Coronavirus, Congress, and Insider Trading

There were reports last week of potential insider trading by members of Congress. Several of them sold millions of dollars in stocks as the coronavirus crisis was just beginning to unfold, before the major stock market decline. At the time, they were receiving regular, confidential briefings on the dangers of the virus. Some were publicly downplaying the severity of the problem while they privately unloaded their stock holdings. But although some of these stock trades may have been deplorable, proving they were criminal would likely be an uphill battle.

The Law of Insider Trading

Insider trading is the purchase or sale of securities based on material, nonpublic information, in violation of a duty of trust and confidence. Classic insider trading involves corporate executives or other company insiders trading their own company’s stock based on nonpublic information, in violation of the duty they owe to their shareholders not to exploit company information for their own private gain. A simple example would be a CEO who knows her company is about to be acquired and purchases large amounts of stock in the company before that information becomes public.

Under the much broader misappropriation theory, an individual is liable for insider trading if he trades stock based on material nonpublic information in violation of a duty owed to the source of that information. In the leading Supreme Court misappropriation theory case, United States v. O’Hagan, the defendant was an attorney whose firm represented the acquiring company in an unannounced takeover bid. He bought large quantities of stock and options in the company that was going to be acquired, and made several million dollars once the deal became public. As an outsider, O’Hagan didn’t owe any duty to the shareholders of that company. But he did owe a duty to his own firm and its client not to misappropriate the client’s confidential information for his personal gain. His trades in violation of that duty thus constituted insider trading.

A key in any insider trading case, therefore, is identifying the relevant duty. Trading on material nonpublic information is only insider trading if using that information for a personal benefit violates a duty the trader owes to someone. If you acquire material, nonpublic information through diligent research and hard work, or even by overhearing two corporate insiders talking on an airplane, it’s not insider trading for you to trade based on that information. There must be a violation of a duty.

The Impact of the STOCK Act

Members of Congress, by the nature of their work, necessarily learn a great deal of information that could impact the stock market. In 2012, in response to concerns about Members profiting off such information, Congress passed the Stop Trading on Congressional Knowledge, or STOCK Act. The Act prohibits Members of Congress and their employees from using information learned during the course of their duties for private profit. It directs the Ethics Committees of both Houses of Congress to issue guidance concerning this prohibition. The Act also states that “Members of Congress and employees of Congress are not exempt from the insider trading prohibitions arising under the securities laws.” The Act specifies that Members and Congressional employees owe a duty “arising from a relationship of trust and confidence” to the Congress and to the American people.

This legislative recognition of a duty is significant for insider trading purposes. As just noted, the existence of such a duty is a prerequisite for insider trading liability. The STOCK Act makes it clear that Members of Congress owe a duty of trust and confidence to Congress and the American people not to personally profit from information they learn in the course of their duties. If Members trade stock in a company based on material, nonpublic information learned through their work, they may be liable for insider trading for breaching that duty.

Senator Richard Burr
Senator Richard Burr

The Congressional Trades and Insider Trading

The allegation concerning several Members of Congress is that they received nonpublic information during briefings about the Coronavirus and traded stocks based on that information in anticipation of the coming market crash. Not all such transactions involved stock sales; for example, Senator Kelly Loeffler bought stock in a company that specializes in software that allows people to work from home, and other congressional aides reportedly bought stock in companies such as Clorox, Inc.

To prove insider trading, prosecutors would have to establish that these purchases and sales were based on material, nonpublic information learned during the course of Congressional duties. If they were, then the STOCK act makes clear that such transactions for private gain would violate a duty owed to Congress and the American people and therefore would potentially be insider trading. But there are several factors that suggest establishing insider trading could be challenging.

1) Was the Information Truly Nonpublic?

To evaluate any claims of possible insider trading, it is critical to know exactly what information was relayed at the Congressional briefings. Prosecutors would need to show the briefings included information that was not yet public and that would likely lead those who received the information to conclude the stock market is going to decline. Any investigation into these Congressional trades, criminal or civil, therefore would have to explore what exactly the Members were told in these briefings.

There was a lot of public information already floating around about the coronavirus at the time of the briefings in January and February. Were Members really given information that was not otherwise publicly available? Or did the briefings simply serve to educate the Members and try to get them to focus on the problem, without necessarily relying on material nonpublic information?

