{link url="http://www.flickr.com/photos/marriageequality/3585755567/"}Rep. Tim Walz (D-Minn.){/link}

A little-noticed bill by Rep. Tim Walz is gaining national attention this week after CBS’ “60 Minutes” aired an exposé on insider training by members of Congress. Walz, along with Rep. Louise Slaughter of New York, introduced a bill to make the practice illegal in March.

The “60 Minutes” report alleged that some members of Congress were benefiting from insider information, allegations that leaders like House Minority Leader Nancy Pelosi and House Speaker John Boehner have denied. The allegations contend that members of Congress have bought and sold stock in companies that pending legislation would impact, which is legal.

Walz introduced his bill to end that type of insider trading and make it illegal for members of Congress, the same as it is for corporate leaders.

“This is about faith in the markets, it’s about faith in democracy, it’s quite honestly what I think irritates people if they believe someone is gaming the system, it hurts all of us,” Walz told KEYC News.

Although the bill, titled the Stop Trading on Congressional Knowledge (STOCK) Act, has only one Republican among its nine sponsors, Walz’ bill is already getting some measured support from Republicans.

“I am for increased disclosure,” said Majority Leader Eric Cantor. “If there’s any sense of impropriety or any appearance of that, we should take extra steps to make sure that the public’s cynicism is addressed.”

And it’s become a campaign issue in Minnesota.

Brian Barnes, a DFL candidate challenging Republican Rep. Erik Paulsen in Minnesota’s Third Congressional District, called on Paulsen to work to end insider trading in Congress.

“This reprehensible practice—which would land business people in jail—should be banned immediately,” Barnes said. “Therefore, I am asking Rep. Erik Paulsen to join with me in condemning the members of both parties who have engaged this insider trading they themselves made legal. I am also calling on the congressman to sponsor legislation to make this disgusting conduct what it should be—criminal.”

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According to Reuters:

U.S. securities regulators are probing potential insider trading at BP Plc in the weeks and months following the disastrous Gulf of Mexico oil spill, two sources familiar with the investigation said on Monday.

Flickr: entobox

For Wall Street tycoons and corporate insiders it would be a dream come true: A hole in insider-trading laws allowing investors to profit from their access to sensitive information before the rest of the world is aware of it — like knowing the winning lottery numbers an hour before the drawing. But on Capitol Hill that dream is currently the reality.

While federal laws aim to restrict insider trading in the corporate world, neither securities law nor ethics rules prevent congressional lawmakers and their staffs from benefiting financially from the non-public information they gather from their daily routines on the Hill. That loophole, studies reveal, has allowed lawmakers to reap significantly higher Wall Street returns than other investors.

Illustration by: Matt Mahurin

On Monday, some Democratic lawmakers took another small step toward ending that practice, holding the first public hearing on a three-year-old bill to close the congressional insider-trading loophole. Though mired in the complexities of securities law and the politics of a Congress that doesn’t much like policing itself, the bill at its root asks a simple question: Should members of Congress and their staffs have investing privileges that the rest of the country doesn’t?

Supporters of the proposal — called the Stop Trading on Congressional Knowledge Act — have a ready answer, arguing that the loophole creates all-too-tempting opportunities for lawmakers to exploit their positions for personal gain, thereby defying the very notion of the government official as public servant.

“Members of Congress and their staffs should not be above the law when it comes to profiting from sensitive information,” Rep. Brian Baird (D-Wash.), a sponsor of the bill, said in a statement Monday. “The American people expect their public servants to represent their interests, not fatten their stock portfolios.”

Baird’s bill, sponsored also by Rep. Louise Slaughter (D-N.Y.), who chairs the House Rules Committee, would expand the scope of the Securities Exchange Commission’s insider-trading rules to prevent congressional lawmakers, their staffs and other federal employees, many of whom routinely access sensitive information, from trading on their privileged knowledge.

The proposal would also prevent lawmakers from sharing non-public information with third-party investors, while forcing members to report all trades larger than $1,000 within 90 days of the transaction, rather than the current annual disclosure requirement. Additionally, the bill would require so-called “political-intelligence” firms — which mine information from Capitol Hill to inform clients of investment opportunities — to register with Congress in the same way that lobbyists do today.

The proposal, supporters say, is particularly apt in the middle of a financial crisis through which the federal government has taken unprecedented steps to intervene in private markets. With the billions of taxpayer dollars that Congress has funneled into the same financial institutions in which many lawmakers are personally invested, they argue, the opportunities to misuse information gathered from Capitol briefings, private committee meetings and pow-wows with White House officials are nearly endless.

