Wednesday, November 4, 2015

Insider Trading, John Boehner and The STOCK Act Travesty

by Nomad

Even though insider trading is a serious crime, until Obama, government officials were immune from prosecution.
New legislation was supposed to eliminate this oversight and it was supposed to be a major step in the right direction. It didn't quite work out that way.


Investigative journalist John Vibes, writing for the Activist Post, reported recently that less than two weeks before the economic collapse of 2008, several members of Congress took their money out of the stock market.

According to Vibes' sources, many top government officials and staff were given advance knowledge that market was about to melt down in secret meetings with the Fed and the Treasury Department(For the full story, click on this link.)
With this information, they engaged in insider trading.
It was revealed that Senator Shelley Capito and her husband sold $350,000 worth of Citigroup stock at $83 per share, just one day before the stock dropped to $64 per share. Another shady trader was Congressman Jim Moran, who had his biggest trading day of the year days after the secret meeting, sellings stock in nearly 100 different companies.
Two weeks is a lot of advanced warning. In Washington, as the collapse approached, politicians on both sides were more interested in saving their own skins than protecting the citizens. 

Who Was and Wasn't Above the Law
However, the most amazing part of this tale is that, despite this use of privileged information for private benefit or at least, safeguarding, no laws were actually broken. 

The standard definition of "insider trading,” is when an individual buys or sells stocks by using non-public information given to them by the people of a company. This is true for information from from government officials. Providing this information offers the certain people a great advantage which can easily be turned into cold hard cash.
Or, in the case above, to prevent a loss of cash.
For the public sector, it's always been considered a serious offense or at least at one time it was.

Martha Stewart, the home guru, was arrested in June of 2003 and taken to court in January of the following year, where she was convicted of obstruction of justicesecurities fraud, and other lesser crimes. Accoding to the charges, Stewart sold stock in a biotech company after receiving a tip that the Food and Drug Administration had rejected the company's application of a new drug. In that transaction, she reportedly avoided losses of $45,673. A lot for me and you but nothing for a woman whose net worth was at that time estimated at around $700 million.

Upon her conviction, Stewart spent five months in West Virginia prison. Many questioned whether she wasn't being unfairly singled-out. Like a lot of people, I asked: Wasn't this kind of thing a common practice on Wall Street?

Taking STOCK of Washington 
It might surprise you to learn that at the time that Stewart was arrested, members of Congress and high-ranking government officials were exempt from insider trading laws.

On April 4, 2012, President Obama signed into law the Stop Trading on Congressional Knowledge Act ("STOCK" Act) which was supposed to equalize the insider trading laws for members of government and members of the public.
The law also explicitly prohibits covered officials from using non-public information gained in the course of their official duties for personal profit and makes private IPOs off-limits for lawmakers.
According to Vibes, many of the key provisions of the law (especially those which required greater openness) were watered down by Congress, reducing the effectiveness of the law.

At the signing, the President said:
"It's the notion that the powerful shouldn't get to create one set of rules for themselves and another set of rules for everybody else.... If we expect that to apply to our biggest corporations and our most successful citizens, it certainly should apply to our elected officials"
Fine words but what about the reality? Vibes points out that in practice the laws are useless.
Whenever a politician is accused of anything, they are defended by other politicians and the investigation is immediately stonewalled.
In fact, the Stock Act ultimately failed when given its first stress test.

The Sutter Investigation 
Less than a year after the laws was signed, the Securities and Exchange Commission (SEC) launched an investigation of possible insider trading by a member of the House Ways and Means Committee, Brian Sutter.

In case you don't know, the Ways and Means Committee is charged with reviewing and making recommendations for government budgets.
In an efforts to get all of the facts, the SEC first asked the Committee to voluntarily turn over records about Sutter's transactions, emails, and phone records. This would have presumably cleared Sutter of all charges had those charges been unfounded.

The New York Times gives us additional information on the allegations against Sutter.
It seems that this SEC investigation was related to share trading by insurance companies  following a change in the Medicare reimbursement rates by the Centers for Medicare and Medicaid Services in April 2013. This extremely valuable insider information was apparently leaked out before its official announcement.