The answer may vary depending on the briefing. At least some of the briefings reportedly were classified, which suggests a greater likelihood that they contained information not otherwise publicly available. But as to a more routine, unclassified briefing, it may be that any diligent researcher could have readily come up with the same information that was being given to the Members. And if that’s the case, then acting on that information would not be insider trading.

2) Was the Information Material?

Even if the briefings contained nonpublic information, that information must have been material. Information is material if it is likely to be deemed important to a person deciding whether to buy or sell the stock. One issue here would be that even if some of the information in the briefings was nonpublic, was it so different from what was already available that it would materially influence anyone’s decision to buy or sell? In other words, there was already so much information available that any additional information received in the briefings, even if not otherwise public, may not have made a material difference to a potential trader. Was there actually something disclosed in the briefings that was both nonpublic and so dramatically different from the other available information that it would have tipped the scales on whether to buy or sell?

Another wrinkle when it comes to materiality is that this information likely did not relate to any particular company, or even any particular industry, but to the risks to the country and economy as a whole. Insider trading cases usually involve nonpublic information that relates directly to the stock that was traded. Charging insider trading based on information suggesting that the overall economy in general is going to decline would be unusual. Even if there is information suggesting that the economy as a whole might suffer, how does one prove that information was material to the stock price of any one company? You could try to argue that certain industries seemed more likely to suffer or to profit, and focus on trades based on those industries (such as sales of hotel or airline stocks), but it still could be challenging to prove materiality as to any particular trade.

Once again, what was said at the briefings could be key; for example, if a briefing focused specifically on likely damage to the airline industry, that might support allegations of subsequent insider trading in airline stocks. But if a briefing was focused more on the overall health risks to the country and less on the economic impact, then proving the materiality link to trading stock in any particular company could be much more challenging.

3) Were the Trades Actually Based on the Information Received?

Another possible defense would be that even if there was nonpublic information provided during the briefings, the trades were not based on that information. In the wake of the insider trading allegations, Senator Richard Burr put out a statement claiming his trades were based only on public information, such as reports on CNBC. Burr is claiming, in other words, that even if he received nonpublic information, his trades were based not on that information but on other information that was widely available to the general public.

If there was material, nonpublic information provided at the briefings, then it likely will not be enough for Burr just to claim he relied on other, public information when making the trades. Under SEC Rule 10b5-1, if a person possesses material, nonpublic information at the time of a purchase or sale of a security, there is a presumption that the trade was based on that information. The purchaser can rebut that presumption, but only by showing that there was a pre-existing, written plan or order to sell the stocks that predates the receipt of the nonpublic information. Absent such a pre-existing order, a Member or staffer will be presumed to have relied upon any material nonpublic information received when making a trade.

A related issue will be whether the Member or other individual who received the information actually ordered the trades in question. Senator Kelly Loeffler, for example, has claimed on Twitter that she does not make decisions about her stock trades and that those decisions are made by third-party advisors without her input. Senator Diane Feinstein has claimed that her stocks are held in a blind trust and that this particular trade was made in her husband’s account, and so any trades were made without her knowledge or participation. If trues, these would be defenses to any claim of insider trading.

One question raised by Senator Loeffler’s defense is whether she had any communications with those “third party advisors” where she shared information learned during the briefings. She may not make the decisions herself, but if she passed along material, nonpublic information and her advisors traded on that information then she could still be liable for insider trading as a “tipper” or for aiding and abetting. The same would be true if she passed the information to her husband, who happens to be Chairman of the New York Stock Exchange, and he then relied on that information to trade or to direct others to trade on their behalf.

Representative Chris Collins

The Case of Representative Chris Collins

These allegations have led some to compare these Members of Congress to Representative Chris Collins, who was recently sentenced to 26 months in prison for insider trading. But the cases have almost nothing in common. Collins served on the board of a pharmaceutical company and sold stock in that company after receiving confidential information from the board chairman that a major drug trial had failed. The Collins case differs from these current allegations in two important respects. First, the inside information Collins gained was not as a result of his work on Capitol Hill. His status as a Congressman was irrelevant to his insider trading case, as was the STOCK Act. Collins could have been just any board member, trading on confidential information received from the chairman. And second, the information Collins received was specific to the one company in whose stock he subsequently traded – it wasn’t information about a potential overall market decline.

