Congressional insider trading

Larry Ribstein —  14 November 2011

CBS is all hot and bothered about insider trading by Congress.  Steve Bainbridge is not so sure it’s illegal. Neither am I, and I question whether it should be on policy grounds (see here, first published here).  I suggest more disclosure, and reducing the opportunity for all kinds of corruption by having less law.

Larry Ribstein


Professor of Law, University of Illinois College of Law

4 responses to Congressional insider trading


    SEC Rule 10b5-1 creates a situation in which the trader may posses the information, but if they can show that this knowledge was not the factor used to facilitate the trade then the action would not constitute insider trading. The problem here is that disclosure requirements have been rather lax for quite some time, and the burden of proof in criminal law is very high. Therefore it is possible to assume that firms have the environment needed to get away with a lot more.



    I think your notion of disclosure (full and informative, not the generalities that usually pass muster as Congressional financial disclosure) as being the most effective enforcement device for Congressional insider trading is exactly right. Surely no one in his or her right mind would leave the enforcement to the SEC, and the foxes won’t tattle on each other as they raid the henhouse. And your point that this is more evidence that government is too intrusive is right on, and indeed the access to insider trading profits may not be the least of the reasons for “government growth.”

    However, I do have one quibble with your blog on this subject. You several times refer to the benefits of MCs being investors in American businesses. That may be true if in fact they were real investors. But the real profits from insider information come from fast trading, not from buying and holding. Congressional investors is one thing; Congressional traders is another. I don’t think that either of the empirical studies you cited understand this weakness in the data base they are using.

    As for the legal question, there is some interesting legislative history in this area. When the very first draft of the SEA of 1934 was presented to the Senate committee considering the new legislation, it contained a predecessor section to the present Section 10b. That provision explicitly outlawed what we now call insider trading by “anyone.” A member of the committee on the first day of hearings asked a staff member if that included Members of Congress, and got a positive response. The draft bill considered the very next day omitted that provision, and it never was discussed again.

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