“Congress and the federal government are now so enmeshed in the operations of our financial markets that the potential for abuse by members of Congress, congressional staff, and federal employees is staggering,” Slaughter testified before the House Financial Services Oversight and Investigations subpanel Monday.

Because of lax financial disclosure rules — not to mention a general inattention to the issue — it’s difficult to know how prevalent insider trading is among federal employees. Earlier this year, however, SEC Inspector General David Kotz concluded a year-long investigation into two SEC attorneys suspected of trading on non-public information they gathered from their jobs within the commission’s enforcement division. Federal law enforcement officials are currently investigating those charges.

Appearing before the House subpanel Monday, Kotz said the problem is not with the SEC’s rules, which prohibit employees from trading on sensitive information, but from a lack of internal oversight.

“The SEC had essentially no compliance system in place to ensure that its own employees, with tremendous amounts of non-public information at their disposal, did not engage in insider trading themselves,” Kotz said. “The existing disclosure requirements and compliance system were based on the honor system, and there was no way to determine if an employee failed to report a securities transaction as required.”

Congress, however, has no such guidelines, and there’s evidence that congressional lawmakers for years have been using their access to non-public information to their personal financial advantage.

A series of studies conducted by Alan Ziobrowski, business professor at Georgia State University, for example, reveals that lawmakers’ access to non-public information lends them a clear advantage over other investors playing Wall Street. After examining 6,000 common-stock trades among select senators between 1993 and 1998, Ziobrowski found that the lawmakers yielded returns 12 percent better than the market as a whole.

A separate analysis of 8,000 transactions among certain House lawmakers found that the returns beat the larger market by 6 percent — the same abnormal return found among corporate inside traders, Ziobrowski told lawmakers Monday. Correcting for the possibility of dumb luck, he testified, “we can state with a 95% confidence level that some members of Congress are trading with a substantial informational advantage.”

Whether those informed trades are occurring consciously or unconsciously, many public-interest advocates argue, is inconsequential.

“Whether members of Congress are in fact cashing in on insider information, or coincidence just makes it appear so, the damage to the integrity of the federal government is the same,” Craig Holman, government affairs lobbyist for Public Citizen, said in a statement Monday.

Not all business experts agree that congressional insider trading is a problem to be addressed by extending the SEC’s reach — or even that it’s a problem at all. V.W. Verret, associate professor at George Mason University’s School of Law, told lawmakers Monday that leaks and data mining surrounding government activities can eliminate market-crippling uncertainties. Verret urged lawmakers that, if they must tackle the issue, they should approach by way of internal ethics rules rather than SEC regulations.

“Don’t ruin the securities laws to try to deal with this,” Verret said.

But Peter Henning, law professor at Wayne State University and former SEC attorney, said that empowering the securities commission with clear oversight of congressional insider trading will go a long way to keep lawmakers honest. The House proposal, Henning testified, “recognizes [that] information with the potential for significant market impact can come from a variety of sources beyond just the company whose securities are  traded.”

Today, however, Rep. Dennis Moore (D-Kans.), who heads the House Financial Services Oversight and Investigations Subcommittee, announced that his panel will take a closer look at just how prevalent government insider trading really is. The hearing, entitled “Preventing Unfair Trading by Government Officials,” is scheduled for July 13.

Expect attendance to be spare.

Reps. Brian Baird (D-Wash.) and Louise Slaughter (D-N.Y.) sponsored a bill to prevent members of Congress from trading on information gleaned from working on the Hill. (house.gov)

In November of 2005, then-Senate Majority Leader Bill Frist (R-Tenn.) took to the upper-chamber floor with a major announcement. The Senate, he revealed, would soon put its full weight behind legislation creating a multi-billion dollar fund to settle lawsuits from victims of asbestos exposure — lawsuits that had already bankrupted several building supply companies.

“I am pleased to inform my colleagues that asbestos reform will be the first major legislation that we consider in late January when we return,” Frist said at the time.

Illustration by: Matt Mahurin

For most of the country, Frist’s speech was the first notice of that strategy. But for some Wall Street investors, his plan was old news that translated into big money. Indeed, shares of the world’s largest sheet-rock company, Chicago-based USG Corp., jumped more than $2 — and trading volume nearly tripled — the day before Frist delivered his announcement.