The Appropriate Remedy

These stock trades deserve to be investigated. Some certainly seem to violate the spirit of the STOCK Act. But given the issues described above, it seems unlikely that any will result in a criminal case. And a criminal remedy is not necessarily the answer; there are many possible consequences for these actions besides a criminal prosecution. The SEC may pursue civil insider trading charges, where the penalties may include fines and disgorging of profits. Other shareholders in companies that were dumped may sue for civil stock fraud. The Ethics Committees can explore the allegations and impose sanctions as well; Senator Burr, for example, has already requested an Ethic Committee investigation of his own stock trades. Members of Congress could face calls to resign, as some already have. And of course, voters have the ultimate political sanction at the ballot box for any offenders who run for re-election.

One good outcome would be for this scandal to lead to reforms that include a requirement that every Member of Congress hold their stocks and other assets in blind trust, with absolutely no control over investment decisions. Until that is the norm, allegations like this will continue to arise and there will always be suspicions that some Members are using the power of their office unfairly to line their own pockets. Such conduct may not always be criminal, but it’s always wrong.

The Rot at the Department of Justice

Almost exactly one year ago, I wrote this post about the resilience of the Department of Justice in the face of president Trump’s onslaught. I argued that although Trump had repeatedly tried to thwart the Mueller investigation, he had been largely unsuccessful due to the strength of the norms mandating that DOJ criminal investigations be free from White House interference. And like many others, I was cautiously optimistic that this would continue under the new Attorney General, William Barr. I wrote:

Whatever you may think of his policies, Barr is a serious person and former Attorney General who understands his role. Once again, if Trump thought that by appointing Barr he was installing someone who would make protecting the president his top priority, I think he is going to be disappointed.

Yikes. You have to grant me this: when I blow it, I really blow it. It took Barr only a few months to prove how spectacularly wrong I was.

Under Barr, the norms of DOJ independence have been shredded. He repeatedly acts like a personal attorney for the president, not like an Attorney General charged with safeguarding the rule of law for the entire country. Barr and Trump have deployed DOJ as a weapon to advance Trump’s political interests and petty personal feuds. And Barr has personally intervened, in an unprecedented way, in criminal cases involving the president’s cronies.

There’s an old saying that a fish rots from the head down. Well, the head of the Department of Justice is rotten. The only question now is how far the rot will extend, and how long it will endure once Barr and Trump are gone.

Richard Nixon
President Richard Nixon

The Tradition of DOJ Independence from the White House

Under president Richard Nixon, the Department of Justice was weaponized and used to further the president’s political interests. Nixon’s Attorney General John Mitchell went to jail for his role in Nixon’s crimes and the subsequent cover-up. Nixon’s case highlighted the dangers of allowing a president to use the awesome power of DOJ, including the power to control criminal investigations, to serve his private political interests. As part of post-Watergate reforms, a figurative wall was erected between the White House and DOJ when it came to criminal investigations.

In the nearly fifty years since Watergate, DOJ criminal investigations have been largely insulated from political influence by the White House. As a general rule, discussion of individual criminal cases between a president and the attorney general has been considered off limits, and presidents generally avoid weighing in on the merits of particular criminal cases. No one claims this rule was never stretched or breached, of course, but in general, administrations of both parties recognized that this norm of DOJ independence was important and worthy of respect.

The example from my own experience that this always brings to mind involves the prosecution of former Illinois Congressman Dan Rostenkowski. Rosty was the chair of the House Ways and Means Committee and one of the most powerful Democrats on Capitol Hill. When Bill Clinton defeated George H.W. Bush and was elected president in 1992, I was part of a team of prosecutors at the U.S. Attorney’s Office in Washington, D.C. in the midst of a lengthy criminal investigation of Rostenkowski for looting various accounts at the House of Representatives.

