The STOCK Act and the SEC
The STOCK Act must be amended to protect government whistleblowers.


John Berlau

I have long admired Stephen Bainbridge’s writings on corporate governance and securities regulation. Usually, he casts a skeptical eye on the Securities and Exchange Commission as well as the “good governance” trends of the moment in the government and corporate worlds. We’ve had some friendly conversations via email through the years, and he has praised my work several times, as I have his.

So I was a bit taken aback to read his blistering attack on the recent NRO article I wrote with my colleague David Bier outlining how the STOCK Act could inhibit the disclosure of information by whistleblowers on congressional staffs, even if they would not profit from a trade made on the basis of that information. Implying that he doesn’t know me from Adam (he refers to me as a “guy from the Competitive Enterprise Institute . . . named John Berlau”), Bainbridge accuses Bier and me of peddling a “load of codswallop” (glad to learn this new word!) and of making “so many mistakes . . . that it’s hard to know where to start.”

My sentiments exactly on his so-called rebuttal. Bainbridge distorts our main premise, and then suspends his longtime skepticism of the SEC in favor of a blind faith that it will enforce the legislation fairly. And he doesn’t even bother to address our proposed solution of inserting a “mens rea” or “guilty mind” clause into the final bill — which has passed both chambers of Congress but with differences that still need to be ironed out by a conference committee. The clause would simply state that disclosures of information are illegal only if they are made for the purpose of making a profit, or with knowledge that the information would be used by the recipient (or others acting with the recipient) to make a profit.

Bainbridge starts out by saying that we “claim that the STOCK Act bans whistle blowing.” We do nothing of the sort. Obviously, a bill that expressly banned whistleblowing would go nowhere.

What we do say is that the STOCK Act would make whistleblowing less likely because the disclosure of “nonpublic” and “material” political information by a member of Congress or a staffer could now be punished even if the member or staffer did not trade on this information. This is because the law takes the “duty of confidence,” meaning confidentiality, that the SEC has applied to corporate information and applies it in a vague way to information about government operations.

Since insider trading has mostly been prosecuted as theft or “misappropriation” of information — with the victim being the corporation rather than, as is often assumed, the investor on the other side of the trade — those who disclosed tradable corporate information (called “tippers”) have often been subject to the same liability as those who traded on it (called “tippees”). “A person can . . . be held liable for ‘tipping’ material, nonpublic information to others who trade,” explained SEC enforcement director Robert Khuzami in congressional testimony in December. Because the STOCK Act does not contain a clause protecting those who unknowingly “tip,” we argue that it thus creates the likelihood that whistleblowers could be busted for the “misappropriation” of information from the government they now owe a “duty of confidence” to.

This was a danger that Representative Louise Slaughter (D., N.Y.), one of the first proponents of expanding insider-trading laws to government information, at least initially recognized. In a 2006 “fact check” on her original STOCK bill, Slaughter argued that because “the work of Congress depends on open lines of communication between Members and constituents and organizations,” trading on congressional information must be policed through a “prohibition that does not require a duty of confidentiality.” Yet the current House and Senate bills fail to incorporate this protection; instead, they state that “each Member of Congress or employee of Congress owes a duty arising from a relationship of trust and confidence [emphasis added] to the Congress, the United States Government, and the citizens of the United States with respect to material, nonpublic information.”

None of the facts that Bainbridge presents — when he finally gets to the facts after his overheated rhetoric — diminish the threat of the current bills to whistleblowers and those communicating with the grass roots. In fact, he acknowledges that whistleblowing by staffers could come into conflict with insider-trading bans, but opines that this is the case under current law regarding market-sensitive information about both corporate and government operations. “If whistle blowing constitutes an illegal tip, accordingly, it’s illegal under current law,” he writes.