And it was not just speculation. The S.E.C. was allegedly able to trace back to the source of the information to Sutter.
According to the S.E.C.’s filing to enforce its subpoenas, Mr. Sutter spoke with a Greenberg Traurig lobbyist just a few minutes before the lobbyist emailed a brokerage firm that “very credible sources” had confirmed the Medicare change. The brokerage firm then issued an alert to clients about the reimbursement policy that resulted in a jump in the share price of insurance companies that would benefit.
The SEC alleged Greenberg Traurig LLP lobbyist Mark Hayes (himself a one-time senior congressional aide from 2002-2011) received this valuable information from Sutter. 

According to one source, from Hayes, the scoop was allegedly passed to an analyst at the investment research firm, Height Securities LLC, who then sent an alert to the clients. Within minutes of the alert, trading in the stocks of insurers such as Humana Inc. spiked dramatically. 
(The Wall Street Journal adds this tidbit too: in addition to being an outside consultant to Height, Mr. Hayes was a lobbyist for Humana.)

Thus, the information could be tracked directly from the horse's mouth through to the opposite end, in other words. Nevertheless, Height maintains that it didn't receive confidential information from the government.

Greenberg Traurig: A K Street Powerhouse
An international law firm founded in Miami, Florida, Greenberg Traurig, is not a mom and pop company. With approximately 1,800 attorneys, it had once been one of the largest and most successful firms on K Street.
But along came the Jack Abramoff lobbying scandals which led to the most extensive federal investigations in American history.

The firm has of late been on the rebound and reportedly topped $25 million in revenue. It has some of the best lobbyists in Washington combined with the signing of some of the most lucrative contracts in the business.

When pressed by the SEC, The Ways and Means Committee, refused to provide the requested information. So the SEC was forced to issue subpoenas. In response, the general counsel’s office for the House sent a letter claiming that the subpoenas were "vague, confusing, overbroad, unduly burdensome, unlikely to lead to the discovery of admissible evidence, and otherwise improper."

In addition, the letter claimed that Sutter was legally untouchable and that the subpoenas were “repugnant to public policy."  The oversight granted under the Stock Act, contrary to that response, was a matter of public policy.

In other words, instead of complying with the Stock Act, Republican-dominated Congress largely ignored the provisions of the law.

The Pathetic Denouement  
But that's not quite the end of the story. The SEC refused to let the matter die a lonely death and was forced to turn to the federal court for an order requiring compliance by the Ways and Means Committee.

That brings us up to July of this year. Journalist Lee Fang offers the final depressing (but predictable) chapter in the saga:
In a little-noticed brief filed last summer, lawyers for the House of Representatives claimed that an SEC investigation of congressional insider trading should be blocked on principle, because lawmakers and their staff are constitutionally protected from such inquiries given the nature of their work.
The legal team led by Kerry W. Kircher, who was appointed House General Counsel by Speaker John Boehner in 2011, claimed that the insider trading probe violated the separation of powers between the legislative and executive branch.
It was not a total loss. In December 2014, Sutter resigned from his Ways and Means post. SEC continues to press for Sutter's testimony. The investigators also dropped this bomb.
The SEC later revealed that it was looking into the trading activities of 44 clients of Height Securities, “including some of the largest hedge funds and asset management advisers in the nation.”  
Where is Congressional Oversight Committee which presumably would be interested in looking into what went wrong with STOCK? They have other things on their minds... like tirelessly investigating Hilary Clinton's email server scandal. 

Greenberg Traurig, Boehner, and Abramoff
Speaker Boehner used every legal tool (at taxpayer's expense) to keep the SEC investigation into insider trading stymied. Such a effort by the leader of the House to undermine legislation that Congress had once hailed enthusiastically might make one wonder why.
Why would Boehner work so diligently against the STOCK Act?