Rosty was a key political ally of Clinton’s and was critical to his (ultimately unsuccessful) efforts to pass health care reform. But there was never even a suggestion that we should back off the investigation in order to further Clinton’s political goals. None of us involved in the case even really gave that possibility a moment’s thought — we knew that was not how DOJ operated. The investigation, begun under a Republican administration and Republican U.S. Attorney, was completed under a Democratic administration and Democratic U.S. Attorney. Rostenkowski was indicted, convicted, and sent to prison. As Eric Holder, Jr., who was the U.S. Attorney at the time, recently confirmed, there was never any interference from the White House.  That’s how it’s supposed to work.

Jeff Sessions
Former Attorney General Jeff Sessions

Trump’s Early Attempts to Breach the Wall

It was always clear that Trump has no appreciation for the importance of DOJ independence and simply sees the Department, like the government in general, as a tool to be used to benefit himself. Even before he was elected, he threatened that he would direct his Attorney General to prosecute Hillary Clinton and that she would “be in jail” if he became president. Trump spoke repeatedly about wanting an Attorney General who would protect him like Roy Cohn, his former personal lawyer and chief counsel for the McCarthy hearings. Trump thought he had found that when he picked Alabama Senator Jeff Sessions, one of Trump’s earliest and most steadfast supporters, to be his attorney general.

But Sessions, a former United States Attorney, resisted Trump’s efforts to use DOJ to serve his personal interests. When questions arose about his own contacts with Russian officials, Sessions properly recused himself from all matters involving the Russia investigation, which infuriated the president. According to the report by Special Counsel Robert Mueller, Sessions thereafter repeatedly resisted entreaties from Trump to “un-recuse” himself so that he could step back in and shut down the Mueller investigation. Sessions maintained the independence of DOJ in other ways as well. For example, his DOJ indicted two Republican members of Congress in the fall of 2018, shortly before the mid-term elections – an act for which the president, naturally, criticized him on Twitter.

During the first two years or so of Trump’s presidency, others who also respected the tradition of DOJ independence thwarted his efforts to interfere with the Mueller probe. Trump requested “loyalty” from FBI Director James Comey, and later asked him to go easy on Michael Flynn, Trump’s former national security advisor, who was ultimately convicted of lying to the FBI about his Russian contacts during the campaign. When his efforts to pressure Comey failed, Trump fired him. That didn’t work either, because Deputy Attorney General Rod Rosenstein, another career DOJ employee, promptly appointed Mueller as special counsel.

The Mueller report also details how White House Counsel Don McGahn resisted Trump’s efforts to obstruct justice. At one point Trump demanded that McGahn have Mueller fired, but McGahn refused to follow that order and was prepared to resign in protest if necessary. Trump later ordered McGahn to create a document falsely denying that this had ever taken place, and McGahn once again refused.

The Mueller investigation proceeded to its conclusion largely unimpeded. Trump was able to do little more than rage-tweet incessantly about the “witch hunt.” There were some guardrails still in place, people who would stand up to Trump’s improper demands – or at least fail to carry them out until he moved on to something else. Trump’s efforts to bend DOJ to his will were largely unsuccessful. That’s what I wrote about in that earlier post.

Now all that has changed.

Attorney General William Barr
Attorney General William Barr

Barr’s Politicized Department of Justice

After more than a year with Barr as the Attorney General, it’s become clear that he has no intention of upholding DOJ’s tradition of independence from White House influence. On the contrary, Barr appears only too willing to use the power of DOJ to protect the president and advance Trump’s personal political interests.

The first real sign of trouble was Barr’s handling of the Mueller report. His incredibly misleading press conference and letter after he had received the final report “spun” the results and created the impression that Mueller had found no wrongdoing by the president. Although Mueller had declined to make a call on obstruction of justice, Barr himself declared that there had been no obstruction. When the report was finally released weeks later, it became apparent how misleading Barr’s characterization of the report had been, but by that time the “no obstruction, no collusion” narrative was firmly implanted in the public’s mind.

