Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, November 14, 2011

Insider Trading by Congressional Officials is NOT "Perfectly Legal"

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.

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I must respectfully disagree. as I document over at my blog ( ), there is debate and, moreover, i believe those of us on there side of the debate have the better argument.

Posted by: Stephen Bainbridge | Nov 14, 2011 12:25:23 PM

I agree with Professor Bainbridge. The better argument under current Supreme Court doctrine is that breach of a general duty owed to the public isn't sufficient to create a 10b violation.

Posted by: Dana Muir | Nov 15, 2011 7:10:41 AM

Although the relationship of members of the House and Senate would be sui generis, I would think members of the House could easily be considered to owe duties to the House itself for these purposes. The House, after all, retains the right to discipline members, including with expulsion.

Posted by: Royce Barondes | Nov 15, 2011 11:04:32 PM

I know from experience that the SEC has investigated insider trading by members of Congress and did not bring cases because they could not find the existence of a duty sufficient to meet the Supreme Court Dirks standard, even where they concluded that the members of Congress had invested based on information that was material and nonpublic and that they had learned in carrying out their official duties.

Posted by: Hardy Callcott | Nov 16, 2011 1:14:14 PM

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