(CN) — Records showing that U.S. lawmakers with early reports on the coronavirus pandemic dumped private stock holdings before markets posted recordbreaking losses has roiled the nation, but some experts say criminal fallout is unlikely.
Courthouse News reached out to former federal prosecutors for their insights on the traditional avenues of accountability, from the difficulty in trying an inside-trading case to the toothlessness that tends to gum up congressional oversight.
“Probably there should be an absolutely bar on this,” Harry Sandick, a former prosecutor for the Southern District of New York, said in a phone interview. “You should be permitted to have, you know, mutual funds and things like that, but not individual stock.”
The idea also intrigued Jennifer Rodgers, who once prosecuted cases in the same district.
“You already have a lot of disclosure requirements when you take office,” Rodgers noted in a phone interview. “So, I don’t think it should be done as just a knee-jerk reaction. On the other hand, it doesn’t seem like such a huge thing. They can still own funds as long as they don’t control them, and there can be blinding procedures in place.”
The anticorruption watchdog Citizens for Responsibility and Ethics in Washington already has called for a congressional investigation of possible insider trading on the pandemic, and its spokesman Jordan Libowitz noted such a ban would nip eyebrow-raising trades like these in the bud.
“There are a number of options and that’s certainly a pretty solid one,” Libowitz said in a phone interview. “It would totally avoid this issue altogether if it were banned. I don’t know if it’s not necessarily the best option, but it is certainly better than the current situation.”
At a time of soaring distrust in national institutions, the U.S. public has been clamoring for action after a series of bombshell reports showed how Congress members — in particular, Senate Intelligence Committee Chairman Richard Burr and Senator Kelly Loeffler — dumped millions in securities while privy to confidential information about how the Covid-19 pandemic was expected to shatter the global economy.
NPR obtained a secret recording of Burr telling major donors three weeks ago — on the same day President Trump promised the illness would miraculously disappear — that the novel strain of coronavirus would be “akin to the 1918 pandemic,” where Spanish flu infected a quarter of the world’s population.
It would be another week before mounting evidence on insufficient medical supplies and other expected dangers of the virus would cripple financial markets. By that time, the North Carolina Republican had sold off up to $1.7 million in 33 separate transactions.
Senator Kelly Loeffler, another Republican from Georgia, meanwhile dumped hundreds of thousands in stocks after attending a Jan. 24 briefing on the coronavirus, but she bought between $100,000 and $250,000 in Citrix, a technology company whose teleworking software gave it a small boost during a time of market turmoil, as first reported by the Daily Beast.
“That looks kind of manipulative here,” remarked Sandick, referring to the Citrix stock purchase.
Now a white-collar defense attorney with Patterson Belknap, Sandick noted that he relies upon Citrix software as one of many attorneys working from home at the time of the national emergency.
Both he and Roghers said they understood the public outrage but that the senators are unlikely to now face federal prosecution.
“This just doesn’t quite fit the mold of a typical insider-trading case, where the information is not about something having to do with the company that’s involved in a particular security, but rather a world event like this particular pandemic,” Rodgers explained.
Securities fraud cases require a jury to find that an investor traded on material nonpublic information, meaning that the knowledge would have to be relevant to the stock and known to only certain insiders.
As a thought experiment, Sandick posited the case of a Columbia University professor of epidemiology hearing from colleagues: “Boy, this one’s going to be really bad. There’s going to have to be a mass shutdown. There’s going to be an economic collapse.”
“You would be totally within your rights to call your broker and start selling more, or putting stop-loss orders on your equity positions, or whatever,” Sandick said. “That would be totally permitted, because none of what you’re learning is non-public. It isn’t a breach of a fiduciary duty. It’s available to anyone interested in studying these things.”
Offering different defenses, both senators already have denied insider trading. Burr insisted in a statement that he sold his stock based on health and science reporting out of CNBC’s Asian bureaus.
“Understanding the assumption many could make in hindsight however, I spoke this morning with the chairman of the Senate Ethics Committee and asked him to open a complete review of the matter for full transparency,” Burr wrote.
Loeffler floated a different defense, that third-party financial advisers made the trades without her knowledge or participation.
The carefully worded statement did not say whether Loeffler shared information that she learned from her official duties with those advisers or her husband, the co-owner of the assets.
Citizens for Responsibilities and Ethics in Washington filed complaints with the Senate Ethics Committee chairman and vice-chair — Senators James Lankford and Chris Coons, respectively — asking to probe potential violations of ethics rules, securities law and STOCK Act, legislation passed to prevent congressional insider trading.
“Especially in these difficult times, any indication that a senator abused his or her office to avoid a personal financial loss is cause for deep concern,” Noah Bookbinder, executive director of the committee otherwise known as CREW, wrote in a 4-page letter.
With the senators being investigated by their fellow Republican leading the committee, recent history does not bode tough enforcement.
“The other thing is, truthfully, ethics enforcement in the Senate and in the House as well has been pitiful,” Rodgers said.
Expulsion from the U.S. Congress is rare, happening only 15 times in the Senate and five times in the House of Representatives throughout their history. Unlike the Senate, the House’s Office of Congressional Ethics investigates and makes recommendations from the outside to ensure nonpartisanship and independence.
CREW’s Libowitz agreed more needs to be done to address the crisis in confidence.
“It is an issue that people need to be able to trust and have trust in their government, and it raises questions of should senators even be in this position,” Libowitz said. “Would they be better off being forced to sell their stocks or put all their interests in blind trusts so that people don’t question uh where their loyalties in decision making lie.”
Whatever the gaps in criminal and congressional enforcement, the senators may be dogged by political problems that will outlast their investigations.
“I think this has attracted so much attention is to be saying on the one hand, ‘All is well, all is well,’ while you’re selling millions of dollars in securities makes it seem like you’re lying to the public about all being well,” Sandick said. “And that’s a serious problem for a politician. And that is the real outrage here.”
Elie Honig, another former federal prosecutor for the Southern District of New York, noted that the passage of the STOCK Act — short for Stop Trading on Congressional Knowledge — gave a potential criminal case more of a chance for lift-off.
“You don’t have to be a CEO or an employee of a company though, to trade on insider information,” Honig said in a phone interview. “You can be somebody who received a tip from the outside. You can be a member of Congress if you receive nonpublic information.”
Burr’s defense that he read public reporting about the pandemic has a long history in the Southern District of New York, where former U.S. Attorney Preet Bharara famously won the insider-trading conviction of billionaire Raj Rajaratnam. A jury in that case rejected what Rajaratnam’s team described as the mosaic defense, that the billionaire’s inside tips were part of a patchwork of information that sparked his trades.
“The question is, was he able to somehow segregate in his mind whatever information he got through his private or classified briefings in the Senate,” Honig explained.
Burr was one of two U.S. senators who voted against the STOCK ACT, which former President Obama signed into law in 2012.