Zachary Karabell: Ethically Challenged Congress Needs Law or Code Banning Insider Trading

November 15th, 2011

The Daily Beast
By Zachary Karabell
Nov. 15, 2011

Sometimes a story breaks that leads to jaw dropping even among the normally jaded. This past week, a new book by conservative muckraker Peter Schweizer and a memoir by the disgraced and convicted lobbyist Jack Abramoff both shed light on the degree to which members of Congress profited from trading stocks that were directly affected by pending government policy. The insider trading ran the gamut of Republicans and Democrats and in all cases involved knowledge of pending contracts or legislation that would benefit or penalize specific industries. The amounts gained ranged from a few thousand dollars to hundreds of thousands.

As the old cliché goes, the scandal here is what is legal. The SEC and federal prosecutors have in recent years cracked down on Wall Street insider trading with a vengeance. The multi-year prosecution of hedge-fund manager Raj Rajaratnam is only the most high-profile example. Yet insider-trading laws do not apply to what many members of Congress have done. Because their privileged information does not come from company insiders and because congressional representatives are not employees of any public company, their trades do not fall under the definition of illegal insider trading. In short, because they trade on material nonpublic information about spending that they acquire as elected representatives, rather than on material nonpublic information provided by companies, they have not broken the law.

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