The central bankers running the U.S. Federal Reserve are the closest thing we have to gods of the markets, their decisions on interest-rate policies and their bond-buying sprees watched breathlessly by everyone on Wall Street — and increasingly Main Street. Last year, the Fed’s influence became even more pronounced after the central bank pumped trillions of dollars into the markets when the global COVID-19 pandemic hit and financial assets of all kinds went into free fall.
As markets began to bounce back on the Fed’s massive effort, two regional Fed presidents — Boston’s Eric Rosengren and Dallas’s Robert Kaplan — were not sitting in some ivory tower pouring over economic data. No, they were actively trading their personal stock portfolios, benefiting from the Fed’s intervention.
The Fed has been criticized for many things in the past: It has been called a handmaiden to the big banks and accused of widening the gulf between the haves and have-nots in this country with a decade of rock-bottom interest rates that fueled raging-bull markets in stocks and bonds disproportionately benefiting the one percent. But until last year, its members had not been viewed as using their insider status to profit ahead of the public.
Rosengren and Kaplan resigned following a backlash after the trades were revealed through disclosure forms — which incidentally did not include dates of the transactions. Since then, the trades of Fed Chair Jerome Powell, a wealthy former private-equity executive, and Vice-Chair Richard Clarida have come under scrutiny, leading to calls from Senator Elizabeth Warren for the Securities and Exchange Commission to investigate.
Of course, Fed officials aren’t the only Washington insiders who had access to market-moving information during the pandemic. A surprisingly large number of Congress members also appeared to have been able to use their inside knowledge for financial gain while unemployed Americans were lining up at food banks. Four senators were probed by the Department of Justice for insider trading, and at least one of them is still part of an active SEC investigation.
Meanwhile, the winning trades of Speaker of the House Nancy Pelosi have become so legendary they have inspired social-media accounts with large followings. On TikTok — for both ironic and unironic reasons — the 81-year-old California Democrat’s investments are a subject of viral interest. One widely viewed video described her as “the stock market’s biggest whale.”
Pelosi has come under scrutiny several times, including for purchases of Tesla stock made by her husband a little more than a month before President Joe Biden announced an executive order requiring that all federal vehicles must be electric. And last summer, her husband exercised call options worth $5.3 million to buy shares of Google parent Alphabet just before the House Judiciary Committee passed a series of tech antitrust bills so mild the market yawned.
Calling Pelosi a stock-market whale may be hyperbole, but it does capture something. While the data is dated, one analysis showed that lawmakers’ stock trades were 20 percent more profitable than those of other individuals with trades by Republicans 35 percent higher.
But Pelosi doesn’t seem interested in dodging controversy and tamping down suspicion by stepping out of the stock market. When asked in a press conference last month if members of Congress should be banned from trading stocks, she brushed off the notion as un-American. “We are a free-market economy. They should be able to participate in that,” she told reporters.
A lot of Americans, though, are dismayed by what they see as unethical financial activity by Washington insiders. “They’re trading an awful lot, and it gives the impression they can get away with it,” says Richard Painter, the former chief ethics lawyer for President George W. Bush, referring to insider trading.
But getting away with it generally isn’t much of a problem. Members of Congress, for example, have protections enshrined in the Constitution that make it difficult for them to be prosecuted for insider trading, and they are not subject to conflict-of-interest laws that generally apply to the executive branch.
The four senators reportedly investigated by the Justice Department during the early days of the pandemic were Richard Burr, a Republican from North Carolina; Dianne Feinstein, a Democrat from California; Kelly Loeffler, the Republican from Georgia who lost her Senate seat; and Jim Inhofe, a Republican from Oklahoma. The probe followed news reports that the senators sold stock after receiving briefings on the dangers of COVID before the public knew about it — and before markets began to tank on the news.
All of the senators denied wrongdoing, and the DOJ closed the investigation into the four with no action, with Burr’s ending on the final day of the Trump administration. But the North Carolina senator, who stepped down from his role as head of the Senate Intelligence Committee during the probe and plans to retire, is not out of the woods. In October, the SEC revealed in a federal-court filing that it is still investigating him for insider trading.
“The idea that people in Washington with access to information that most people don’t have — and who are engaged in decisions that affect people’s lives — might be running to trade stock and make money off of what they heard really seems appalling,” says Noah Bookbinder, president and CEO of Citizens for Responsibility and Ethics in Washington.
For now, Burr is the only lawmaker in the SEC’s crosshairs, but Business Insider recently reported that 52 members of Congress have failed to file timely disclosures of stock positions as required by a 2012 law that grew out of a prior crisis — the 2008 financial meltdown — after 60 Minutes did a scathing segment on questionable trading by several lawmakers. (Pelosi was one of those singled out for her stock trades during the financial crisis.)
That 2012 law is the Stop Trading on Congressional Knowledge Act, or STOCK Act. It states that members of Congress are not exempt from securities laws that prohibit insider trading. In other words, it is illegal for them to make trades based on “material nonpublic information” they may learn about in their government jobs. But that requires the information to be both unavailable to the public and significant enough to move any particular stock in question — which in the real world can be very difficult to establish. “You have to be able to prove a direct causal link between some information that a person had that wasn’t public and some transactions that they made after that,” explains Dylan Hedtler-Gaudette, government-affairs manager at the Project on Government Oversight. The law requires lawmakers to disclose trades made by themselves, a spouse, or a dependent within 45 days.
While lawmakers may argue the lapses are simply bookkeeping matters they forgot to take care of, that may not be the entire story, worries Kedric Payne, general counsel for the Campaign Legal Center, which has alerted the House Office of Congressional Ethics about several disclosure omissions. He points to Kentucky senator Rand Paul’s failure to disclose his wife’s purchase of stock in Gilead Sciences, the manufacturer of a COVID-treatment drug, on February 26, 2020 — before much of the general public was fully aware of the magnitude of the COVID threat. Paul did not disclose the trade until 16 months later.
“If he had disclosed it in March or April of 2020,” says Payne, “he would’ve come under investigation by the FBI and the DOJ because they were investigating four other senators at the same time for their stock trades because they were so suspicious.” Paul’s spokeswoman told the Washington Post, which first reported the disclosure lapses, that the senator had completed the form in a timely fashion and did not know it had not been submitted.
Paul’s case is no exception — little has happened to those who have ignored the law. In almost ten years of the STOCK Act’s existence, only one lawmaker — Tom Malinowski, a Democratic representative from New Jersey — has been investigated by the Office of Congressional Ethics for allegedly violating it. In July, the ethics office found “substantial reason to believe” Malinowski failed to properly disclose stock transactions. The congressman did not report dozens of stock trades between January 2019 and May 2021. The probe was referred to the House Committee on Ethics, which typically does not take any action, according to Payne. He says the Senate is even worse when it comes to reprimanding its members because of the oft-discussed “congeniality” of the chamber. (Malinowski, who admitted “carelessness” in not reporting the trades, has since put all his investments in a blind trust. He also paid a $200 fine.)
The assumption that these insiders act on knowledge unavailable to the ordinary investor is of high concern to the public according to a poll of Michigan and Ohio voters commissioned by the Project on Government Oversight. Nine in ten people polled see corruption — including insider trading — in D.C. as a problem. “Everyone hates it. Everyone is very convinced that it happens,” says Hedtler-Gaudette of POGO. The notion of insider trading “has penetrated the general consciousness,” he says. “People can wrap their head around what that means and why it’s so bad.” But Americans also realize there tend to be few, if any, consequences for our political leaders who operate near the line.
The relatively few successful prosecutions of insider trading — think Martha Stewart or hedge-fund manager Raj Rajaratnam — tend to involve emails or phone calls and cooperating witnesses who can show not only the nonpublic information but also how it was used to trade. And here’s where members of Congress get a break no one else has: The “speech and debate” clause of the Constitution protects communications among members of Congress from snooping by outsiders, whether the executive branch or law enforcement.
