock Act Violators in 2021?
Although Nancy Pelosi and her husband have taken the public spotlight due to the Speaker’s high-ranking political career, insider trading is entirely a bipartisan issue. You will notice that when elected politicians purportedly engage in such practices, they are almost always registered as “late disclosures”.
The SEC has noted this phenomenon as selective disclosure:
“…many issuers are disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.”
This leeway to report beyond the 30-day requirement then leads to a predictable outcome.
“Where this has happened, those who were privy to the information beforehand were able to make a profit or avoid a loss at the expense of those kept in the dark.”
In 2021, 37 members of Congress are known to have engaged in such practices. According to research done by @unusual_whales, the pandemic has made the Senate wealthier at a time when small businesses have been decimated by the lockdowns. Given that they know which industries are impacted by their budget proposals and stimulus packages, the sector investment distribution mirrors this.
Here are some of their top stock picks for 2021.
Bearing in mind that supply chain disruptions are on the rise, and the global chip shortage is still unresolved, KLAC, AVGO, AMAT are more predictable picks than others. After all, the semiconductor sector saw triple-digit gains over the last year.
In the end, nobody has a proper solution to solve the puzzle – how to impose rules on those who make the rules? When it comes down to it, a socio-political study published in 2014, titled “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens“ had already demonstrated that ordinary citizens have zero impact on enacted policies.
However, we do know that cryptocurrencies tend to outperform the traditional stock market, and without it being reliant so intimately on Fed policies. In particular, some DeFi protocols have outperformed traditional finance by 1,662%.
Do you think a more decentralized economy, one that needs no lobby groups, is the only way to reduce political corruption? Let us know in the comments below.