Somehow, someway, the message that Congress was moving to help companies like USG had dribbled onto Wall Street before the rest of the world knew a thing about it. And trading on such leaks, it turns out, is perfectly legal.

Now, a small group of Democrats, backed by a host of public-interest groups, wants to prevent the use of similar non-public information to guide investment decisions. Under the bill, sponsored by Reps. Brian Baird (D-Wash.) and Louise Slaughter (D-N.Y.), lawmakers and their staffs would be prohibited from trading in stocks, bonds and commodities markets based on insider knowledge gleaned from their everyday duties on Capitol Hill. The proposal would also prohibit the transfer of such information to other parties — a spouse; a brother-in-law; a political intelligence firm — who then use the information for trading purposes.

In a telephone interview last month, Baird said there’s no clean evidence that such insider trading is endemic in Washington. “But in a town that trades on information,” he added, the likelihood that it’s happening is “almost a certainty.”

“There’s no question that we get access to information,” Baird said. “There need to be bright-light firewalls between public and non-public [information].”

With most lawmakers dabbling to some extent in stocks and other publicly traded commodities, watchdog groups warn that the opportunities for members to use or convey non-public information — even if it’s done 100 percent unconsciously — are frequent. This has particularly been the case during the long string of government-funded bailouts of the finance industry that’s marked the last 18 months.

Last September, for example, as Wall Street was crumbling but before the extent of the troubles were clear, the heads of the Federal Reserve and the Treasury Department called congressional leaders to an emergency, closed-door meeting to announce their plan for an unprecedented, multi-billion dollar rescue of the nation’s financial sector.

One day later, at least 10 senators traded stock or mutual funds related to the finance industry, according to personal financial disclosure forms submitted by lawmakers last month.

At least one of those lawmakers, Sen. Richard Durbin (D-Ill.), had attended the meeting the evening before, an episode first reported by Bloomberg last month. A Durbin spokesman told Bloomberg that the senator didn’t use any information from that closed-door gathering to counsel his trades the following day.

While there’s no evidence to refute that claim, public-interest advocates argue that the mere appearance of lawmakers’ abusing their powers can lead to a dangerous erosion of public trust in all government officials.

“If it appears to be the case, then everyone’s under suspicion,” said Laura MacCleery, deputy director of campaign finance at New York University’s Brennan Center for Justice. “You want politicians to be beyond reproach. You want a system that protects the innocent and makes it impossible for the guilty to operate.”

While current law prevents insider trading on non-public information gotten through corporate channels, the Securities and Exchange Commission does not have similar powers to regulate trades made on non-public information obtained through government channels.

That loophole could allow lawmakers and other federal employees to make millions of dollars on insider investments, Baird said. If they’re later accused of getting insider information, he added, they’ve got a simple defense: “Not from the company, I didn’t.”

In March, a coalition of public interest groups, including the League of Women Voters, Common Cause and Public Citizen, endorsed the House bill in a letter to Baird and Slaughter that explained the loophole further. “Under current law, ‘insider trading’ is defined as the buying or selling of securities or commodities based on non-public information in violation of confidentiality — either to the issuing company or the source of information,” the groups wrote. “Most federal officials and employees do not owe a duty of confidentiality to the federal government and thus are not liable for insider trading.”

There is some evidence that, consciously or not, federal lawmakers tend to use their informational advantage to reap better Wall Street returns than other investors find. A 2004 study conducted by researchers at Georgia State University, for example, found that trades made by selected senators between 1993 and 1998 produced returns more than 12 percent higher than the rest of the market.

“These results,” the researchers concluded, “suggest that Senators knew appropriate times to both buy and sell their common stocks.”

Such findings might make a strong case for adoption of safeguards like the Baird-Slaughter bill. But it’s not easy to get Congress to police itself. Indeed, despite having both control of the White House and comfortable majorities in Congress, Democrats this year seem poised to ignore proposals reforming campaign finance laws and eliminating automatic congressional pay raises.

Melanie Sloan, executive director of the Center for Responsibility and Ethics in Washington, said the Baird-Slaughter bill fits into the same category. “There’s rarely support,” she said, “for things that limit lawmakers’ behavior.”

Robert M. Stern, president of the Center for Governmental Studies, a Los Angeles-based non-profit research group, agreed, maintaining that the Baird-Slaughter proposal has little chance of getting anywhere anytime soon.

“I don’t think I would hold my breath for that one,” Stern said, adding, “It’s so typical of legislators holding everyone up to standards except themselves.”