There have been many other troublesome events. For example, in the wake of the phone call with the president of Ukraine that ultimately resulted in Trump’s impeachment, DOJ quickly concluded there was no campaign finance violation and did not even investigate the possibility of bribery, which was clearly implicated by the call. During the Trump administration’s ongoing battles with Congress, Barr’s DOJ has repeatedly supported the administration’s complete refusal to cooperate  with Congressional oversight and blanket assertions of absolute immunity prohibiting testimony by any administration officials. In court pleadings, DOJ has argued that Congress essentially lacks the power to investigate any possible criminal misconduct by the president. Barr announced he has created an intake process to accept information from Rudy Giuliani about the Bidens and Ukraine, part of the efforts that led to Trump’s impeachment. He has appointed another U.S. Attorney, John Durham, to examine whether the investigation into Russian interference in the 2016 election was begun improperly, part of Trump’s claim that the entire Russia investigation was a hoax.

But in recent weeks, it’s been Barr’s interference in the criminal cases of Trump allies who were prosecuted by Mueller that has really set off alarm bells about the lack of DOJ independence.

Roger Stone
Roger Stone

The Roger Stone Case

Republican political operative and Trump advisor Roger Stone was convicted by a jury last November of seven felony counts of lying to Congress, obstruction of justice, and witness tampering. The jury found that Stone repeatedly lied to a Congressional committee about his role as an intermediary between the Trump campaign and Wikileaks concerning the stolen Democratic emails that were released in the weeks leading up to the 2016 election. Stone also threatened another witness, Randy Credico, including sending text messages telling Credico to “prepare to die” and threatening to harm Credico’s dog.

The federal sentencing guidelines call for Stone to be sentenced to between 7 and 9 years in prison. That’s a pretty stiff sentence for this kind of case, but it was largely driven by the threats to a witness and by the pervasiveness of Stone’s misconduct. The sentence was calculated by the U.S. Probation Office, which prepares a pre-sentence report for the judge that includes the guidelines calculations.

The career prosecutors who convicted Stone filed a sentencing memorandum on Monday, February 10. They took a pretty hard line on Stone and his misconduct, and agreed that a sentence within the guideline range recommended by the probation department would be appropriate. At the same time, they acknowledged the court might find that some of the guidelines enhancements should not apply, and that such a finding could result in a lower sentence. Overall, it was a tough but measured position and, considering that it was right in line with probation’s recommendation, it was certainly nothing unusual. In fact, they were following DOJ policy; Sessions had issued a memorandum in 2017 instructing prosecutors that in most cases they should request sentences within the guideline range.

But at around 2:00 am the following day, Trump tweeted out what he thought about the proposed sentence:

Hours later on Tuesday, senior DOJ officials announced that they thought the proposed sentence “extreme, excessive, and grossly disproportionate” and that they would be filing a new sentencing memorandum. That memorandum was filed later on Tuesday, with the Department now recommending a much lower sentence. On Wednesday, Trump tweeted out a congratulations to William Barr for “taking charge” of the Stone case.

The Tuesday Night Massacre

None of the names of the four career prosecutors who worked on the Stone case appeared on the new sentencing memo. They all moved to withdraw from the case in protest, and one of them quit the Department of Justice entirely. Some have dubbed this the “Tuesday Night Massacre,” a reference to the Watergate “Saturday Night Massacre” when Nixon’s Attorney General and Deputy Attorney General both resigned rather than carry out his order to fire Watergate special prosecutor Archibald Cox. (In this sequel, the role of Solicitor General Robert Bork, who ultimately agreed to fire Cox, is played by John Crabb, Jr., a supervisor at the U.S. Attorney’s Office, who signed the pleading after the other prosecutors refused and quit.)

Barr subsequently claimed in an interview that he had already decided to intervene in the Stone case before Trump’s tweet, and that he had no communication with the White House about it. But even if true, that’s beside the point. Everyone, including Barr, could predict how Trump would react to Stone’s proposed sentence. And there is absolutely nothing unusual or extraordinary about Stone’s case that would justify the personal attention of the Attorney General.

Former DOJ officials have been commenting on social media about how many cases they can recall where the Attorney General personally intervened about a sentencing recommendation. So far, the total for everyone I’ve seen – including me – is zero. And it would be ridiculous to suggest that Barr suddenly developed a newfound concern about the harshness of the federal sentencing guidelines. There’s no plausible explanation for Barr’s intervention other than that it was done to appease the president and try to cut one of his political cronies a break.

