Did multiple senators engage in insider trading when they sold stocks after being briefed on the threat of the coronavirus, but before the full extent of the threat was publicly known? The answer is not the same for every senator. Kelly Loeffler and David Perdue appear to have been unfairly targeted by national and Atlanta media. Dianne Feinstein and Jim Inhofe likewise have reasonable explanations for their reported stock sales, as does Vermont representative Peter Welch. Senator Richard Burr, however, has some serious questions to answer, and has yet to offer a particularly persuasive defense.
Congress and Insider Trading
Congressional insider trading is both a legal and political question. Congress in 2012 passed the STOCK Act, clarifying that when members of Congress receive confidential nonpublic information that could affect the price of a stock, they are treated as if they were company insiders. That’s important, because insider-trading laws generally only ban people from trading on company secrets if they work for the company or have a relationship that causes them to owe a legal duty to it. While the SEC is typically hesitant to admit it, a random bystander on the street who accidentally overhears a CEO spilling inside information and buys or sells stock as a result is probably not breaking the law. Those in Congress, however, frequently learn market-moving information because they work in government, rather than the companies that information pertains to. The STOCK Act aimed to close that perceived loophole by declaring that members of Congress have their own duty not to trade on what they learn. It requires regular disclosure of stock transactions to let outside watchdogs police potential violations.
Some critics inside and outside of Congress argue that this doesn’t go far enough, and senators and representatives shouldn’t hold individual stocks at all. They are probably right. Loeffler, the wealthiest member of the Senate, has announced in the aftermath of this controversy that she will be liquidating her entire stock portfolio and switching to mutual funds. Inhofe insists that his sale was part of an ongoing plan to do just that.
Divesting of stocks can, however, be complicated and sometimes painful: selling them is a taxable event, and top executives at large businesses may have compensation packages full of future grants of stocks and options. Loeffler’s husband is the chairman and CEO of the Intercontinental Stock Exchange, the parent company of the New York Stock Exchange, and some of her controversial sales involved ICE stocks and options from his compensation package. The debate over whether to require more extensive divestment of stocks is thus tied up in the broader debate over having business leaders such as Donald Trump and Michael Bloomberg in high political office, as well as the debate over how to handle conflicts tied to a politician’s spouse.
Three sets of questions matter to the insider-trading charge here. First, did the senators learn something confidential about American exposure to the coronavirus? Second, did they use that information to trade stocks? And third, were their stock sales inconsistent with what they were telling the public?
What Did They Know, When Did They Know It?
The present controversy has its origins in a Senate Health Committee briefing led by the head of the CDC and Dr. Anthony Fauci on January 24. Two senators (Perdue and Inhofe) say that they didn’t even attend the briefing. Loeffler, in a carefully worded op-ed in today’s Wall Street Journal, contends that the information in the briefing was consistent with what the CDC and other public-health experts were saying publicly at the time:
Based on contemporaneous reporting and public statements by the officials who provided the briefing, there was no material or nonpublic information discussed. All we did was meet public-health leaders and ask them questions about the emerging virus.
Loeffler cites a January 24 article on the briefing in The Hill, which quoted the committee’s top Democrat, Patty Murray, as saying of the federal response to the virus, “I think they have responded very well at this point.” In the same article, Murray’s fellow Democrat, Richard Blumenthal, expressed deeper alarm but remarked, “What I heard in response to many questions [in the briefing] is a tentative answer: Here’s what we know, but we need to know more.” Notably, the briefers “told senators they do not need more funding at the moment to fight the virus.” Speaking to reporters the same day, Dr. Fauci was — in retrospect — unduly optimistic:
“I think the risk is very low right now for the United States. The thing that you need to be watching out for is sustained person-to-person transmission,” Fauci said. . . . Senators and Fauci also offered praise for China’s cooperation with U.S. officials. “I’m impressed,” Fauci said. “I was involved very deeply with the SARS response. And with SARS, the Chinese were not particularly transparent. . . . It was an embarrassment for them. I think they regretted that. Right now, from what I can see, they’re being quite transparent.”
There is no indication that Dr. Fauci gave a different message in the closed-door briefing from the one he delivered at the press briefing. Likewise, one of the major pieces of evidence against Burr is that he gave a talk on February 27 to the North Carolina State Society in which he painted a much more dire picture. But by that point, a month had passed; it is unsurprising that his assessment of the situation would have changed in the interim.
In legal terms, what is material, nonpublic information under the federal securities laws is not necessarily the same as what is “widely known to the general public.” Under the theory of efficient stock markets, the law typically assumes that if news is reported, the markets know it. Clearly, however, most of the American public and most of the stock market were not alarmed enough to dump most of their investment portfolios, as Burr did. That alone could create problems for Burr, since the law also looks at how people behaved when they learned news in order to determine whether it was new, material information.
Burr has asked the Senate Ethics Committee to review his trades. The FBI is reportedly investigating him, while thus far, the other senators say they have not heard from the FBI or the Justice Department. Burr has also been sued civilly in the federal district court in D.C. by an investor in Wyndham Resorts, one of the stocks he sold. The Ethics Committee and the FBI will presumably have access to what was actually said in the classified briefing. The rest of us, possibly including the plaintiff in the civil lawsuit, will not. The civil suit is a publicity stunt in any event.
Who Decided to Sell?
A key question in insider-trading cases is proving that the person who bought or sold stock actually knew about the inside information, and traded on that basis. Where the insider-trading charge breaks down here is that all of the senators other than Burr say that their stock trades were made by their financial advisers without their input. Feinstein, for example, has her investments in a blind trust. Loeffler says that her “family’s investments are managed by third-party advisers at Morgan Stanley, Goldman Sachs, Sepio Capital, and Wells Fargo,” all blue-chip Wall Street firms or major investment advisers. Inhofe and Perdue also have outside advisers handle their investments. Congressman Welch says his investment in a German company that makes coronavirus tests was made by an adviser, and that he will donate the proceeds. Only Burr handles his own investments. He may regret that.
It is possible, of course, that one or more of these senators actually tipped off their advisers. There is as yet no evidence of that, only pure speculation, but the Senate Ethics Committee can and should review each senator’s investment-advisory agreements and any other evidence of communications with advisers to confirm that no such heads-ups were given. Some of the sales may have resulted from pre-arranged investment directions, which in some cases can be a defense to an insider-trading charge. Loeffler seems to have been generally selling to raise cash to self-finance her 2020 campaign, and taking advantage of her husband’s executive stock options:
Loeffler’s campaign said the ICE stock sales were prearranged and part of her and her husband’s compensation package. Records provided by the campaign show Loeffler and her husband exercised their employee options to buy ICE stock at a discounted rate, then sold much of it within a few weeks. The campaign said the sales were to pay taxes, cover transaction costs and produce “liquidity.”
Inhofe says his adviser has been instructed to sell off all his individual stocks since a controversy erupted over his investment in defense contractor Raytheon. Senator Ron Johnson, also questioned about a private-equity investment in his brother’s business in this period, noted that the deal had been in the works since 2018.
Circumstantial evidence of insider trading is most of what the media reports have focused on. Of course, savvy professionals were thinking about coronavirus risks to particular industries before many others were, so the fact that a well-heeled, professionally advised investor such as Loeffler was selling off some risk-exposed stocks in a fairly small portion of her portfolio is not surprising. A review by the Washington Post concluded that Loeffler sold about $1.8 million in stocks (a big number to most of us, but not to a couple worth half a billion dollars), while her “husband was making bullish moves at the same time, betting that the market would go up a few months later,” including buying $1.679 million in “‘puts’ that would benefit him if the stocks rose and risked big losses if the market crashed.” That hardly seems like a pattern of profiteering that would be worth risking for someone as wealthy as Loeffler, who intends to spend many multiples of $1.8 million campaigning for re-election. Perdue’s pattern of purchases and sales is, as Erick Erickson has explained, not consistent with being tipped off to the coming coronavirus crisis: He was buying stock in Starbucks, Delta, Disney, and concert promoter LiveNation while selling Kroger, Clorox, and Proctor & Gamble.
This, again, is where Burr has issues. He sold off 33 stocks worth between $628,000 and $1.7 million (the required disclosures are reported in frustratingly wide ranges), amounts that “appear to be a significant share of his holdings.” The defense he offers is that he was following CNBC’s reporting on the growing coronavirus hazards. That may be true, but it is not especially convincing. If he received non-public information in this period that would significantly add to or change the picture painted on CNBC, he could be in serious legal jeopardy.
On the other hand, the critics have gone awry in their efforts to smear Burr as assuring the public that the coronavirus threat was minimal. Attacks on Burr have cited a February 7 Fox News op-ed he co-wrote with Senator Lamar Alexander as evidence that he was downplaying the virus, but that op-ed opened with a stern warning:
Americans are rightfully concerned about the coronavirus — there are 12 confirmed cases of this new infectious disease in the United States, and the ability of the virus to rapidly spread in China, where it has infected more than 24,300 people and left 491 dead, is alarming.
True, Burr and Alexander were unduly optimistic at the time about the nation’s readiness to handle the coming plague, but so were Dr. Fauci and other government experts at the time of the January 24 briefing. Burr started selling stocks a week after the Fox op-ed.
Attention has focused most heavily on Loeffler and Burr in good part due to how they are politically situated. Both are targets that Democrats would love to take down, and both have enemies on the populist right. Loeffler, as an appointed senator, must run in Georgia’s “jungle primary” in November, with the top-two vote-getters facing off in a later runoff if nobody clears 50 percent of the vote. She faces both Democratic and Republican opponents, including Representative Doug Collins. Collins and Georgia House speaker David Ralston, a Collins ally, have been pounding her on this issue, and Collins has put out an internal poll showing him at 36 percent, Loeffler at 13 percent, and another Republican between them at 16 percent. Perdue will also be on the Georgia ballot the same day.
Burr is disliked by many on the right over what some see as disloyalty to Donald Trump in his chairmanship of the Senate Intelligence Committee. His term runs through 2022 and he does not plan to seek reelection. If he was forced to resign before November, his replacement would be appointed by Democratic governor Roy Cooper, but North Carolina law requires Cooper to choose from a three-name list provided by the same party that Burr belongs to.
We have likely not heard the last of this story. Unless there is significant new evidence, however, none of the participants other than Burr should have much to worry about legally.