A review of what the Georgia senator’s critics have wrong.
A review of what the Georgia senator’s critics have wrong.
I t’s election season all over again with the looming Senate runoffs in Georgia, and that means another round in the persistent but ever-shifting effort by the Jon Ossoff campaign and its media allies (the New York Times, the Daily Beast, the Atlanta Journal-Constitution, Salon) to build a narrative that Republican senator David Perdue has been engaged in insider trading to enrich himself from information obtained from his role in office. Ossoff has poured an enormous amount of his advertising budget into this theme, and the sheer volume of stories written about Perdue’s trading in different stocks are plainly designed to create a “where there’s smoke, there’s fire” atmosphere that obscures the actual details. But there is far less here than meets the eye. The one example of possibly questionable judgment by Perdue is unrelated to his job as a senator, has been thoroughly examined by federal investigators without any charges, and has obvious, innocent explanations.
Despite the volume of ink spilled on Perdue’s investments, many of the accusations against him fail for simple reasons. There are five core elements to insider trading: (1) receiving information, (2) in a confidential relationship, (3) when the information is non-public, (4) the information is material (important enough to affect a reasonable investor’s decision), and (5) one trades on it before it becomes public. In a typical insider-trading case, the big fights are over the more technical elements — the materiality of information and whether the investor received it in some confidential capacity, such as serving on a company’s board or (in Perdue’s case) through briefings to Congress. But most of the insider-trading theories about Perdue’s trades fall down at a much more basic level: they either lack evidence that Perdue received information or made the trades himself; or they cite instances of Perdue selling stock before good news as opposed to bad news became public as evidence of wrongdoing, which is backwards; or they ignore obvious indicators that Perdue’s trades are inconsistent with receiving inside information. Let’s review what the critics have wrong.
Most of Perdue’s Trading Is Not Done by Perdue
Start with the central fact: Senator Perdue’s multimillion-dollar investment portfolio (he is worth an estimated $15 million) is managed by professional money managers at the blue-chip Wall Street firm Goldman Sachs. Perdue says that he is not involved in day-to-day trading decisions, which are made by his investment advisers. That doesn’t mean he is never involved in investment strategy — it’s not a blind trust — but it means that the timing of trades in his accounts is typically the work of other people, with Perdue providing only general guidance. Could Perdue and his advisers be lying about this? That’s always a possibility with politicians accused of misconduct, but if Perdue was actually hands-on directing the timing and amounts of his own trading, you would not expect that to escape the notice of investigations by the Justice Department, the Securities and Exchange Commission, and the Senate Ethics Committee. Investigations of this nature can easily access the phone and email records of the investor and the money managers. The New York Times reports that Perdue’s “lawyers turned over hundreds of pages of information, including . . . emails . . . in response to a subpoena from a grand jury.” This would be difficult evidence to hide, particularly with a large institution such as Goldman Sachs that has an extensive compliance apparatus. In most cases, there is no evidence that Perdue actually made the decisions to buy and sell particular stocks at particular times.
Perdue’s Trading Volume Is Not Unusual
One of the themes in some of the reports on Perdue, such as a December 2 Times item, is simply that Perdue trades stocks a lot: 2,596 trades in six years, about two trades a day. The suggestion is that Perdue is unduly focused on his portfolio. But as Aaron Brown, a former managing director and head of financial market research at AQR Capital Management, writes for Bloomberg, Perdue’s account activity is “entirely consistent with a busy professional who devotes only a small fraction of time to overseeing investments. . . . There’s no unusual turnover or short-term trading, and no puzzling strategies or decisions. The results are within legal expectations.” In some cases, Perdue just sold one stock position in dozens of individual trades — and those trades would logically be handled by the advisers.
Perdue’s Ho-Hum Pandemic Trades
The insider-trading narrative originally got rolling due to scrutiny of Republican North Carolina senator Richard Burr’s trades following an early briefing on coronavirus risks, which led to scrutiny of other senators. As I discussed back in April when this story broke, however, there were multiple problems with pinning the insider-trading label on Perdue’s stock trades: He hadn’t attended the briefing, the briefing seems largely to have covered the same ground as a public briefing the following day, and “Perdue’s pattern of purchases and sales is . . . 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.” After that controversy, however, Perdue announced that he would avoid investing in individual stocks, outside of a few companies where he still held stakes from his time on their boards.
So, if the pattern is not a problem, what about individual stock trades?
Cardlytics
The one trading story that suggests potentially poor judgment on Perdue’s part is his trades in Cardlytics, a company in which Perdue held a significant stake and on whose board he sat for four years before becoming a senator. It was the Cardlytics trade that was examined by the Justice Department and the SEC, each of whom ultimately decided against bringing any charges. But the case is far from a slam-dunk insider-trading story.
As the Journal-Constitution recounts, Perdue resigned from the Cardlytics board when he was elected to the Senate, and “was allowed to hold onto shares of a Georgia startup even after resigning from its board, a deal that earned him millions of dollars when the company went public several years later” — an ownership stake disclosed in the company’s public SEC filings. The company defended this on the record:
A Cardlytics executive told The Intercept, a left-leaning online news organization, that the company allowed Perdue to retain his shares until its public debut because he had been instrumental in its success. The company noted that it had made similar agreements with other employees and that extensions like these are common practice. “Senator Perdue was a very involved and valuable board member, particularly as a past CEO of a retail company,” Dani Cushion, Cardlytics’s chief marketing officer, told The Intercept. “In 2014, the board unanimously agreed to give Senator Perdue the grace period to make use of the options he had earned. This is not unique to Senator Perdue and in other circumstances with employees leaving Cardlytics, the board has also granted the same opportunity.”
Did the company also want to stay on the good side of an incoming U.S. senator? Undoubtedly. In January of this year, Perdue got an apparently misdirected email from the CEO and founder, Scott Grimes, who had too many Davids in his contact list:
“David, I know you are about to do a call with David Evans,” Mr. Grimes wrote from his iPad. . . “As an FYI, I have not told him about the upcoming changes. Thanks, Scott.” Mr. Evans, then the chief financial officer of Cardlytics, stepped down from that role six weeks after Mr. Grimes sent the email, at the same time that Mr. Grimes announced plans to assume a new role as executive chairman . . . Mr. Perdue responded to Mr. Grimes’s email by saying he would check with his Senate scheduler but “I don’t know about a call with David or the changes you mentioned.” Mr. Grimes wrote back the next morning to apologize. “David, Sorry. That email was not meant for you. Wrong David!” he wrote.
At first glance, it seems that Perdue may have read between the lines and decided that “changes” that the CFO had not been told about were probably a sign to sell:
Mr. Perdue then contacted his wealth manager at Goldman Sachs, Robert Hutchinson, and instructed him to sell a little more than $1 million worth of Cardlytics shares, or about 20 percent of his position, three of the people said. One person familiar with the inquiry into Mr. Perdue’s trades said that the conversation was memorialized in an internal Goldman Sachs record later obtained by the F.B.I.
Legally speaking, this would seem to fit the textbook situation of trading on non-public information that doesn’t violate the law: Perdue no longer had any confidential relationship with the company, and while the CEO did, there is every indication that he sent the email by accident, rather than as an effort at a tipoff. That said, if Perdue used his prior knowledge of the company to put two and two together, he was at least skating close to an ethical line. Critics point to a drop in the stock price following the personnel announcements — but that may not be why the price dropped. As the Times notes, the company released underwhelming sales numbers the same day (March 3), and as you may also recall, March 2020 was not a great month for the stock market in general, which collapsed amid the early weeks of the pandemic. Further complicating the picture, Perdue held onto the bulk of his Cardlytics stock, and the sales were consistent with advice he had already received and that made sense as a matter of diversifying his portfolio:
Mr. Perdue’s legal team told investigators that Mr. Hutchinson had advised their client in October 2019 that he needed to sell Cardlytics shares to balance his holdings. The shares had increased in value and the advisers argued that Mr. Perdue should take the profits from the sales and reinvest them elsewhere to limit his exposure to the fluctuation of a single stock. Mr. Perdue elected to go forward with those changes in January, his lawyers said.
The closing price of Cardlytics stock soared from $10.40 a share on December 17, 2018, to $33.44 a share on September 30, 2019, to an all-time high of $98.16 a share on February 10, 2020, before starting to plunge in early February; a rational investor in Perdue’s position would naturally want to cash out some of that climb even if he was holding onto most of his position. He wasn’t alone; the stock had sagged to $79.39 a share by the end of February, before the personnel announcements, and collapsed to $29.39 on March 23, at the trough of the market’s overall pandemic panic. But investors who bought when Perdue was selling were richly rewarded (as Perdue has been with the rest of his more than $3 million in Cardlytics holdings, which he increased again when the price bottomed out): by December 10, 2020, the stock had hit an all-time high of $135.14 a share. Company insiders sold more stock than they bought in 2020, but still own 14 percent of the company — a pattern consistent with trying to cash out a portion of a big run-up while staying bullish overall on the company’s long-term prospects.
