Monday, November 14, 2011
60 Minutes ran a piece last night on members of Congress who may have used confidential information obtained through their positions to make profitable stock trades. Curiously, the correspondent asserted that the practice is “perfectly legal” and legislation is necessary to prohibit the conduct.
Yet this common wisdom -- that insider trading by Congressional insiders may be unethical, but is legal -- is “a specious claim,” according to Professor Donna Nagy, who has written a law review article, “Insider Trading, Congressional Officials, and Duties of Entrustment” (available on SSRN), as well as a shorter Roll Call piece, “Enforce Laws to Fight Lawmaker Insider Trading." Professor Nagy explains that this fundamental misunderstanding stems from two misconceptions: “a lack of regard for the broad and sweeping duties of entrustment that attach to public office and an unduly restrictive view of the Supreme Court’s precedents….” As she explains, “the (un)lawfulness of Congressional insider trading therefore turns on whether these officials owe duties of trust and confidence to others who would be deceived and defrauded by the self-serving use of nonpublic Congressional knowledge.”
Is there any debate about the answer to that question? While legislation to clarify insider trading law generally may be useful , there is no “legal loophole” that permits insider trading by Congressional insiders.