Senators' Stock Sales Raise Insider Trading Concerns

not from a company, Well, it's really all the above, June. Really, what regulators will be looking at here is whether or not there's potential insider trading, or whether there's a potential violation of something called the Stock Act, of which is really just like insider trading, And what it really focuses on is whether or not individual soul stock while in possession of information that was not yet publicly available, and whether or not that information was material to the pricing

of the stock, the same exact standard that is used in all insider trading cases. In a tweet on Friday, Senator Burr denied any wrongdoing, saying that he relied solely on public news reports to inform his decisions. How will investigators decide whether that's true. Well, it's really very much the challenge that is faced in all insider trading cases, and that is trying to get inside the head of the trader to determine what caused the individual to make

the trading decisions that were made. And of course, again it has to be information that is non public and it has to be material, which means it would have had to have caused a significant change in the stock price. So here in the in the situation of Senator Burr, we really have a circumstance where he was apparently pretty to quite a few briefings. Um many of those briefings

were information that was publicly available. But then there was also a thing that occurred, apparently on February twelve, which focused on the United States being ready for this potential epidemic,

but also touched on the possible economic fallout. And it was the very next day, February thirteenth, that apparently Center Burst sold off some thirty three different stock holdings worth a collective UH six twenty eight thousand to one point seven million dollars, which represented a significant share of his portfolio.

Another Senator under scrutiny is Georgia Republican Kelly Loffler. She's sold off millions of dollars worth of stock beginning on January That's the day the Health Committee she sits on was briefed by US Public health officials. Um she would have lost up to one and a half million dollars if she held onto those stocks. I heard her say that these are trades that she didn't know about, that

they're done automatically without her knowing about them until afterwards. Yeah. Well, as when any insider stock deal, you have to show that the person was the one who directed the trading. That doesn't mean that they would have had to have done it themselves. They certainly could have instructed their broker.

But if you have a circumstance, as some of the Senators and some of the House members who did trade have now stated publicly that these decisions were made without their involved involvement, that they were either held in a blind trust, or that they were investment advisors who were making these decisions without their input, then that would be a defense to any insider trading charges or a potential violation of the Stock Act of what about not attending

that meeting. Senators Diane fine Stein, a Democrat from California, and James Inhoff, a Republican from Oklahoma, also sold assets after that January briefing, but they both denied even attending the meeting, and fine Stein said her assets were held in a blind trust. So if they didn't attend the meeting but they still sold, does that have bearing. Absolutely, It really doesn't so much depend on whether you tended

the meeting. It depends on whether you had the information. So, for example, if you didn't attend the meeting, but one of the other senators you did pass along the information to you, and then you use that to trade on it, it could potentially be a violation of either of those two statutes and insider trading laws or the Stock Act

of twenty twelve. There's also the possibility that the SEC could take a look at this from a civil enforcement standard, and that would be a case where the genitive proof would be lower than there would be in a criminal case. Basically, regulators would have to convince a judge or a jury that the accused public official recklessly and consciously uh indifferent to their produciary duties took these steps, and they would only have to prove that by a preponderance of evidence.

So not only are they potentially looking at criminal charges here, that's a possibility, there's also SEC taking civil enforcement actions. And then there's also the possibility of ethics investigations by the Senate or by the House into some of these trades.

But again, they would have to look at the timing of it, what information was available to the individual directing the trade, and then they have to surmount that difficult hurdle of proving that the material the information was material and that the decision was made based upon non public information.

And in the case of sender Burn, for example, we could see that he was privy to both public and non public information, and proving that it was the non public information that precipitated the trading decision is a difficult one. But that's the same um high hurdle that's faced by prosecutors in all insider trading cases. The same high hurdle was faced by the SEC and all civil enforcement actions in the ethics investigations. Is it a different standard, is

it a different kind of inquiry? But yeah, that that's a completely different kind of investigation. It's done by Senate or House members themselves, and uh history tells us that rarely are sanctions imposed by those investigations, but that can ultimately result in the Senate or the House voting to remove a member if they believe there has been a violation. So that is another option, And in fact, Senator Burr has publicly called for an investigation by the Senate Ethics

Committee into these trades, an attempt to clear his name. Yeah, there's no question that the investigations by House or Senate committees is going to be a standard that is less than what prosecutors would have to meet in order to bring either civil or criminal charges. But you're really a good point here, because what we're seeing in many ways is a pattern that is similar to the financial crisis of two thousand and eight, where we saw individuals in

corporate America being prosecuted by the SEC. Mainly where he had instances of politically connected corporate insiders a top financial institutions who had advanced knowledge of bailouts in the wake of the two thousand and eight financial crisis, and who used that information for stock trades anticipating the market reaction. So I think where we're gonna see here is a

delay in enforcement. We're certainly not gonna see regulators moving quickly on any of this, given the fact that they're all working from home and there's quite a bit of other things going on in the market that SEC officials are gonna have to be looking at. But there are going to be looking down the road at trades by

various people. This could be months, could be even years later, because whenever you see this kind of market volatility, it presents a heightened opportunity for insider trading, and we're going to see regulators looking at the trading patterns of certain individuals to see whether or not there's a possibility that we're using inside information order to make those trading decisions.