Had I been advising Perdue as his lawyer, I probably would have told him to wait longer before selling, to avoid the suspicion of selling on the misdirected email, and that would have spared him the headache of the DOJ and SEC putting him through the wringer. Still, he did nothing illegal, and nothing that had anything to do with his role as a senator.
The insider trading stories get weaker from there.
First Data
The Daily Beast homed in on Perdue’s sales of First Data stock at a profit in 2019, again glossing over who made the day-to-day trading decisions. The Daily Beast article argues that Perdue’s “transactions . . . coincided with both policy announcements affecting the company and a major merger that sent its stock price soaring,” but has to admit that “Perdue’s office denied that the senator had any advance knowledge of that merger,” and offers no evidence to the contrary. The Daily Beast report tries to imply that perhaps Perdue had advance non-public notice of favorable regulatory changes, but look at the timeline:
The public didn’t get a glimpse at those concessions—which rolled back some of the consumer protections—until CFPB officially asked stakeholders for comment on the changes in June 2017. As it happened, Perdue’s DBP Enterprises, through the senator’s investment adviser, had begun purchasing First Data stock just a couple weeks earlier. From June 2, 2017, through December 11, 2017, Perdue reported 17 First Data purchases, acquiring between $100,000 and $250,000 in holdings in the company. Then on December 13, he liquidated his First Data holdings entirely. Perdue’s office said the transactions had “nothing to do with his role in the Senate.”
Yes, the Daily Beast is counting purchases all the way into December as if they preceded a rulemaking in June. In fact, ten of the 17 purchases came on or after July 5. We are told that further purchases “coincided with a major CFPB move on its prepaid card rule,” but without any indication of what Perdue was told, who made the decisions, or what “coincided” even means (in this case, Perdue purchased the stock about two weeks before the announcement). The Times notes Perdue’s profits from the trades and adds that he “had received campaign contributions from First Data executives,” but that has nothing to do with insider trading. Moreover, it is unsurprising that some executives at a large Atlanta-based company would donate to a Georgia senator whose ideological positions are beneficial to the company’s interests.
BWX Technologies
The Daily Beast also launched a broadside against Perdue for buying stock in BWX Technologies, a submarine-parts manufacturer, leading to a Democratic congressman and a purportedly nonpartisan “watchdog group” requesting an investigation. But again, look at the timeline:
In January 2019, Perdue was named as the chairman of the Senate Armed Services Subcommittee on Seapower . . . in the month before he took over the job, Perdue did something unusual: he acquired up to $190,000 worth of stock in BWX Technologies, a company he had never invested in before. The Virginia-based firm had lucrative contracts with the U.S. Navy to develop high-tech components for its fleet of nuclear submarines—and it was looking to expand that business when lawmakers took on the 2019 [defense bill that] Perdue would have a key role in shaping. . . . By the time the bill passed the Senate in June, Perdue touted several wins—one of which was securing $4.7 billion for [the class of submarines that] BWX is one of two to three vendors with Pentagon contracts to design and make key parts for . . . From February to July, as he was shaping the defense bill and working for that submarine funding, Perdue reported selling off all his shares of BWX—reaping a healthy profit in the process . . . the company’s stock price also rose from the time Perdue first bought, in December and January, through the six-month window during which he sold off the shares.
If you’re keeping score at home, Perdue started selling in February — months before the passage of the bill. Of course, the price would rise gradually as the market absorbed public information about BWX’s prospects of profiting from the appropriations bill, but anyone looking to cash in on the news would want to hold their position until the market had priced in the certainty of passage. What the Daily Beast describes is the opposite of insider trading.
Other Companies
The Times finds it suspicious that Perdue bought shares of Pfizer in late February 2020, but admits that Perdue “had frequently traded Pfizer stock before this year.” It complains in general about Perdue owning bank stocks, but identifies nothing resembling improper trading.
Would it be a better practice for Perdue and other senators to get out of investing in individual stocks? Yes, and Perdue has implicitly acknowledged that by this point in time. But given how much weight Jon Ossoff has placed on falsely painting Perdue as some sort of white-collar criminal, you’d really think he had more to work with than this.