Insider trading is ugly, unfair and un-American
This article was online in The Tennessean, but Sen Corker called…and now it’s no longer available. Wow. Let’s add muzzling the press to the list of things that are un-American.
Phoebe Venable, For The Tennessean 11:04 p.m. CST November 20, 2015
One might say that the spirit of America is fair play. That’s not to say that all’s fair in America; there’s much, of course, that’s not fair. What I mean is that as a nation we’re guided by an idea — formally outlined in our noble Constitution and practiced down to our playgrounds — that everyone has an equal shot. Regardless of color, creed or capital, you can make it. You can succeed. You can be happy. You can make a difference. You can even be president. The rules aren’t written to ensure that this happens. No, that’s going to require hard work, smarts and some luck, too. Rather, what the rules do is ensure that no one stands in your way. Not cheats, not thieves, not bullies.
We don’t like individuals breaking the rules — be it Lance Armstrong, Richard Nixon, Bernie Madoff, the MIT blackjack team or the 1919 Chicago White Sox — and we don’t like corporations like Enron, Arthur Anderson, AIG, Halliburton or Volkswagen doing it either.
There are fair-play rules when it comes to the markets. These rules disallow bad behavior such as insider trading, market manipulation, and false statements and omissions of material fact in connection with security sales.
What is insider trading?
Insider trading is a complicated issue, but here are the basics: Corporate insiders — officers, directors, owners of more than 10 percent of a class of the company’s stock and those who have been “imputed” the duty of trust — may not trade in the company’s stock based on material nonpublic information. If they do, it’s fraud. That’s because a corporate insider is legally obligated to put shareholder interests before his or her own. This obligation or duty to the company can be imputed — a legal term for “assigned” — to another when an insider gives that person a tip based on material nonpublic information that’s likely to have an effect on the company’s stock price.
What is material nonpublic information? Material information is anything that would be relevant to an investor making a decision to buy or sell stock. Nonpublic information is anything that hasn’t been disclosed to the general marketplace. Put them together and what you’ve got is unfair play. The blatant disregard of the rule and other players is cheating.
Senator faces allegations
Some of you may have read the recent Wall Street Journal story regarding Sen. Bob Corker’s previously undisclosed trades in the Chattanooga real-estate firm CBL & Associates. Those trades were incredibly lucrative — amounting to millions of dollars in gains for Corker and his family — and are with a company that the senator has decades of history with, both in business dealings and in campaign contributions from CBL executives. By Congressional ethics rules, Sen. Corker is supposed to disclose those trades. It’s alarming that a senator, particularly one who sits on the powerful Senate banking committee, would allow himself anywhere near something that so smacks of insider trading. Let’s hope that’s not the case.
To make matters worse, just last month Sen. Corker told viewers of CNBC to “short” (bet against a stock’s price increasing) shares of Fannie Mae and Freddie Mac. Besides the fact that it’s not often — or ever, as some reporting mentioned — that a U.S. senator gives advice on securities trading, this is a senator who co-authored legislation on Government Sponsored Enterprise reform. That’s eyebrow-raising and unbecoming at the very least.
SEC clamps down
Founded in 1934, the U.S. Securities and Exchange Commission (SEC) is the federal agency responsible for proposing, regulating and enforcing securities rules. In recent years, the SEC has filed insider trading cases against hundreds of entities and individuals, including financial professionals, hedge fund managers, corporate insiders, attorneys and others whose illegal tipping or trading has undermined the level playing field that is fundamental to the integrity and fair functioning of the capital markets.
Congressional members and staff certainly aren’t outside the law. In fact, there is a court case currently underway deciding if a former U.S. House of Representatives staff member leaked material nonpublic information about Medicare reimbursement rates to a lobbyist. To clear up any ambiguity about the use of “political intelligence” for personal gain, the STOCK Act (Stop Trading on Congressional Knowledge Act) was passed in 2012.
John Adams, one of our Founding Fathers and the second president of the United States, once said that we are “a government of laws, and not of men.” That’s because laws can be good, impartial and dependable, while men can be cheats, thieves and bullies. Nothing is more important to the lives of Americans — and the idea of America itself — than a level playing field and fairness in how that play is conducted.
Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors
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