This story was originally published on The Conversation, and later re-published on The Fulcrum.
Recent allegations regarding stock trading by members of Congress in the middle of the Covid-19 pandemic have raised calls for the investigation of these politicians for illegal "insider trading."
But successful prosecutions would be very difficult. Even federal judges struggle with writing clear instructions to jurors in insider trading cases. Often, verdicts are reversed on appeal due to errors in explaining complicated legal terms.
Two different laws could criminalize trading activity by senators and congressional staff. But proving a violation and convicting them is not likely.
The first is known as Rule 10(b)(5), after the section of the law under which it was issued by the Securities and Exchange Commission. This rule makes it illegal for anyone who has nonpublic information about a company to use that information to trade in the company's stock before that information is available to the public. And it applies to members of Congress because it applies to everyone.
But the second applies only to Congress: Known as the STOCK Act, since 2012 it has barred members and staff from taking advantage of nonpublic information, gained in the performance of their duties, by trading on that information before it is public.
Recently, GOP Rep. Chris Collins of New York pled guilty to violating Rule 10(b)(5). He has resigned and been sentenced to 26 months in prison. His crime was trading stock in a pharmacy company on whose board he served after receiving inside information regarding failed drug trials.
This was not difficult to prosecute under the first provision as federal prosecutor's had evidence: Collins' incriminating telephone records. The activity had nothing to do with his congressional duties.
In the current cases involving trading by senators, successful prosecution under either provision will likely be substantially more complicated than the Collins case.
The STOCK Acts defines nonpublic information as confidential and not widely disseminated to the public. That's a hard standard to prove.
Then there's the problem of so much talking by, and information flowing from, multiple sources within Congress. How can it be proved that lawmakers used only information from a confidential briefing to inform decisions to sell stocks?
There is another defense senators might raise, or that might prevent them from being formally charged. The Constitution gives members of Congress immunity for acts they take when performing their legislative duties, in a part of Article I saying that "for any speech or debate in either house, they shall not be questioned in any other place." That could make prosecution impossible for certain types of information received officially in committee or other legislative settings.
The clause has been interpreted by the Supreme Court to cover more than literal speech or debate and include anything "generally done in a session of the House by one of its members in relation to the business before it" including voting, holding hearings, writing reports or gathering information from outsiders.
The language was added to the Constitution to reinforce the separation of powers. But as the Supreme Court has stated, it "has enabled reckless men to slander or even destroy others with impunity."
George Canellos, when he was co-chief of the SEC's enforcement division, said during an earlier insider trading scandal that cases involving information from public companies are different from cases in which a member of Congress sells stock. And when it comes to information that could affect a stock price coming from Congress, he said, "the lines aren't quite as bright and the opportunities for arguments by the defense are greater."
One example is a 2014 case involving Height Securities, a stock brokerage. A confidential decision by Medicare to raise some reimbursement rates had been leaked by a congressional staffer to a Height lobbyist. The lobbyist passed it on to clients, setting off a flurry of trading in health stocks before the decision was made public.
During the subsequent investigation, the FBI discovered that as many as 400 people at the Medicare agency knew the decision before it was announced. The size of that group made it difficult to determine if the lobbyist based his conclusion on his own analysis or publicly available information.
Senate Ethics Committee guidance on the STOCK Act acknowledges how common this problem can be. "While senators and staff are prohibited from using non-public information for making a trade, a great deal of congressional work is conducted on the public record or in the public realm," it says, so whether a lawmaker gets information in a nonpublic briefing or in public proceedings is hard to determine.
Republican Richard Burr of North Carolina, one of at least four senators allegedly involved in trading, heard from intelligence officials about how other countries were responding to the World Health Organization's declaration of a global emergency. The briefing was not classified, but drawn instead from diplomatic wires and publicly reported sources. The attending senators could have gotten the same information elsewhere.
So proving beyond a reasonable doubt that what they heard was "insider" information could be very difficult.
Speech or debate clause immunity doomed previous prosecutions that depended on actions taken during a legislative hearing or related to that hearing.
In 1972, after Democrat Mike Gravel of Alaska placed a purloined copy of the Pentagon Papers into a public Senate hearing record, the Justice Department began a criminal inquiry. In the end, the Supreme Court said the speech or debate clause meant the senator was absolutely immune for anything done at the hearing or in communications with his staff beforehand.
In the Height case, when the SEC subpoenaed records from the House Ways and Means Committee to determine the source of the leak, the court upheld the speech or debate protection for committee documents. That made prosecution for insider trading impossible.
These same problems would make prosecuting the insider trading cases difficult.
And while the constitutional shield would not bar the Senate Ethics Committee from getting at the evidence — because it is "the place" where members may be questioned — senators would still be able to defend by showing that the information was based on publicly available non confidential sources.