One obvious reason for that is his easygoing relationship with lobbyists. Boehner has had a reputation of being very cooperative. When news of the Speaker's decision to leave politicians, many lobbyists went into mourning at the thought. 
Commented one lobbyist: 
"We are grateful for Speaker Boehner’s leadership in so many areas."
We can imagine. Another tweeted:
"History will conclude that John Boehner’s leadership as Speaker of the House was an unparalleled success."
Success for whom?
Yet another said that Speaker Boehner’s departure will leave "a hole, to be sure." 
Politicians take pride in the fact that in Washington most holes are invariably filled.

One nexus point between the Sutter investigation, Boehner and lobbyists is related to Jack Abramoff whom you might recall worked at the law firm at that center of the Sutter investigation. 

Journalist Jack Cafferty, in his book, "It's Getting Ugly Out There: The Frauds, Bunglers, Liars, and Losers Who Are Hurting America" offers us a piece of the puzzle which perhaps explains why Boehner chose to shut down the SEC investigation. 
By one estimate, more than two hundred members of Congress received political contributions from Abramoff during Bush's first term.
That's exactly the time that Abramoff worked for the company at the center of the SEC probe. (2001-2004).
Cafferty claims that Boehner accepted more than $30,000 from Greenberg Traurig lobbyist Abramoff as part of a Indian tribes casino arrangement. In that scandal, lobbyists were accused of illegally giving gifts and making campaign donations to legislators in return for votes or support of legislation.

Michael Collins reported in the January 5, 2006, Cincinnati Post
that while Boehner did not get any political contributions directly from Abramoff, but his political-action committee, the Freedom Project, did get money from four tribes represented by the lobbyist.

To put that into the proper perspective Rep. Bob Ney, R-Ohio, who has become one of the central figures in the political corruption investigation, received $31,500 in donations from Abramoff and his clients - $1,000 less than Boehner. 
In 2007, Ney was convicted on charges of corruption and served a 30-month jail sentence. Boehner was sailed through and eventually became Speaker.

The full story, or how valid any of these connections actually are, will never be known because this kind of information never reaches the public.

The Meaning of the Word "Fix"
Therefore, despite all of the applause the STOCK Act received from Congress and the president went it became law, when it mattered, the law was buried under mountains of legal motions and claims of immunity.
A cynic would say that Congress was never serious about limiting insider trading in Washington. It's too deeply ingrained in the overall corrupt atmosphere of the capitol.
Fang notes:
Wall Street investors routinely hire specialized “political intelligence” lobbyists in Washington to get insider knowledge of major government decisions so that they may make trades using the information. But little is known about the mechanics of political intelligence lobbying, which falls outside the scope of traditional lobbying law, and therefore does not show up in mandatory lobbying disclosure reports.
Suddenly the entire concept of insider trading laws has been made irrelevant by lobbyists for Wall Street and by government insiders with very helpful advanced information.
Those who protect them, and that starts at the top of the legislative branch of government, are equally at fault.  

Applause followed by Disgust
When Congress passed the STOCK Act, there was a lot self-congratulation by Washington. One of the voices was Republican Congressman from Ohio, Bill Johnson, who said at the time:
This piece of legislation – the STOCK act – strengthens rules already on the books to not only prevent insider trading by members of Congress and their staffs, but all employees in all three branches of the federal government – judicial, legislative, and executive. This ensures a more honest and open government that is accountable to the American people."
Tea Party favorite Johnson laid it on with a shovel when he said:
The STOCK Act is one important step toward regaining the trust of the American people, because Americans need confidence in the people who serve them. Our founding fathers made sure that everyone would be treated equally under the law – whether you are an elected official or not. The STOCK act makes sure of that.
Washington was broken, Johnson said, and members of both parties, by voting in favor of this legislation were taking "a big step forward to fix it."
Except it didn't.

Retiring Speaker Boehner will soon leave Washington, proud of the fact that through his efforts to quash a perfectly valid SEC investigation, Washington remains just as broken as ever. 
And nobody gives a damn -especially Wall Street lobbyists and all those who aiding and abetted. 

Except for one person maybe. Ex-con Martha (aka "Sugar-free Marty") Stewart must be feeling pretty peeved at the injustice of it all.


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