“It makes it very difficult for the SEC, prosecutors, or anyone else to investigate members of Congress as only members of Congress can launch an investigation if it involves getting into their internal emails and communications,” says Painter. He argues that self-regulation by Congress is inadequate to the task. Not only are members often reluctant to go after their peers, he says, they also aren’t adept at ferreting out illegal trading, as SEC and DOJ prosecutors are trained to do.
The Constitution, however, doesn’t stop investigators from obtaining communications between lawmakers and parties outside of Congress. For example, the SEC said in a recent filing that the day Burr called his broker to sell shares worth more than $1.6 million a week before markets started collapsing in early 2020 on growing COVID fears, he placed a phone call to his brother-in-law, Gerald Fauth. After the two talked for 50 seconds, Fauth called his broker and sold stock, the filing revealed. Like Burr, Fauth is now under investigation by the agency for insider trading.
At the time of his trading, Burr — one of only three members of Congress to vote against the STOCK Act — was chairman of the Senate Intelligence Committee, which would have given him access to classified information about the COVID threat. The SEC says it appears he made the stock sales “while in possession of potentially material nonpublic information concerning COVID-19 and its potential impact on the U.S. and global economies.” Burr’s attorney told ProPublica, which first reported the new SEC filing, that his trades were based on public information and were not coordinated with Fauth.
The Burr case “underscores how hard it is to prove insider training because of how often you are dealing with quasi-public, quasi-not-public information in hearings and in briefings. It’s just really hard to parse what information they had access to and how it predicated some transaction,” says Hedtler-Gaudette.
Ethics expert Painter likes to point out that the laws against insider trading trace back to the Great Depression. The securities laws of 1933 and 1934 were enacted because during the 1920s “all the rich people were insider trading like crazy,” he says.
In recent years, lawmakers have been getting wealthier, which Painter argues is part of the problem. Raising campaign funds forces candidates to rub shoulders with wealthy donors, ultimately giving politicians access to big money. In 2020, OpenSecrets reported that more than half of the members of the 116th Congress had a net worth above $1 million. And they aren’t getting that rich off their congressional salaries, which are $174,000 per year. (The pay is slightly higher for the leaders of both chambers.)
In Painter’s estimation, the anti-fraud provisions of the securities laws already prohibited insider trading by members of Congress. But even though Congress took the extra step of specifically outlawing insider trading by its members in 2012, he says, “we still don’t have anybody who has been busted for trading on information learned in Congress.” And he isn’t sure that’s because no one has broken the law. His solution, which is endorsed by ethics organizations like POGO and CREW, among others, is simply to ban individual stock and bond trading by members of Congress. “They ought to just invest in mutual funds like the rest of us,” says Painter.
To stem the furor at the Fed, its board of governors recently instituted a policy that would ban all top officials — all of whom are millionaires — from trading individual stocks and bonds. Legislation to codify the policy has been introduced in the Senate.
Less progress has been made in Congress. Lawmakers in both chambers have introduced bills that would ban the trading of individual stocks and bonds by members. So far, the Senate bill has four co-sponsors while the House legislation has 22, according to CREW. The bills would prohibit members of Congress and senior congressional staff from buying or selling individual stocks and other investments. It would also keep them from serving on corporate boards while in office. A separate House bill, which would force members to put their stock holdings in a blind trust, has also gotten the backing of several ethics organizations.
What has so far been a tepid response to the proposed stock-trading bans by members of Congress is disheartening to Bookbinder, the CREW president, who thinks the public’s perception of corruption has led to some of the other, more dangerous political trends his organization has been fighting. “It contributes to us having a system that works for those in power rather than working for the people,” he says. “That can contribute to the loss of faith in democracy, which then can make it easier for even more serious things to happen.”
Bookbinder says he has heard those in Congress who are sponsoring the legislation express “frustration” with their colleagues, saying it is difficult to get their support. “That’s distressing because this should be an easy one,” he says.
The Fed, he notes, “worked it out in a couple of days … It should be a no-brainer for Congress.”