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Members of Congress are generally wealthier than the people they represent, and some leave office with fatter bank accounts than when they started. Could their growing riches be a result of access to special information that allowed them to make lucrative trades in the stock market?
Those were questions that 60 Minutes tackled in a November 2011 report inspire by the book Throw Them All Out, by Peter Schweizer, a fellow at the conservative Hoover Institution at Stanford University. The book’s thesis is that members of Congress are using inside information to buy and sell stocks at a profit, using advantages that ordinary investors don’t have.
The 60 Minutes report helped breathe life into a bill largely ignored by Congress for years, the Stop Trading on Congressional Knowledge Act, or STOCK Act. Suddenly, nearly everyone in Congress was in support of banning themselves from insider trading. The Senate and House passed different versions in February.
Bipartisanship at its best? Hardly.
Democrats argue that the legislation passed by the Republican-controlled House is too watered down. That argument has reverberated down to a Florida congressional race.
Luis Garcia, a Miami Beach state representative and a Democrat, is trying to unseat U.S. Rep. David Rivera, R-Miami. In a Feb. 15, 2012, press release, Garcia attacked Rivera’s vote on the STOCK Act to suggest that Rivera is soft on public corruption.
Garcia said Rivera "allowed House Republican leaders to strip key provisions from the STOCK Act that would crack down on corruption of public officials and on those who peddle political inside information for profit." We should note that Garcia’s claim was similar to claims in a press release sent by the Democratic Congressional Campaign Committee just a few days earlier.
Rivera is the subject of a criminal probe by the FBI and the Internal Revenue Service related to $510,000 in undisclosed payments from a gambling enterprise to a company owned by his mother.
Here, we will fact-check Garcia’s claim that Rivera allowed House Republican leaders to strip key provisions from the STOCK Act about public corruption and on those who peddle insider information. In a related report, we will check another claim from Garcia, that Rivera received a $5,000 contribution from U.S. Rep. Spencer Bachus, R-Ala., who is under a House ethics investigation related to his stock trades.
Roots of the STOCK Act
Insider trading is illegal for everyone, including members of Congress -- even without the STOCK Act. But independent investigations by journalists and academics show suspicious patterns of trading by members of Congress. Fueled in particular by the 60 Minutes report, members wanted to pass legislation specifically for Congress, so there is no uncertainty about the matter.
While newspaper articles have often focused on the trades of individual politicians, some believe the problem could be more widespread. Alan Ziobrowski, a business professor at Georgia State University, found that senators’ purchases outperformed the overall market, according to his 2004 paper on the topic. His research showed "senators trade with a substantial informational advantage....The results suggest that senators knew when to buy their common stocks and when to sell," he wrote.
In testimony about the STOCK Act in December, U.S. Securities and Exchange Commission (SEC) enforcement director Robert Khuzami said that under current law pursuing insider-trading charges against a member of Congress, "is without direct precedent and may present some unique issues." (Here’s more analysis about the complications of a federal agency investigating Congress.)
In 2006, a version of the STOCK Act was introduced after the Wall Street Journal reported that Tony Rudy, chief of staff to then House Majority Leader Tom DeLay, engaged in hundreds of stock trades from his computer at the Capitol. The bill never received a vote. It was reintroduced in 2007 and 2009 but drew little interest.
Before the 60 Minutes report aired on Nov. 19, 2011, the STOCK Act had nine co-sponsors. After it aired, it got than 200 within a few weeks. Rivera signed on in December.
Fighting over the STOCK Act
It’s at this point, when it looked like the STOCK Act might have an actual chance of passing, that the real battle began.
On Feb. 2, 2012, the Senate approved an amendment calling for the "public corruption prosecution improvements" that was intended to give prosecutors more tools to go after corrupt public officials, including stiffer sentences.
The Senate version also included new requirements for "political intelligence consultants," people who monitor actions on the Hill and sell the information to investors. The concern was that the consultants receive nonpublic information from members of Congress, so the Senate required them to disclose their activities the way that lobbyists do. The Senate approved the bill 96-3.
Over in the House, Republican majority leader Rep. Eric Cantor, R-Va., unveiled his own version, which stripped out the public corruption amendment and the requirement that political intelligence consultants disclose their activities.
Democrats and watchdog groups criticized Cantor’s bill as weak -- but so did a Republican senator who zeroed in on the elimination of the political consultant provision.
"It’s astonishing and extremely disappointing that the House would fulfill Wall Street’s wishes by killing this provision," said Sen. Charles Grassley, R-Iowa, in a statement. "If Congress delays action, the political intelligence industry will stay in the shadows, just the way Wall Street likes it."
Still, House Republicans added new clauses to the bill and said they were strengthening it. They called one of those sections the "Pelosi provision"; it included stricter rules for members participating in public offerings. The 60 Minutes investigation reported that U.S. Rep. Nancy Pelosi, D-Calif., participated in Visa’s initial public offering while a bill about credit cards was pending.
Several groups that advocate for government transparency have called for a stronger version of the law including the Sunlight Foundation (which called the House version "STOCK Act Lite") and Common Cause.
The House approved their version on Feb. 9 in a vote of 417-2. News reports in early March indicated that the Senate might accept the House’s version of the bill.
Whatever one thinks of the particulars of the House version, its passage might still serve as a warning for Congress about insider trading, said Jacob Frenkel, a former SEC lawyer now in private practice who prosecuted securities fraud.
"The real effect of the STOCK Act is to put on notice prominently everyone on Capitol Hill and in the federal government that using material non-public information to buy or sell securities, or to tip off another person to do so, is a violation of federal law, and that they have a duty to keep confidential such information," said Frenkel in an email.
We asked Garcia directly what he meant by saying Rivera "allowed House Republican leaders to strip key provisions from the STOCK Act." What did Rivera do specifically that allowed the House version of this legislation to go forward?
By his "yes" vote, Rivera allowed it, Garcia said.
"He voted for the law," Garcia said. "If you are voting for that law you are allowing that law to go on."
We checked to see if Rivera took any public action to encourage a stronger STOCK Act. We searched news reports and Rivera’s office website and could not find anything beyond a single "week in review" press release.
Garcia’s statement -- that Rivera "allowed House Republican leaders to strip key provisions from the STOCK Act" -- makes it sounds like Rivera had some sort of power to stop Republican leaders from recrafting the bill, perhaps thanks to a committee post or close ties to leadership. In fact, that’s not the case. Rivera doesn’t have any powerful committee role connected to the act and is a member of separate House committees on foreign affairs and natural resources.
Meanwhile, Cantor has kept his distance from Rivera at times. In 2011, a Cantor spokesman said Cantor had concerns about investigations into Rivera. When Cantor held a fundraiser in Miami in February 2011, Rivera wasn’t in attendance.
Garcia claimed that "Congressman David Rivera allowed House Republican leaders to strip key provisions from the STOCK Act that would crack down on corruption of public officials and on those who peddle political inside information for profit."
It’s true that Rivera voted for a version of the bill that removed provisions related to corruption of public officials and on political intelligence consultants. But Garcia doesn’t offer any evidence that Rivera "allowed" it to happen other than voting for it. The statement makes it sound like Rivera had some sort of powerful role in making the legislation coming to pass. Actually, Rivera himself is under investigation -- and not exactly the guy House leaders would turn to when crafting legislation about ethics.
We rate this claim Mostly False.
Luis Garcia press release, "Luis Garcia: Congressman Rivera shouldn’t use his office as a ‘Get Out of Jail Card,’" Feb. 15, 2012
Democratic Congressional Campaign Committee press release, "Rivera Fails to Fight For Stronger STOCK Act," Feb. 9, 2012
U.S. Rep. David Rivera, Committees and caucuses, Accessed March 13, 2012
U.S. Rep. David Rivera, Week in review: Week of Feb. 6, 2012
Office of Congressional Ethics, Frequently asked questions, Accessed March 13, 2012
House Committee on Ethics, Website, Accessed March 13, 2012
U.S. Library of Congress, Stop Trading on Congressional Knowledge Act S. 2038, Passed the House Feb. 9. 2012
U.S. Library of Congress, Stop Trading on Congressional Knowledge Act H.R. 5015, Introduced March 28, 2006
U.S. Securities and Exchange Commission, "Testimony of Robert Khuzami, director of the division of enforcement, on H.R. 1148, the Stop Trading on Congressional Knowledge Act," Dec. 6, 2011
GOP, Legislative digest S. 2038, Feb. 9, 2012
House Majority Leader Eric Cantor, "Leader Cantor statement on House consideration of the STOCK Act," Feb. 7, 2012
U.S. Rep. Louise Slaughter, D-N.Y., About the STOCK Act, Accessed March 9, 2012
Journal of Finance and Quantitative Analysis, "Abnormal returns from the common stock investments of the U.S. Senate," December 2004
Journal of Business and Politics, "Abnormal returns from the common stock investments of the U.S. House of Representatives," 2011
CNBC, "Insider Trading on Capitol Hill: Congressional Democrats do it better," May 27, 2011
Miami Herald Naked Politics blog, "Republican leader Eric Cantor has ‘concerns’ about Rivera," Feb. 25, 2011
Miami Herald, "Feds investigate Congressman Rivera on Casino contract," July 21, 2011
60 Minutes, "Congress: Trading stock on inside information?" Nov. 13, 2011
Politico, "Eric Cantor under fire for STOCK Act tweaks," Feb. 8, 2012
Politico, "STOCK Act Limps toward passage," Feb. 29, 2012
Washington Post, "Rep. Spencer Bachus faces insider trading investigation," Feb. 9, 2012
Washington Post, "For SEC, investigating insider trading in Congress presents complications," Feb. 10, 2012
Miami Herald, "Garcia clams Penelas and national Democrats," March 7, 2012
AP, "Bachus re-election bid tops Alabama House races," March 3, 2012
New York Times, "Senate to choose an insider trading bill," March 5, 2012
Sunlight Foundation, "Senate should stay strong on the STOCK Act," Feb. 28, 2012
Common Cause, "Common Cause urges conferees to strengthen STOCK Act," Feb. 9, 2012
Project on Government Oversight, "POGO and partners support STOCK Act, Issue letter to House speaker John Boehner and Majority Leader Eric Cantor," Feb. 6, 2012
Interview, Stephanie Formas, Democratic Congressional Campaign Committee, March 8, 2012
Interview, State Rep.Luis Garcia, March 8, 2012
Interview, Christian Ulvert, campaign spokesman for Congressional candidate Luis Garcia, March 9, 2012
Interview Meredith McGehee, Policy Director, Campaign Legal Center, March 9, 2012
Interview, Jacob Frenkel, a lawyer in private practice in Maryland and former SEC Enforcement lawyer and federal prosecutor of securities and public corruption offenses, March 8, 2012
Interview, Alan Ziobrowski, a business professor at George State University who published papers in 2004 about stock purchases of Senators and in 2011 about Congress, March 8, 2012
Interview, Victoria Dillon, spokeswoman for U.S. Rep. Louise Slaughter, March 9, 2012
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