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The STOCK ACT and the SEC

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The STOCK ACT and the SEC

Needless to say, it is a minority opinion that current insider-trading laws reach government information, or else there wouldn’t have been this much of a push for the STOCK Act in the first place. Slaughter summed up the consensus view of scholars in her fact sheet: “Just as anyone else, Members of Congress and staffers are subject to current insider trading laws. However, current insider trading laws do not apply to nonpublic information about current or upcoming congressional activities.”

Bainbridge then makes much of the fact that many courts require that the tipper cannot be found guilty unless he has received a personal “benefit.” Our article acknowledged that courts were split on this matter.Bainbridge then makes much of the fact that many courts require that the tipper cannot be found guilty unless he has received a personal “benefit.” Our article acknowledged that courts were split on this matter.

More important, however, is that prosecutors and courts have broadened the “benefit” requirement to include even nonfinancial reputational gains. In SEC v. Downe, 969 F.Supp. 149, the Second Circuit ruled that a tipper was guilty of insider trading merely because he “enjoyed the benefits of being viewed as a successful investor in the eyes of his peers.” Similarly in SEC v. Yun, 327 F.3d 1263, the 11th Circuit found that a “benefit” of disclosure could include “maintaining a good relationship between a friend and frequent partner in real estate deals.”

As applied to the disclosure of government information, these precedents could make it relatively easy to find a “benefit” for prosecution of a whistleblower. Presumably, if a congressional staffer helps his or her boss win a major legislative battle, that staffer’s reputation would rise — and, quite possibly, so would his or her future earnings. Thus, if a congressional staffer discloses, say, a nonpublic draft bill to a think-tanker or activist for the purpose of aiding the recipient’s efforts to support or defeat the legislation, it is certainly plausible that a court might find that the disclosure was for personal benefit.

But none of this seems to matter to Bainbridge, because he believes the SEC can be trusted to be reasonable and prudent when it deals with Congress, even if it has shown no such restraint in dealing with the private sector. “I admit that I’ve long suspected that the SEC thinks there is an invisible footnote to the First Amendment that exempts it from the prohibition on interfering with the right of free speech,” Bainbridge writes. But in this case, he argues, we don’t have to worry because “surely not even the SEC would argue that it can police political speech in the same manner it polices corporate speech.”

Besides, even if the SEC did so, Bainbridge reminds us, there are always the courts. “Have Berlau and Bier never heard of the courts?” he asks. He then offers the “best bottle of wine” in his cellar for a bet that “if the SEC tried to apply insider trading laws to whistleblowers . . . the courts would invalidate [the action] in a heartbeat.”

We have indeed “heard of the courts.” We’ve also heard something to the effect that it takes quite a long time, even if a constitutional challenge is eventually successful, to find a plaintiff, gain standing, and go through several rounds of appeals. So if the law passes, and Bainbridge agrees to a definition of “heartbeat” that encompasses a time period of any length less than one year after such an adverse action occurs, it’s a safe bet that I will become the new owner of his bottle of 1982 Château Montrose. Game on!

But it is still my desire to see simple changes to the final bill that will ensure that such a bet can never be made, and that government whistleblowers can never be threatened — even temporarily — with prosecution for insider trading. Members of Congress have a duty to never pass laws with provisions that violate or give agencies latitude to violate the Constitution under the rationale that the courts will come to the rescue. The members of all branches of government swear an oath to the Constitution, and all must do their best to uphold it.

And to uphold the First Amendment and other precious liberties, the final STOCK Act must not include the awful amendment introduced by Senator Charles Grassley (R., Iowa) that, as NR publisher Jack Fowler has noted, would force a wide variety of groups who communicate with Congress to register as “political intelligence” firms. And it must include a clause protecting disclosure of information unless it is done deliberately for private profit. This clause could read:

“Nothing in this subsection shall be construed to impose liability on Members of Congress or employees of Congress for acts of disclosing material, nonpublic information to nonaffiliated third parties, unless the Member of Congress or employee of Congress discloses the information to a nonaffiliated third party: (a) as a means for making a private profit; or (b) with knowledge that the recipient of the information, or persons acting in concert with the recipient of the information, intend to use the information for purposes of making a private profit.”

What’s your objection, Professor Bainbridge, to this extra layer of protection for those who try to ensure that our government remains transparent and accountable?