Michael Flyy
Michael Flynn

The Michael Flynn Case

The case of Michael Flynn, Trump’s former national security advisor, has seen some strange twists and turns. Flynn pleaded guilty to one count of lying to the FBI about his contacts with the Russian ambassador in the weeks leading up to Trump’s inauguration. He agreed to cooperate with the Mueller investigation. At the time of his initial sentencing date in December 2018, prosecutors told the court that Flynn’s cooperation was extensive and they did not oppose a sentence of probation. However the judge did not seem satisfied, and looked like he was poised to send Flynn to prison anyway. The sentencing was then continued to allow Flynn to cooperate further by testifying in the trial of his former business associate about their work on behalf of Turkey.

Leading up to that trial, however, prosecutors decided Flynn was lying to them, and they never put him on the stand. They went back to his sentencing judge and withdrew their recommendation of a sentence of probation, arguing for a sentence within the guideline range – which was still only 0-6 months.

Flynn’s new lawyer, Fox news regular and conspiracy theorist Sydney Powell, flipped out (that’s a legal term). She filed motions to withdraw Flynn’s guilty plea and to dismiss the case entirely, accusing prosecutors of gross misconduct. Prosecutors responded to those motions by returning to their earlier recommendation of a sentence of probation. That seemed odd, but not earth-shattering, since probation was always an option within the recommended guideline range.

But now it appears Barr may have had a hand in that reversal as well. There are reports that Barr has appointed an outside prosecutor to review the entire Flynn prosecution. And during the time the government softened its sentencing position, Trump removed the U.S. Attorney who had convicted Stone, Jessie Liu, and replaced her with Timothy Shea, a former close aide to Barr. The government’s backing off harsher sentencing recommendations as to both Stone and Flynn coincides with the arrival of Barr loyalist Shea as the acting U.S. Attorney.

The Fallout from Barr’s Actions

Barr’s very public interference with the criminal investigations of Trump’s political cronies has resulted in some extraordinary blowback. More than 2,000 former DOJ employees, from both parties, have signed a letter demanding that Barr resign. Barr’s former colleague in the George H.W. Bush Justice Department, former Deputy Attorney General Donald Ayer, wrote an article in the Atlantic demanding the same thing. The Federal Judges Association convened an emergency meeting to discuss the “deepening crisis” involving Barr and the DOJ. There are rumors that Barr is thinking about resigning, although I find that very hard to believe.

Trump, meanwhile, tweeted that he believes he has every right to intervene in criminal cases prosecuted by DOJ:

As disturbing as this Tweet may be, Trump is technically correct: there is no law that prohibits such interference. Only the norm of DOJ independence, and our traditional adherence to the rule of law, stand in his way. This norm is what separates us from authoritarian regimes, where leaders use criminal prosecution as a political weapon against their enemies. Events over the past year have shown us what a fragile norm that is, and how easily it can be discarded by an administration with no regard for the rule of law and concerned only about maintaining power.

You have to wonder what else might be coming between now and the election. What will become of all the other investigations that were referred out by Mueller, and with the ongoing investigations in the Southern District of New York that may implicate Trump, his business, his family, and his close associates? There seems little reason to be confident that they will be allowed to proceed unimpeded.

It also now seems entirely predictable that, at some point later this year, we are going to hear an announcement from DOJ of some kind of investigation that benefits the president. Maybe it will be a criminal investigation of whoever ends up being Trump’s Democratic opponent, or a report concluding that the entire Russia investigation was a sham and part of a “deep state” effort to take down Trump. Under Barr, the politicization of DOJ appears to be nearly complete.

There are still a few guardrails remaining. One is the independent judiciary. The judges in the Stone and Flynn cases will have the final word on their sentences, regardless of the DOJ recommendations – although Trump will, of course, always have the final card to play in the form of a possible pardon. And the dedicated career people at DOJ, who still believe in its mission, will continue to fight and protest from the inside. Perhaps more will follow the lead of the Stone prosecutors by stepping down rather than agreeing to go along with Barr’s corruption.

One day, one way or another, Trump and Barr will be gone. I hope that DOJ can recover from the damage they have done. It’s not easy to restore public trust once an institution’s integrity has been so badly tarnished. But the country did it after Watergate, and hopefully it can do it again. If not, then the damage to our system of justice and belief in the rule of law may become one of the most tragic legacies of the Trump administration.