An Invitation to Corruption

As long as lawmakers are allowed to trade individual stocks, disaster profiteering is always a risk.

This week, ProPublica and the Daily Beast reported that members of Congress sold equities after receiving briefings on the dangers of the novel coronavirus. The sales came before a global financial panic slashed stock prices around the world, and before the American public was broadly cognizant of the scale and danger of the virus.

Senator Richard Burr, the chairman of the Senate Intelligence Committee, sold off what looks like a large share of his personal holdings the day before Valentine’s Day, picking up between $628,000 and $1.72 million in cash. Roughly a week later, the market tanked. And Senator Kelly Loeffler, whose husband is the chairman of the New York Stock Exchange, began selling equities on January 24, the day of an all-Senate briefing from officials including Anthony Fauci of the National Institute of Allergy and Infectious Diseases. Through mid-February, her household dumped dozens of stocks and bought shares in Citrix, which makes teleworking software.

Both politicians have contested the allegation that they were trading on nonpublic information and putting themselves before their constituents. (Members of Congress are legally barred from buying and selling based on the information they get in classified briefings.) On Twitter, Loeffler said: “This is a ridiculous and baseless attack. I do not make investment decisions for my portfolio. Investment decisions are made by multiple third-party advisors without my or my husband’s knowledge or involvement.” She also posted a document indicating that she was informed of the trades in mid-February. Burr’s office said he sold his shares when the markets showed signs of volatility, implying he was acting on public information only.

Nevertheless, the moves raise obvious questions about the prospect of insider trading and disaster profiteering. As the conservative commentator David French noted, “The potential insider trading is dreadful and possibly criminal, but what could elevate this to a historic scandal is the idea that senators may have known enough to be alarmed for themselves yet still projected rosy scenarios to the public and failed to make sure we were ready.” The simple perception that officials might have prioritized their own financial well-being over the well-being of American households is damaging enough, even if the trades were innocuous.

The fallout is likely to include investigations of who knew what and when, and who directed what investment decisions based on what information. There is no need for it, and the fix here should not be in a specific parsing of individual portfolios and communications, but in a broad rule designed to bolster public confidence in the country’s political institutions. Members of Congress—with or without inside information—simply should not be allowed to trade stocks.

The lack of a ban means that Congress is perpetually rife with conflicts of interest, with dozens and dozens of stock trades every year raising the specter of public corruption. It also means that scandals emanate from the country’s legislative body again and again and again, year after year: Former Representative Tom Price bet on health-industry companies; former Representative Chris Collins told friends and family to dump biopharmaceutical shares, which led to his pleading guilty on insider-trading charges. (In that case, he had nonpublic information from sitting on a corporate board while in office.)

What is more, there is clear evidence that members of Congress profit from their position through equity trading—a problem that was more acute before the passage of the 2012 STOCK Act, which tightened insider-transaction rules for public officials. Several studies have shown that politicians’ portfolios consistently outperform the market. This should be an enormous, high-flying red flag. One analysis of 61,998 stock trades made from 2004 to 2010, for instance, showed that politicians outperformed the market by 20 percent, with the portfolios of high-ranking Republicans beating the market by a whopping 35 percent.

The fix is simple and obvious, deployed in many of our peer countries: Just don’t let public officials be active investors. One option would be to require members of Congress, their household, and their staff to sell individual equities and instead to put their money in things like index funds and diversified mutual funds. This would mean that politicians would benefit from bull markets, but that they would be unable to make bets on specific companies and market sectors. Another option would be to ask members of Congress to put their holdings into a blind trust. Finally, politicians could be required to hold their investments for the duration of their public service, though that would leave open the possibility of corrupt members pushing for legal and regulatory changes that would benefit their own portfolios.

The country should not have to wonder whether politicians’ stock trades were corrupt. It should not have to think about politicians’ portfolios at all.