So Bob, explain basically what insider trading is. Sure, the body of insider trading law points to some key guidance when you're looking at what is legal and what is illegal. Basically it comes down to don't trade on non public information about listed companies, don't tell someone else to trade on it, and don't lie if authorities have questions for

you about your trades or investments. The problem and the challenge for prosecutors always for insider trading cases is demonstrating the cause and effect, which you can get kind of murky. Insider trading cases are not easy to make, which is why you don't see them frequently prosecuted, and they're often complicated. Insider trading, remember, is only illegal when the information is material, meaning that it would have caused a significant change in

the stock price. And it's also only illegal when the information is known by the trader and not the public.

So it really requires prosecutors to get inside the head of the trader, which they have to do circumstantially by showing the pattern of trading prior to the incident, which they believe is based on insider information, and showing that based on the circumstantial evidence, the timing, the amount of trades, all of that put together, it shows that the individuals making the decision not based on public information and not based on their past trading patterns, but arguably based on

infra nation that was not available to the public and was ultimately the trayal on the stock price. So is the fear here that corporate insiders could trade based on advanced knowledge of let's say, government relief for airlines or

other companies before the measures are made public. Oh. Absolutely, there's going to be unfortunately, lots of opportunities here due to the enormous market volativity volatility that we're seeing and the possibility of government bailouts and corporate insiders who may have information about those bailouts before it's publicly known. Obviously, we'll have the opportunity to potentially trade on that information

before the market reacts. That's the kind of thing that regulators will be looking at, but it's probably information that they'll be looking at in a delayed way down the road. They're just not going to have the ability to look at this kind of trading activity in real time. We're going to see some delay months, maybe even years before regulators can catch up on some of the trading that may occur during this period of market volatility connected to

the coronavirus. Daniel Taylor, who is a professor at the University of Pennsylvania's Business School, said that the pattern we saw what the financial crisis appears to be repeating itself. Can you explain a little bit about what happened then compared to what's happening now, Sure, what we're talking about here is the same potential government bailout system where we saw in the financial crisis of two thousand and eight.

There are instances in which politically connected corporated ciders at financial institutions who may have had advanced knowledge about these bailouts and the wake of that two thousand and eight financial crisis, use that information for stock trades anticipating the market reaction. So, in other words, if they were prevy new information that a bailout was coming, and they knew that was going to cause a jump in the stock price, which is at that point had been enormously depressed, they

could trade on that information. And given the fact that we can expect to see a similar amount of government allowed to different industries, which as the airline industry and others, that information presents opportunities for those to trade on the information.

This heightened opportunity for insider trading is something that regulators will no doubt be looking at, and those trading records will be available to them after the fact to try to figure out the timing of when those trades were made versus the information that they have been available to these corporate insiders, to try to piece together a case

for insider trading. But these cases, again are always difficult to prove, so it remains to be seen whether we're going to see a real spike in insider trading prosecutions in the wake of some of these anticipated government bailouts. Bob, if you remember, were any executives given jail time for insider trading during the financial crisis or was it mainly

penalties that they had to pay. No, that's a great example because even during the bailouts of two thousand eight, we saw very few insider trading cases actually being brought where people were criminally responsible. For example, Angelo Mozilo, who

was the co founder and CEO of Countrywide Financial. There is a very high profile case in which this Morgage company faced financial clap collapsed in two thousand and eight before being purchased by Bank of America, and in that case, Mr Brazilla paid a multimillion dollar penalty to the sec but never admitted or denied any wrongdoing and there were no criminal charges brought. As an example of how difficult it is to bring these types of cases. Do you

think years before we'll see any of these cases. Yeah, I think we're gonna have to wait to see how this whole crisis plays out on the economy. There's going to be instances where uh, there are drug approvals, there's going to be Medicare coverage issues, there's going to be

government bailout issues. There's all kinds of information that is going to have an impact on the market, uh and will result in markets either moving up or down, and that information present opportunities always for people to trade on the information, but it will take the government years probably rather than months, to unravel whether or not there was anything done illegally in any of these trades. That's former federal prosecutor Robert Ment's a partner mcarter and English. Thanks

for listening to the Bloomberg Law Podcast. You can subscribe and listen to the show on Apple Podcasts, SoundCloud, and on Bloomberg dot com slash podcast. I'm June Rosso. This is Bloomberg. Yeah.