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Congressional Insider Trading Gets Somewhat Less Legal

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Today is a good day for Congress passing laws with sunny punny names, so after the JOBS Act on we go to the STOCK Act, for Stop Trading On Congressional Knowledge, which, who wouldn't want JOBS and STOCKS and also much less Congressional insider trading. Anyway it passed, so now Congressional inside information is like corporate inside information in that if you trade on it you go to jail, maybe, sometimes. There was however some controversy as Reuters explains:

House Republican leaders argued that the political intelligence provision, which targeted former Capitol Hill insiders who use their contacts to gather information on pending legislation and sell it to Wall Street investors, could tread on First Amendment free speech rights. The final version orders a study of what to do about that increasingly widespread practice.

Coincidentally, earlier in this deadly deadly week we talked a little about the First Amendment and securities regulation, but that was in the context of people being able to say true non-confidential things about their investment prowess or prowesslessness. Even there, for non-Congress-related people, the First Amendment doesn't seem to do much for them, though maybe the Supreme Court will change that but don't count on it.

The STOCK Act provisions, on the other hand, are in the context of people saying true confidential things about the progress of pending legislation, which sounds a lot more like insider trading. Still, it is kind of important for people to be able to talk about what their legislators are up to, so you can see why you might have some First Amendment unease about cracking down on people talking about Congress. As we've also talked about before, though, just like elsewhere in insider trading law, it's probably okay for non-Congresspeople to trade on information about pending legislation if it wasn't disclosed in violation of a duty - which probably means something like, if you learned it as part of The Democratic Process and not as part of a scheme where you give a Congressman kickbacks from your profits from trading on his information. So to a first approximation the First Amendment should be okay.

If you wanted to both avoid an uneven playing field for Congressional insiders while also preserving the ability of people to talk about Congress, what you'd want is something like a regime where Congress-related people don't talk much about inside information unless they disclose it publicly - sort of like how Regulation FD works for public companies, where companies can't tell favored analysts or investors things that they haven't previously or simultaneously disclosed publicly.

In completely unrelated news what do you make of this?:

Citigroup Chief Financial Officer John Gerspach and Chief Operating Officer John Havens indicated a willingness to sell more than the scheduled 14 percent stake in Morgan Stanley Smith Barney if Morgan Stanley makes an attractive offer, [Nomura's Glenn] Schorr wrote in a note to clients today, citing a recent meeting with the executives.

Morgan Stanley has the option to buy a 14 percent stake in the joint venture in May, increasing its ownership to 65 percent, and can purchase the business outright over the next two years. In 2009, Morgan Stanley (MS) bought a controlling stake in the joint venture, which has more than 17,000 advisers and $1.65 trillion in client assets.

The firms would have to renegotiate their existing deal, and Morgan Stanley, which got Federal Reserve approval for acquiring the 14 percent stake, would have to submit a new capital plan to regulators, according to a person briefed on the situation who declined to be named because an agreement hasn’t been reached. ... Shannon Bell, a spokeswoman for Citigroup, also declined to comment.

Nice to see Gerspach and Havens exercising their First Amendment free speech rights to tell Schorr what was up with their otherwise private negotiations with MS.*

Senate passes lawmakers' insider trading bill [Reuters]
Citigroup Willing to Sell All of Smith Barney, Schorr Says [Bloomberg]

* Newsworthy though it is, I guess the analysis is that it's not material - it's not that much of Citi's assets or revenues, everyone knows MS has an option to buy anyway so it's just a timing question, and the deal isn't done yet. Still it's kind of a weird way to put this news out into the universe?


After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information: