Ultimate Resource On Insider Trading
CEOs are departing in droves. Also, America’s corporate insiders along with politicians dumped shares at record levels. Bad news for the stock market. Ultimate Resource On Insider Trading
* CEOs Are Departing In Droves.
* America’s Corporate Insiders, Which Include Chief Executives, Dumped Company Shares At Record Levels.
* One Wall Street Firm Is Projecting A Stagnant Year For U.S. Companies.
Numerous Senators In The Trump Adminstration Dumped Millions In Stock Weeks Before Coronavirus Pandemic Hit US!!!
Burr, Senate Colleagues Sold Stock After Coronavirus Briefings
Multiple members of Congress and spouses made sales that saved them from losses before markets slid.
Weeks before the new coronavirus pandemic sent the stock market plummeting, several members of Congress, their spouses and investment advisers each sold hundreds of thousands of dollars in stock after lawmakers attended sensitive, closed-door briefings about the threat of the disease.
Some of the well-timed sales saved the senators and their spouses as much as hundreds of thousands of dollars in potential losses, a Wall Street Journal analysis of the trades shows.
Sen. Richard Burr, a top Republican from North Carolina who sits on two committees that received detailed briefings on the growing epidemic, reported in disclosure reports that he and his wife on Feb. 13 sold shares of companies worth as much as $1.7 million.
The Journal analysis shows that the shares sold by the Burrs were worth—at minimum—$250,000 less at the close of trading on March 19 than they were when the senator and his wife sold them. Mr. Burr said in a statement that he relied upon “public news reports to guide my decisions regarding the sale of stocks.”
Mr. Burr quickly drew criticism after his stock sales were reported Thursday evening by ProPublica and the Center for Responsive Politics. Fox News host Tucker Carlson called for Mr. Burr to resign, as did a handful of Democratic House members and the North Carolina Democratic Party.
On Friday morning, Mr. Burr said he “understands the assumption that many could make in hindsight” and asked the Senate Ethics Committee chairman “to open a complete review of the matter with full transparency.”
While some market analysts were warning at the time of the potential damage the emerging coronavirus could cause to the stock market, the sales also came at a time when President Trump and some Republican politicians were playing down the potential harm from the epidemic.
Other senators who were actively trading before the spreading infectious disease caused the markets to fall were Republican Senators Kelly Loeffler and David Perdue of Georgia, and James Inhofe of Oklahoma. The husband of Sen. Dianne Feinstein, the California Democrat, also sold stock before the market downturn.
Ms. Loeffler and Ms. Feinstein, who are both married to investment professionals, said they had been unaware of the trades because they are handled by advisers. Mr. Perdue said his portfolio is managed by an investment adviser who regularly makes dozens of trades and was buying as well as selling shares of companies at the time. Mr. Inhofe in a statement said he also has an investment adviser and doesn’t manage trades.
Mr. Burr, chairman of the Senate Intelligence Committee, which has been receiving frequent briefings on the spread of Covid-19 since it emerged in China, made 33 stock trades on Feb. 13 worth between $628,000 and $1.7 million, according to the filings. Congressional rules require that trades be reported in ranges, not precise figures.
Mr. Burr, who is regarded as the Senate’s leading authority on pandemics as the author of the 2006 Pandemic and All-Hazards Preparedness Act, is also on the Senate health committee, which was briefed on the coronavirus on Jan. 24.
Three of Mr. Burr’s sales were in hotel company stocks—Park Hotels and Resorts Inc., Wyndham Hotels & Resorts Inc. and Extended Stay America Inc. —which have seen their value drop 74%, 63% and 50%, respectively, since Mr. Burr made the sales.
Mr. Burr and his wife also sold between $96,000 and $265,000 in stock between Jan. 31 and Feb. 4, the filings show, including additional shares of Extended Stay.
In an opinion piece published on Fox News online, Mr. Burr said, “Thankfully, the United States today is better prepared than ever before to face emerging public health threats, like the coronavirus.”
Behind closed doors, in a meeting with a small group of constituents in Washington, Mr. Burr warned them to prepare for dire economic effects of the coronavirus, according to a recording obtained by NPR. On Twitter, Mr. Burr called that report a “tabloid-style hit piece.”
On Friday, Mr. Burr explained his trades were motivated by news reports. “Specifically, I closely followed CNBC’s daily health and science reporting out of its Asia bureaus at the time,” he said.
Sales were also reported by two other members of the Intelligence Committee, Mr. Inhofe and Ms. Feinstein.
Between Jan. 27 and Feb. 20, Mr. Inhofe sold between $230,000 and $500,000 of stock in several companies, including Brookfield Asset Management, a real-estate company.
Mr. Inhofe in a statement said that his investment adviser has been moving him out of stocks and into mutual funds after he took the chairmanship of the Senate Armed Services Committee in December 2018 “to avoid any appearance of controversy.
Richard Blum, the husband of Ms. Feinstein and a professional investment manager, sold shares of Allogene Therapeutics Inc., a biotech company, on Jan. 31 and Feb. 18 in amounts between $1.5 million and $6 million.
Ms. Feinstein’s spokesman said the senator wasn’t involved in the sales. “All of Senator Feinstein’s assets are in a blind trust, as they have been since she came to the Senate. She has no involvement in any of her husband’s financial decisions,” her spokesman, Tom Mentzer, said in an email.
Matthew Sanderson, a political ethics attorney for Caplin & Drysdale, said he advises his congressional clients either to invest in mutual funds and 401(k)s, or turn investments over to an adviser with a regime to separate the lawmaker for the decision-making.
Mr. Burr’s statement that he acted based upon what he heard from the news media, and not what he learned as a committee chairman, could land him in hot water, Mr. Sanderson said. “That’s pretty weak tea, as for defenses,” Mr. Sanderson said. “That really doesn’t pass muster.”
In 2012, President Obama signed the Stop Trading on Congressional Knowledge Act to outlaw members of Congress and other government employees from engaging in insider trading based on information learned through their jobs.
The public interest group Common Cause filed complaints asking the Justice Department, the Securities and Exchange Commission and the Senate Ethics Committee to investigate the trades of Sens. Burr, Feinstein, Loeffler and Inhofe for possible violations of the law. A Common Cause spokesman said the group’s lawyers had just learned of Mr. Perdue’s trades and were considering adding him to the complaint.
Ms. Loeffler also sits on the Senate’s health committee, which had a closed-door briefing on Jan. 24 about the virus with presentations from the leading U.S. public-health officials, including Dr. Anthony Fauci, the top infectious-diseases specialist in government.
That day, Ms. Loeffler reported, she and her husband began making more than two dozen transactions, primarily selling millions of dollars in companies, including retailers AutoZone Inc. and Ross Stores Inc. They sold between $1.28 million and $3.1 million in stock.
By selling stock when they did, Ms. Loeffler and her husband avoided at least $480,000 in losses as of market close on March 19. The couple also purchased two stocks in February, one of which rose in value despite the market crash. Citrix Systems Inc., which makes remote computing software, rose nearly 3% value since the couple bought shares on Feb. 14.
Ms. Loeffler said neither she nor her husband make her own day-to-day decisions on purchases and sales. She said didn’t learn about these transactions until three weeks after they were made. “This is a ridiculous & baseless attack,” Ms. Loeffler said on Twitter.
Ms. Loeffler’s husband, Jeffrey Sprecher, is the chairman of the New York Stock Exchange.
Ms. Loeffler was appointed to her seat in December after Sen. Johnny Isakson resigned for health reasons and is locked in a fierce intraparty battle for a Senate seat in Georgia. Her primary rival, Rep. Doug Collins, criticized the senator. “It’s a sad situation,” Mr. Collins said.
The stock sales of Ms. Loeffler and Mr. Sprecher were reported earlier by the Daily Beast.
The stock market is cratering and corporate America’s chief executives have been a step ahead of the disaster. Many have been dumping shares prior to the correction. On top of that, top honchos of big U.S. companies are leaving their posts in record numbers. These signs indicate that the longest bull market in history may be over.
Corporate Captains Are Abandoning Ship
Chief executives of top companies in the U.S. are leaving their posts at a pace not seen in nearly two decades. Challenger, Gray, and Christmas reported that 1,480 CEOs departed in 2019. This caught the attention of some analysts as C-level executives don’t often step aside while both the economy and the stock market are booming.
The trend continued in January 2020 with 219 chief executives calling it quits. The number represents the highest CEO departures on a monthly basis since 2008. Are they getting out while the getting is good?
When CEOs vacate their positions while the stock market is trading at record highs, it can be a sign that the business cycle has peaked. Massive insider selling of shares adds weight to this theory.
Financial Times reported that corporate insiders, such as chief executives and chief financial officers, sold an estimated $26 billion worth of shares in 2019. This puts insider selling at the highest level since 2000 when corporate insiders sold $37 billion worth of stock in the midst of the dotcom bubble.
Jeff Bezos alone sold $4 billion worth of Amazon stock in a week. Meanwhile, Warren Buffett has been patiently sitting on a cash pile worth $130 billion. The writings on the wall suggest we may be witnessing the beginning of the end of the longest bull market in history.
Earnings Growth for U.S. Companies Will Be Flat This Year
To add fuel to the fire, one Wall Street firm estimates that 2020 will be a stagnant year for U.S. companies. Goldman Sachs revised its earnings estimates for 2020 to $165 per share from $174 per share. The change represents 0% growth for the year.
The multinational investment bank expects coronavirus to shock both supply and demand in China and the United States. In a note to clients, Goldman equity strategist David Kostin wrote,
“We have updated our earnings model to incorporate the likelihood that the virus becomes widespread.”
“Our reduced proﬁt forecasts reﬂect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, disruption to the supply chain for many US ﬁrms, a slowdown in US economic activity, and elevated business uncertainty.”
Once again, it appears that many chief executives are a step ahead of a disaster. The captains of corporate America are fleeing like rats on a sinking ship while dumping shares in record numbers. The best days of the longest bull market in history may be over.
Former Bakkt CEO To Sell All Holdings After Insider Trading Accusations
Following major accusations of insider stock trading during the coronavirus-induced market crash, Senator Kelly Loeffler (R-GA), the former CEO of Bakkt, is liquidating her holdings along with her husband.
In an April 8 tweet, Loeffler said that she and her husband Jeffrey Sprecher, CEO of ICE, which is the company that owns Bitcoin (BTC) options contracts regulator Bakkt, are liquidating their holdings in managed accounts to focus on tackling the coronavirus situation.
“I’m Doing It Because The Issue Isn’t Worth The Distraction”
The former CEO of Bakkt has also published an opinion piece in the Wall Street Journal, emphasizing that her action is not caused by Senate requirements but rather a strong commitment to defeat the coronavirus.
Loeffler Added That She Will Report All Transactions In The Public Periodic Transaction Report:
“I am taking action to move beyond the distraction and put the focus back on the essential work we must all do to defeat the coronavirus. Although Senate ethics rules don’t require it, my husband and I are liquidating our holdings in managed accounts and moving into exchange-traded funds and mutual funds. I will report these exiting transactions in the periodic transaction report I file later this month.”
Accusations Of A Coronavirus Insider Trading Scandal
As reported by Cointelegraph, Loeffler came under fire on March 20, with reports claiming that she sold millions in stock within days of a private Senate Health Committee hearing on the novel coronavirus.
American political commentator Keith Boykin explicitly accused Loeffler of being involved in a “coronavirus insider trading scandal” alongside other Senators including Richard Burr, Jim Inhofe and Ron Johnson.
Loeffler rejected the accusations of improper trading, claiming that she is not directly involved in decisions regarding her portfolio. As reported, the former Bakkt CEO explained that a third party person or set of advisors is tasked with making those decisions.
Loeffler Was Delaying Her Financial Disclosure After Swearing Into The Senate
Loeffler was sworn into the United States Senate on Jan. 6, 2020 after serving as CEO of digital asset exchange Bakkt for about a year.
After taking her seat in the Senate, Loeffler was reportedly delaying her Financial Disclosure Report. The report is a basic requirement for all officials that reveals potential conflicts of interest by identifying asset holdings.
Former Bakkt CEO Hands Documents To DoJ Amid Insider Trading Controversy
Former Bakkt CEO Kelly Loeffler sent documentation concerning her stock trades to the Justice Department amid insider trading accusations.
The former chief executive officer of both Bakkt and the New York Stock Exchange’s parent company Intercontinental, U.S. Senator Kelly Loeffler, has handed over documentation concerning her trading activities to the U.S. Justice Department, or DoJ, the Securities and Exchange Commission (SEC), and the Senate Ethics Committee.
Loeffler is seeking to quell widespread accusations of improper trading, after the third party managing Loeffler and her partner’s portfolio offloaded millions in shares shortly after the senator attended a closed-door senate hearing on coronavirus in January.
In a statement issued on May 14, Loeffler claimed that the documents evidence that both her and her husband, Jeffrey Sprecher, chairman of the New York Stock Exchange, “acted entirely appropriately and observed both the letter and the spirit of the law.”
Senator Loeffler Relinquishes Trading Documents
Since operating Intercontinental Exchange and the New York Stock Exchange, decisions surrounding Loeffler and Sprecher’s portfolios have purportedly been made by “multiple third-party advisors” without input from either individual.
“The documents and information demonstrated her and her husband’s lack of involvement in their managed accounts, as well the details of those accounts,” Loeffler’s statement said.
The accusations stem from 27 stock sales that were executed on Loeffler and Sprecher’s behalf during February — a period through which Loeffler consistently expressed confidence in the U.S. economy, despite her enormous sell-off amid the worsening coronavirus pandemic.
The pair also made a number of six-figure investments into Citrix — a firm selling technological solutions for distributed workplaces.
Richard Burr Under FBI Investigation For Improper Trading
The move follows reports detailing a probe launched by the Federal Bureau of Investigation, or FBI, into republican senator, Richard Burr, regarding stock trades that he made following the same hearing. Senator Burr has handed his phone to investigators and was served a search warrant at his address.
Loeffler has repeatedly declined to answer questions regarding whether she has been contacted by the FBI regarding her or her husband’s trades.
The FBI has also contacted democratic Senator Dianne Feinstein concerning stock transactions made by her husband.
NBA Star Wants Fans To Buy His Contract For $24.6M… Because Bitcoin?
Spencer Dinwiddie has launched a crowdfunding campaign in a bid to sell his NBA contract to his fans for the cash equivalent of 2,625.8 BTC.
The latest development in pro basketballer Spencer Dinwiddie’s efforts to tokenize his NBA contract has seen the star launch a Gofundme campaign in an attempt to raise the cash equivalent of the 2,625.8 Bitcoins (BTC) — worth roughly $24.6M at time of writing.
Dinwiddie launched the campaign, oddly titled ‘Dinwiddie X BTC X NBA’, to purportedly affirm his “commitment to [his] previous tweets” that offered his fans the opportunity to choose which NBA team he would go to in exchange for the value of his contract in Bitcoin.
Dinwiddie Abandons Crypto Campaign, Wants Cash Instead
However, the new campaign is requesting the cash equivalent of the BTC he previously asked for — giving the $24.63 million fundraiser little relation to Bitcoin.
If unsuccessful, Dinwiddie claims that 100% of the money raised will be designated to an undisclosed charity.
Since launching the campaign roughly 11 hours ago, Dinwiddie’s bizarre fundraiser has raised $690 from 65 donors.
Sporting Organizations Tokenize Athletes
During September 2019, Dinwiddie first announced his intention to tokenize his then-reported $34 million NBA contract extension — however, the offer was framed as an opportunity for investors to receive principal and interest.
While many sporting organizations have sought to establish partnerships with crypto firms to offer gamified tokenized representations of stars to fans in recent months, few initiatives appear to have taken off.
Last month, billionaire investor and owner of the NBA’s Dallas Mavericks, Mark Cuban, revealed that since relaunching Bitcoin as an option for fans to purchase tickets and merchandise in August 2019, the team has taken in a measly $130 in BTC.
Nominee To Financial Regulator CFTC Traded Stocks, Options While In Government
Robert Bowes, a housing official, bought options in cruise-ship operator, shares of in-flight internet company.
President Trump’s nominee to the agency that regulates the vast derivatives market is no stranger to risky bets.
Robert Bowes, a political appointee in the Department of Housing and Urban Development, has reported 140 trades of stocks and options that collectively amount to between $671,000 and $3.2 million since joining the government in early 2017. Three bets on options or individual stocks were larger than $50,000 each.
Disclosure forms filed by Mr. Bowes, a former banker and fund manager nominated by Mr. Trump to the Commodity Futures Trading Commission, list wagers against cruise operator Royal Caribbean Group, bets on market volatility and purchases of small-cap stocks.
Ethics rules don’t ban government officials from trading, as long as they steer clear of conflicts of interest and don’t take advantage of inside information, which Mr. Bowes said he didn’t. What was unusual, ethics experts said, was the frequency of his transactions, the high-stakes bets he sometimes made and the exotic securities he sometimes traded. On several occasions in 2018 and 2020, he bought and sold thousands of dollars of options on the same day.
“It is literally day trading,” Robert Rizzi, a partner at law firm Steptoe & Johnson LLP who advises government officials and nominees on financial disclosure, said after reviewing Mr. Bowes’s filings. “When they’re in the government, a lot of them don’t have time to do this, so it’s pretty amazing that he’s doing all this trading.”
Despite his investment activity, which continued into August of this year, Mr. Bowes listed no financial income, brokerage accounts or bank accounts on his year-end 2018 or 2019 financial disclosures.
In response to questions from The Wall Street Journal, Mr. Bowes said that he made a mistake on the 2018 filing and that his bank and brokerage-account balances at the end of 2019 were too low to require disclosure.
Mr. Bowes, 59 years old, had a decadeslong career in finance as a vice president at Chase Manhattan Bank and a director of counterparty risk at government-backed housing-finance giant Fannie Mae.
A staffer on Mr. Trump’s 2016 presidential campaign, Mr. Bowes was appointed senior adviser to HUD in January 2017 and has since held several positions within and outside the department, including stints as a policy adviser to Stephen Miller, a top aide to Mr. Trump, and in the Office of Personnel Management.
In August, Mr. Trump nominated Mr. Bowes to a seat on the five-member CFTC, a financial regulator that oversees derivatives markets and enforces laws against insider trading and fraud.
If he is confirmed by the Senate Agriculture Committee, Republicans can maintain their 3-2 majority on the commission until 2022, giving them the chance to block tougher financial regulations if Joe Biden wins the presidential election in November and appoints a Democrat to head the commission.
In his most recent role at HUD as director of faith-based initiatives, Mr. Bowes advocated a plan to shelter homeless residents of New Orleans on a Carnival Corp. cruise ship following the Covid-19 outbreak, despite being told by Housing Secretary Ben Carson to drop the idea, according to people familiar with the matter.
David Bottner, executive director of the New Orleans Mission, an evangelical Christian organization that supports the cruise-ship idea and hoped to manage it, said Mr. Bowes traveled to New Orleans a few months ago to discuss the plan with him. City officials were opposed to the idea, LaTonya Norton, a spokeswoman for the city said.
In June and July, Mr. Bowes reported 13 trades to buy or sell put options on shares of Royal Caribbean, a rival cruise operator.
Several of the transactions were valued at between $15,000 and $50,000, his disclosure forms show. Put options give the holder the right to sell shares at a predetermined price and are typically used by investors to bet against a company’s stock. It couldn’t be determined whether Mr. Bowes made a profit or a loss on those trades.
“HUD initially explored in May, June and July connecting the cruise-ship companies with the large homeless shelters operating in U.S. port cities,” Mr. Bowes said, without specifying whether this was his idea. He added that he hadn’t been involved in the plan since early July.
Mr. Bottner said Sept. 1 that he had last spoken with Mr. Bowes “a couple weeks ago,” telling the HUD official he had been unable to secure a berth for the vessel in New Orleans and that the plan’s chances of coming to fruition were diminishing.
Carnival didn’t comment. Royal Caribbean didn’t comment on Mr. Bowes’s trades but said it had been contacted by HUD earlier this year “about the possibility of using cruise ships for homeless housing. After preliminary inquiries, we decided it was not practical and we walked away from it,” company spokesman Jonathon Fishman said in an email, without providing additional details.
A HUD spokesman declined to comment on Mr. Bowes’s investment activity or the cruise-ship plan but said he is “a talented public servant who is more than qualified to handle the new job he is taking on.” A White House official said Mr. Bowes’s financial disclosure was cleared by the Office of Government Ethics before his nomination to the CFTC.
On March 26, 2018, Mr. Bowes bought 15,500 shares of Genworth Financial, a Richmond, Va.-based insurance company with a market capitalization of less than $2 billion. The stock closed that session at $2.88 a share, making Mr. Bowes’s investment worth about $45,000.
The following day, Genworth and Beijing-based financial-holding company China Oceanwide Holdings Group Co. agreed to extend a merger deal that was pending before a U.S. government panel, the Committee on Foreign Investment in the U.S., which reviews foreign investments.
On June 11, the first trading day after Cfius approved the merger, Genworth’s shares jumped 27% to $4.82. Mr. Bowes sold his shares on Nov. 8, when Genworth’s stock closed at $4.71, increasing the value of this stake by almost $30,000.
In a written response to questions about the trades, Mr. Bowes said he had no inside or advance information, and no knowledge of Cfius’s deliberations. He also disputed the notion that the bet was well-timed, without providing further details.
In October and November of 2018, Mr. Bowes bought between $53,000 and $145,000 of call options on shares of Bermuda-based shipping company Golar LNG, according to his disclosures. Call options give the holder the right to buy shares at a predetermined price.
He said in a text message to the Journal that he held the options until Jan. 3, 2019, when he sold them for about $41,000.
“I thought I had sold the GLNG call positions just before year end but instead sold them a business day or two later,” Mr. Bowes said in the text message. He said he has submitted a letter to HUD’s ethics officer to amend that form.
Other trades included dozens of bets on market volatility and the purchase of between $65,000 and $71,000 of shares in Gogo Inc., an in-flight internet provider with market capitalization of less than $1 billion. Mr. Bowes said in another text message that he sold those shares in 2018, though the transaction doesn’t appear in his disclosure forms. It couldn’t be determined whether Mr. Bowes made a profit or a loss on those trades.
Regulations require federal employees to disclose cash holdings above $5,000 and financial assets, such as stocks, worth more than $1,000. Mr. Bowes said his bank and brokerage balances were below those thresholds at the end of 2019. Money for his more recent trades, he said, has come from his bank account and income this year.
Mr. Bowes said his trading isn’t unusual and pointed to his career in finance.
“I was a fund manager,” he said in a text message. “I banked the securities brokerage industry. I have a 30+ year career covering large complex financial institutions.”
Pelosi’s Husband Locked In $5.3 Million From Alphabet Options
Speaker Nancy Pelosi’s husband, Paul Pelosi, won big on Alphabet Inc. stock and added bets on Amazon.com Inc. and Apple Inc. in the weeks leading up to the House Judiciary Committee’s vote on antitrust legislation that seeks to severely limit how these companies organize and offer their products.
In a financial disclosure signed by Nancy Pelosi July 2, her husband reported exercising call options to acquire 4,000 shares of Alphabet, the parent company of Google, at a strike price of $1,200. The trade netted him a $4.8 million gain, and it’s risen to $5.3 million since then as the shares have jumped.
The transaction was completed just a week before the House Judiciary Committee advanced six bipartisan antitrust bills, four of which take aim at Google, Amazon, Apple and Facebook Inc. Market reaction was muted, suggesting that investors don’t see the House proposals as a real threat to the companies.
Alphabet’s share price has increased 3.2% since the judiciary panel approved the legislation.In fact, Nancy Pelosi last month said she supports the Judiciary committee’s bipartisan effort to challenge the hold that big technology companies have over the internet economy, telling reporters that Congress is “not going to ignore the consolidation that has happened and the concern that exists on both sides of the aisle.” She said Congress’s responsibility is to “the consumer and competition.”
The six antitrust bills, especially the four that target a narrow set of companies, have a long road to become law. Pelosi’s top deputy, Majority Leader Steny Hoyer, said the legislation needs work before getting a vote in the full House. And the Senate presents an even tougher hurdle, where support from at least 10 Republicans is required to pass.
Paul Pelosi made his fortune in real estate and venture capital in the San Francisco area. His transactions are not suspected of violating any laws regarding members of Congress, their spouses and insider trading.
Disclosure reports must be filed within 30 days that lawmakers are aware of a transaction, or no more than 45 days after the transaction took place, according to House guidelines.
Paul Pelosi on May 21 also bought 20 call options for Amazon with a strike price of $3,000, expiring in June 2022, suggesting that he expects the online retailer to continue its gains. He also bet on Apple, purchasing 50 call options with the same expiration date and a strike price of $100.
“The speaker has no involvement or prior knowledge of these transactions,” her spokesman Drew Hammill said in an emailed statement on Wednesday, adding that Speaker Pelosi doesn’t own any stock.
Executive Stock Sales Are Under Scrutiny. Here’s What Regulators Are Interested In
10b5-1 plans allow executives to create schedules for buying and selling shares in the future, but they can be modified without disclosure.
Securities regulators are rethinking rules on popular plans that let corporate executives sell stock without violating insider-trading provisions.
The plans—known as 10b5-1 plans—allow executives to create schedules for buying and selling shares in the future. In theory, a predetermined sale, even if it comes at a fortuitous time, wouldn’t be based on inside information.
But years of research has shown that the reality is more complicated: Executives might establish a plan to sell shares that very day. Executives could set up a raft of plans to sell on different days, then cancel most of them. They can modify plans without disclosing what they are doing.
Securities and Exchange Commission Chairman Gary Gensler has expressed skepticism about the plans and in June asked the commission’s staff to recommend changes that would curb abuses.
Lawmakers called for changes last year after pharmaceutical executives developing Covid-19 vaccines sold $500 million worth of shares; many of the sales came under 10b5-1 plans that were modified after vaccine trials began. The companies say the trades followed rules for 10b5-1 plans, and no one has been accused of wrongdoing.
The plans are wildly popular: They accounted for 61% of all insider trades during 2020, up from 30% in 2004, according to data from InsiderScore, a research service tracking executive-trading data.
“The original intent was to create a safe harbor so people who want to follow the rules have a clear way to do that, but there may be a need to further strengthen those rules,” said Priya Huskins, partner and senior vice president at insurance brokerage Woodruff Sawyer & Co. who advises clients on corporate-governance issues including 10b5-1 plans.
Here Are Four Areas Likely To Draw Regulators’ Attention:
No Waiting Around
Under the current rules, an executive can trade the same day a plan is adopted. Trades that occurred within 60 days of the plan’s establishment were more likely to avoid significant losses and to have come ahead of stock-price declines, according to a January study of more than 20,000 plans by researchers from Stanford University, the University of Pennsylvania and the University of Washington. After 60 days, the advantages disappeared.
“I worry that some bad actors could perceive this as a loophole to participate in insider trading,” said Mr. Gensler in early June during an Investor Advisory Committee meeting.
He said he supports proposals to establish a four-to-six month window between establishing a plan and executing a trade.
Nearly 50% of all 10b5-1 sales since 2004 occurred within 60 days of an insider’s establishing a plan, according to data from InsiderScore.
Charles Schwab Corp.’s stock was trading at more than twice its pandemic low in late May when Chief Financial Officer Peter Crawford established a plan to sell shares; eight days later he sold more than $642,000 worth of shares near the all-time high, according InsiderScore data.
In July, the company revealed an SEC investigation into disclosures related to its robo-advisory service; the shares fell 5% a week after the announcement. Mr. Crawford hasn’t been accused of wrongdoing. The trade was executed as part of a broader 10b5-1 plan and adheres to all applicable regulations, a company spokesman said. Mr. Crawford declined to comment.
Current rules allow executives to cancel plans even when they have nonpublic market-moving information. For instance, an executive who has a plan scheduled to sell shares on Sept. 1 could cancel that plan knowing that good news is coming on Sept. 2.
“This seems upside-down to me,” Mr. Gensler said. “It also may undermine investor confidence.” The SEC is reviewing options to limit cancellations.
Insiders aren’t required to disclose when a plan is canceled, so researchers have been unable to study the extent of terminated plans. Just 0.44% of plans since 2004 included details about a termination, according to InsiderScore data.
Darren Lampert, chief executive of cannabis-equipment seller GrowGeneration Corp., established a 10b5-1 plan in September 2019 that executed a series of transactions while the stock traded for less than an average of $6 through last August.
The plan was terminated after selling 70% of its anticipated 750,000 shares two days after the company said it would take legal action against a short seller that published a report about GrowGeneration’s management team.
After the presidential election, shares of cannabis companies rallied and GrowGeneration’s stock price rose nearly 300% to $35 between August 2020 and the end of November 2020.
Mr. Lampert’s next transactions were made without a plan days after earnings were announced, selling for as much as $31 a share at the end of November, according to InsiderScore data. GrowGeneration declined to comment. Mr. Lampert couldn’t be reached for comment; the company’s president declined to comment.
Many 10b5-1 plans steadily sell shares, whether the stock is up or down. Facebook’s Mark Zuckerberg, for example, has sold consistent volumes of shares at regular intervals since at least August 2019, according to InsiderScore data.
“Those plans that are selling routine amounts of shares every month over multiple years; that’s what the plan was intended for, to sell shares slowly over time,” said Daniel Taylor, an accounting professor who runs the Forensic Analytics Lab at the University of Pennsylvania’s Wharton School and one of the authors of the January study of trading under plans.
But about a third of plans since 2004 involve just a single trade, according to InsiderScore data. (Because documentation is scant, researchers can’t differentiate between plans that intended to execute a single trade and those that planned for multiple trades but were terminated after the first sale.)
Single-trade plans outperformed multi-trade plans regardless of the timing, according to Mr. Taylor’s research. “When it’s a single-trade plan, it’s abusive,” he says.
Another twist: Insiders can also adopt a variety of plans with different strategies and then cancel those with unfavorable trades before they are executed. Mr. Gensler is considering limits on how many plans can be established at once.
Insiders aren’t required to tell the SEC about modifications to 10b5-1 plans, which could include changing the volume, frequency and price targets of trades.
Since 2004, voluntary filings indicated that just 2.2% of nearly 34,000 plans were modified, according to InsiderScore data. Even when amendments are disclosed, there are seldom details about what changed.
Mr. Gensler isn’t the first SEC official calling for additional disclosures; a 2002 proposal would have required public companies to report each executives’ adoption, modification and termination of a plan. Some elements of the proposal were adopted by the Sarbanes-Oxley Act that year, but requirements to disclose modifications were abandoned.
“Disclosures are important because it helps facilitate an outside learning,” said Alan Jagolinzer, a professor of financial accounting at the University of Cambridge who has studied 10b5-1 plans. “We really don’t know how people utilize these plans because we see only the ones we see so it’s really hard to understand the outliers.”
Judge Rodney Gilstrap Sets An Unwanted Record: Most Cases With Financial Conflicts
The patent-law expert took on 138 cases involving companies in which he or his spouse had a financial interest, a Wall Street Journal investigation found.
No federal judge in America has heard more patent-infringement lawsuits in the past decade than Rodney Gilstrap, who presides over a small courthouse in Marshall, Texas.
He also holds another record: Judge Gilstrap has taken on 138 cases since 2011 that involved companies in which he or a family member had a financial interest, more than any other federal judge, a Wall Street Journal investigation shows.
The companies included Microsoft Corp. (53 cases), Walmart Inc. (36 cases), Target Corp. (25 cases) and International Business Machines Corp. (9 cases).
A 1974 federal law requires judges to disqualify themselves from cases if they, their spouse or minor children hold a financial interest in a plaintiff or defendant, including the interest of a beneficiary in assets held by a trust.
The Journal investigation, which compared judges’ financial-disclosure forms against their court dockets, found that 131 federal judges violated this law from 2010 to 2018, in a total of 685 cases. Judge Gilstrap had several dozen more violations than the runner-up, Judge Janis Sammartino of California, who heard 54 cases involving companies held in her family’s trusts. She has since directed court clerks to inform the parties in most of the cases that she should have recused herself.
Judge Gilstrap, the chief judge for the U.S. District Court for the Eastern District of Texas, also disclosed one of the largest holdings in a conflicted company. He oversaw a patent-infringement case against a Walt Disney Co. unit while he or his wife reported holding between $100,001 and $250,000 of Disney stock. The plaintiff later withdrew its claim.
The 64-year-old Judge Gilstrap, one of America’s most prominent district judges, said he believed he didn’t need to recuse himself from some cases because they required little or no action on his part, and in other cases because the stocks were in a trust created for his wife without her stock-picking input. Legal-ethics experts disagree on both counts.
Judge Gilstrap declined interview requests. “I take my obligations related to potential conflicts/recusals seriously,” he said in one of seven emails to the Journal. “Throughout my judicial career, I have endeavored to comply with all such obligations, and I will continue to do so.”
Beyond violating law and ethics, the judges’ handling of lawsuits filed by and against companies in which they have financial interests threatens the federal courts’ hard-earned and crucial reputation for fairness, impartiality and objectivity.
Federal district judges have considerable discretion on matters of fact finding and other pretrial issues, and this can be especially important in patent litigation, a complex area of law. “The more important questions in any given patent case are the small discretionary, often procedural questions that the judge resolves before trial,” said Paul Gugliuzza, a law professor at Temple University.
Friends and other lawyers said they couldn’t imagine that Judge Gilstrap would ever be swayed by his or his family’s investments in making court rulings. “That man is as pure as the driven snow in terms of his ethics and personal responsibility,” said Brad Toben, the dean of Baylor University Law School and a longtime friend of the judge.
An unusually large role in patent litigation has made the Eastern District of Texas a lightning rod for criticism from some academics, corporations and think tanks.
These critics say its rules encourage patent holders to bring suits there because they are dispatched swiftly, often with quick settlement payouts to the plaintiffs. A 2016 article in the Southern California Law Review described how it said the court engaged in “forum selling,” a pejorative twist on “forum shopping,” the practice of lawyers seeking out friendly legal venues.
Some have lauded the court’s efforts to cater to patent litigants. A 2011 article in Southern Methodist University’s Science and Technology Law Review said the patent rules in East Texas “provide structure and a default schedule for the efficient, effective, and more predictable administration of patent cases.”
It is in patent suits where 85% of Judge Gilstrap’s recusal violations identified by the Journal occurred. In one, a McKinney, Texas-based company called Biscotti Inc. alleged that Microsoft’s Xbox One services infringed a patent covering live video-chat capabilities. A jury found in Microsoft’s favor in 2017.
Biscotti sought a new trial, citing numerous reasons, including an assertion that a video shown to the jury about videoconferencing calls violated evidentiary rules.
“The video does not present the sort of prejudice that would justify a new trial,” Judge Gilstrap said in rejecting Biscotti’s claims in 2018. “A plethora of other evidence in this record supports the jury’s verdict in this regard.”
For most of the nearly five years he oversaw the case, Judge Gilstrap’s disclosure forms listed between $15,001 and $50,000 of Microsoft stock.
In another instance, Judge Gilstrap took unusually strong action in a 2015 case that he shouldn’t have overseen because of stock held in his wife’s trust.
A firm called Iris Connex LLC sued Microsoft and 17 other technology companies alleging that their computer and smartphone devices infringed its patent for videoconferencing. In a 2016 ruling, Judge Gilstrap said that “no reasonable juror could find the accused camera system” with fixed cameras violated a patent held by the plaintiff that called for a movable camera.
The judge granted summary judgment, though the defendants hadn’t requested it. In doing so, he cited court precedent that said disposing of the claims at such an early point in the infringement case was highly unusual “but entirely appropriate at an early stage in a case where…the issues are cut and dry.”
In a later ruling, Judge Gilstrap also called Iris Connex’s lawsuit “exceptionally bad,” said the company was a shell meant to insulate the true owner of the patent against sanctions for filing frivolous cases, and ordered him to pay attorneys’ fees and expenses to one of the defendants.
Lawyers for Iris Connex and a spokesman for Microsoft declined to comment.
Judge Gilstrap said he removes himself from cases involving plaintiffs or defendants in which he or his wife hold stock—but not when those stocks are held in a trust created for his wife and her descendants.
Judge Gilstrap said that a trustee makes investment decisions for the trust and holds legal title to its assets and that the trust will continue to exist after his wife’s death.
Judge Gilstrap said he checked the trust’s characteristics against ethics guidance provided to other federal judges and believes that “its structure, the limitations it imposes, and the Trustee’s discretion place it in a category of trusts which would not require recusal.”
Legal experts told the Journal that Judge Gilstrap’s wife has an interest in the trust’s stocks, even if she doesn’t hold legal title to them.
Federal law defines a “financial interest” in a party as either a “legal or equitable interest,” such as a beneficiary’s interest in a trust.
“The judge must recuse if the trust for the spouse has even one share of stock in a party,” said Stephen Gillers, a New York University law professor and author of a judicial ethics casebook, who reviewed the filings for the Journal. “It does not matter that the spouse or child have no say in the investment choices.”
Investments in his wife’s trust should be disclosed if she either is the legal owner of the trust or has an equitable interest, said Ben Johnson, a law professor at Pennsylvania State University, who published research on recusal failures among district judges. “He would have to recuse.”
Judge Gilstrap’s financial disclosure forms make no distinction between the trust’s assets and stocks the judge and his wife hold in other investment accounts.
In emailed statements, he declined to provide an accounting of the stocks in the trust but confirmed that Microsoft was among them, reiterating that he believed he had no duty to recuse himself in cases involving the company.
Judge Gilstrap also initially said he had no duty to recuse himself from some cases involving parties in which his family’s other investment accounts held stock because the cases identified by the Journal were handled by a magistrate judge or required only “ministerial” actions by Judge Gilstrap.
After the Journal contacted him, he sought counsel from the federal judiciary’s ethics committee. The panel said he was mistaken.
A Sept. 2 opinion by the committee, provided to the Journal by Judge Gilstrap, said the Code of Conduct for U.S. Judges “requires recusal when a judge has a financial conflict, regardless of the substance of the judge’s actual involvement in the case,” and “encompasses a situation where the Clerk’s Office assigns you a case, even where you do not act.”
In sharing the opinion with the Journal, Judge Gilstrap said he would follow the panel’s guidance. “In hindsight and considering the attached opinion from the Committee, I now understand that, despite my lack of any involvement or action, such cases result in a need for me to recuse,” he said.
He declined to say whether he sought an opinion from the committee on whether he was required to recuse in connection with his wife’s trust.
Court dockets in the cases identified by the Journal give no indication that Judge Gilstrap or the court clerk has notified parties that he held a disqualifying interest while assigned to the cases.
On Tuesday, another federal judge notified by the Journal about recusal violations directed a court clerk to make public alerts to parties in 16 lawsuits saying he shouldn’t have heard the cases. That brought to 57 the number of judges who have told clerks to issue similar court notices, in 345 lawsuits.
Judge Gilstrap joined the federal bench in 2011, nominated by former President Barack Obama and recommended by two Republican senators from Texas. “He has earned the support of people of all political stripes in East Texas and around our great state,” Sen. John Cornyn said at the confirmation hearing.
When nominated, he reported that he or his family owned a total of nearly $1.8 million in shares of more than three dozen companies. In a more recent accounting, his 2018 disclosure form, Judge Gilstrap reported holding $3.7 million in stocks, among total assets of more than $8 million.
The shares he disclosed owning when nominated included $16,521 of Microsoft, $6,915 of JPMorgan Chase & Co. and $1,756 of Cisco Systems Inc. Within days of his confirmation, his docket filled with more than 100 cases, including suits that named Microsoft, JPMorgan and Cisco as parties.
By the end of the year, he had more than a dozen cases that involved companies in which he or his wife owned stock, the Journal found.
Mr. Gilstrap faced no questions about his investments at his confirmation hearing. But senators asked him about “patent-troll” litigation, a derisive term for suits by plaintiffs—often firms that make no products but own patents—to enforce rights against alleged infringers far beyond the patents’ value.
He vowed to be fair. “I’ve heard it said that to be an effective district judge, you have to be willing to disappoint your friends and astound and please your detractors sometimes,” he said at the hearing.
Judge Gilstrap is known around Marshall for meeting with students for civics lessons, singing in a church choir and handing out jars of homemade honey he has branded “Sweet Justice.”
A magna cum laude graduate of Baylor with a degree in religion, Mr. Gilstrap went to Baylor Law School before starting to practice law in Marshall. In 1984 he co-founded a firm there specializing in intellectual-property and patent law.
Court rules at the time allowed plaintiffs to file patent-infringement suits anywhere the defendant’s product was sold. When Dallas-based Texas Instruments sued competitors based in Asia to defend its semiconductor patents In the late 1980s, TI’s lawyers brought the cases not in Dallas but in Marshall, which had acquired a reputation for having juries sympathetic to plaintiffs and where suits could go to trial quickly.
A series of judges in the Eastern District of Texas adopted local rules that promised a “rocket docket” for patent cases. In a patent case before the U.S. Supreme Court in 2006, when an attorney complained of a pro-plaintiff bent at the court in Marshall, Justice Antonin Scalia referred to it as being among “renegade jurisdictions.”
“Why Do Patent Trolls Go to Texas? It’s Not for the BBQ,” the Electronic Frontier Foundation, a libertarian digital-rights group that opposes patent trolls, said on its website in 2014. The pro-defendant American Tort Reform Association in 2016 deemed the district among “judicial hellholes” because of its plaintiff-friendly reputation.
The Marshall community benefited from the local court’s being a center of patent litigation. Law firms needed hotels. Some companies opened local outlets to facilitate filing cases in the district.
“These attorneys are coming to small-town Texas for cases, often bringing a team of 20 lawyers,” said Prof. Gugliuzza of Temple, who has studied the court.
Before joining the federal bench, Judge Gilstrap served for a dozen years as the local Harrison County judge. That made him a top county politician, in a role concerned with local economic development as well as with the local court.
When tapped for a federal judgeship, he committed to taking on what by then was a bulky patent-suit caseload in Marshall. Since 2011, Judge Gilstrap has heard nearly 15% of the more than 47,800 patent cases filed in federal courts.
The assets reported by Judge Gilstrap and his family include companies that are typically defendants in patent-infringement suits.
Judge Gilstrap has retained or enhanced rules that made the local court attractive to plaintiffs’ lawyers seeking to enforce patents rights, who often seek to settle their suits quickly.
In the period before patent cases got to trial, Judge Gilstrap’s court has proved somewhat plaintiff-friendly, according to data analyzed for the Journal by Lex Machina, a legal analytics provider. Of 6,929 patent cases in front of Judge Gilstrap, 83% were resolved with a settlement before trial, compared with 69% of patent cases nationally since 2011.
Once litigants got to trial, however, the data analysis shows Judge Gilstrap’s rulings have favored defendants more often than in patent suits nationwide. Since 2011, he has found that defendants infringed patents in 34 cases and didn’t infringe in 35. Nationwide, judges have found infringement in 277 cases and none in 204 cases, according to Lex Machina, which also counted more patent suits handled by Judge Gilstrap than any other judge in the past decade.
Judge Gilstrap didn’t respond to requests for comment on these findings.
The tort-reform association said that in 2015, Judge Gilstrap threw out 168 suits filed by what the association labeled “a serial patent troll” that sought small settlements from numerous companies.
Over the years, Judge Gilstrap has championed the Eastern District of Texas on the legal-lecture circuit. In 2018, he made two dozen trips, many to speak at national and international conferences about patent litigation, paid for by the U.S. court system, bar associations and universities, his financial disclosure form shows. All this was permissible.
The Eastern District’s outsize role in patent litigation has eased since 2017, when the Supreme Court limited plaintiffs to bringing their suits where defendants have an established place of business. The district now is only the third-busiest, of 94 federal court districts, in patent cases. Judge Gilstrap, though, is still one of the busiest patent judges and has been since his earliest days on the federal bench.
Judge Gilstrap disqualified himself from a patent case weeks after his Senate confirmation in 2011, but he kept the case when it boomeranged back to him after brief stops in the courtrooms of two other judges.
In the suit, the plaintiff alleged its patent was infringed by a tool on the websites of McDonald’s Corp. and several other companies to help people find stores near them. Judge Gilstrap recused himself in January 2012 without explanation.
Asked recently about it, he said, “This was a long time ago, but I suspect the presence of McDonald’s Corp. (which I hold in a personal brokerage account) would have prompted” him to bow out.
The judge to whom the case was reassigned retired after about two months. The district court assigned it to another judge, but later took it away from that judge in a rebalancing of caseloads. The case landed on Judge Gilstrap’s docket again in January 2013. This time, he didn’t recuse himself.
McDonald’s was no longer a defendant, having settled. The plaintiff, however, had filed more suits alleging that various retailers, banks and big-box stores were infringing its patent. Judge Gilstrap consolidated these suits.
Of the more than two dozen companies that were by then parties, Judge Gilstrap’s disclosure forms showed investments in five: Home Depot Inc. and JPMorgan (each $15,001 to $50,000 worth) plus Microsoft, Target and Walmart (each up to $15,000).
Walmart and the plaintiff, LBS Innovations LLC, entered into an agreement to dismiss the claims against the retailer in September 2013. Judge Gilstrap discarded some of LBS’s infringement claims against the remaining companies in a January 2014 ruling. Settlements with Home Depot, JPMorgan, Microsoft and Target quickly followed.
Judge Gilstrap said the stocks in the five companies were assets of his wife’s trust and didn’t require his recusal.
Eric Buether, a lawyer who represented LBS in the case, said, “My experience is that he’s a fastidious judge who holds all parties and lawyers to obey the rules and [I] would not expect this to be anything other than an innocent error if there even were one.”
Mr. Buether has a trial in Judge Gilstrap’s court starting next week.
131 Federal Judges Broke The Law By Hearing Cases Where They Had A Financial Interest
The judges failed to recuse themselves from 685 lawsuits from 2010 to 2018 involving firms in which they or their family held shares, a Wall Street Journal investigation found.
More than 130 federal judges have violated U.S. law and judicial ethics by overseeing court cases involving companies in which they or their family owned stock.
A Wall Street Journal investigation found that judges have improperly failed to disqualify themselves from 685 court cases around the nation since 2010. The jurists were appointed by nearly every president from Lyndon Johnson to Donald Trump.
About two-thirds of federal district judges disclosed holdings of individual stocks, and nearly one of every five who did heard at least one case involving those stocks.
Alerted to the violations by the Journal, 56 of the judges have directed court clerks to notify parties in 329 lawsuits that they should have recused themselves. That means new judges might be assigned, potentially upending rulings.
When judges participated in such cases, about two-thirds of their rulings on motions that were contested came down in favor of their or their family’s financial interests.
In New York, Judge Edgardo Ramos handled a suit between an Exxon Mobil Corp. unit and TIG Insurance Co. over a pollution claim while owning between $15,001 and $50,000 of Exxon stock, according to his financial disclosure form. He accepted an arbitration panel’s opinion that TIG should pay Exxon $25 million and added $8 million of interest to the tab.
In Colorado, Judge Lewis Babcock oversaw a case involving a Comcast Corp. subsidiary, ruling in its favor, while he or his family held between $15,001 and $50,000 of Comcast stock.
At an Ohio-based appeals court, Judge Julia Smith Gibbons wrote an opinion that favored Ford Motor Co. in a trademark dispute while her husband held stock in the auto maker. After she and the others on the three-judge appellate panel heard arguments but before they ruled, her husband’s financial adviser bought two chunks of Ford stock, each valued at up to $15,000, for his retirement account, according to her disclosure form.
The hundreds of recusal violations found by the Journal breach a bedrock principle of American jurisprudence: No one should be a judge of his or her own cause. Congress first laid out that principle in 1792 to guarantee litigants an impartial judge and reassure the public that courts could be trusted.
Judge Ramos, who oversaw the Exxon case, was unaware of his violation, said an official of the New York federal court, because his “recusal list”—a tally judges keep of parties they shouldn’t have in their courtrooms—listed only parent Exxon Mobil Corp. and not the unit, whose name includes the additional word “oil.” The official said the court conflict-screening software relied on exact matches.
The unit had informed the court at the outset of the case that it was a subsidiary of Exxon Mobil so Judge Ramos could “evaluate possible disqualification or recusal,” a court filing shows.
After the Journal contacted Judge Ramos, who was named to the court by former President Barack Obama, the court’s clerk notified the parties of his stockholding. TIG attorneys asked the court to set aside his ruling and send the case to a new judge because of “the inevitable appearance of partiality.” Exxon opposed assigning a new judge, calling that a “manifest unfairness, gross inefficiency, and waste of judicial resources.” An appellate court has put a hearing on hold until the district court decides what to do.
In the Comcast case, a Colorado couple asked Judge Babcock to issue an order blocking Comcast from accessing their property to install fiber-optic cable. Representing themselves in court, Andrew O’Connor and Mary Henry accused Comcast workers of bullying them, scaring their 10-year-old daughter and injuring their dog, Einstein, allegations the company denied.
Judge Babcock, who was appointed to the court by former President Ronald Reagan, ruled the couple had “continually blocked Comcast’s access to the easement.” He sent the case back to state court, as Comcast wanted.
“I dropped the ball,” Judge Babcock said when asked about the recusal violation. He blamed flawed internal procedures. “Thank you for helping me stay on my toes the way I’m supposed to,” he said. A Comcast spokeswoman declined to comment.
Mr. O’Connor, who settled his case in state court, said, “If you are a federal judge, you should not be holding individual stocks.”
Judge Gibbons from the Ford trademark case, appointed to the appeals court by former President George W. Bush, said she had mistakenly believed holdings in her husband’s retirement account didn’t require her recusal. She later directed the clerk of the Sixth U.S. Circuit Court of Appeals to notify the parties of the violation and said that her husband has since told his financial adviser not to buy individual stocks.
“I regret my misunderstanding, but I assure you it was an honest one,” she said.
A spokesman for Ford said: “A fair and impartial judiciary is critical to the integrity of our legal system. In this case, the violation of Ford’s trademarks was clear.”
“I dropped the ball. Thank you for helping me stay on my toes the way I’m supposed to.”
Judge Lewis Babcock, When Asked About His Violations
Nothing bars judges from owning stocks, but federal law since 1974 has prohibited judges from hearing cases that involve a party in which they, their spouses or their minor children have a “legal or equitable interest, however small.” That law and the Judicial Conference of the U.S., which is the federal courts’ policy-making body, require judges to avoid even the appearance of a conflict. Although most lawsuits don’t directly affect a company’s stock price, the Supreme Court in 1988 said the law’s purpose is to promote confidence in the judiciary.
Conflict-of-interest rules are common for state and federal employees as well as for lawyers, journalists and corporate executives. U.S. government workers may not participate “personally and substantially” in matters in which they have a financial interest.
The Journal reviewed financial disclosure forms filed annually for 2010 through 2018 by roughly 700 federal judges who reported holding individual stocks of large companies, and then compared those holdings to tens of thousands of court dockets in civil cases. The same conflict rules apply to criminal cases, but large companies are rarely charged, and the Journal found no instances of judges holding shares of corporate criminal defendants in their courts.
It found that 129 federal district judges and two federal appellate judges had at least one case in which a stock they or their family owned was a plaintiff or defendant.
Judges’ stockholdings exceeded $15,000 in 173 cases and $50,000 in 21 of those cases, although under the law, the amount doesn’t matter.
The Journal found 61 judges or their families not only holding stocks in companies that were plaintiffs or defendants in the judges’ courts but also trading the stocks during cases.
Judges offered a variety of explanations for the violations. Some blamed court clerks. Some said their recusal lists had misspellings that foiled the conflict-screening software. Some pointed to trades that resulted in losses. Others said they had only nominal roles, such as confirming settlements or transferring cases to other courts, though there is no legal exemption for such work.
The ethics code for federal judges “requires recusal when a judge has a financial conflict, regardless of the substance of the judge’s actual involvement in the case,” the Judicial Conference’s Committee on Codes of Conduct wrote in a letter to a judge this month.
Some blamed court clerks. Some said their recusal lists had misspellings. Some pointed to trades that resulted in losses.
In response to the Journal’s findings, the Administrative Office of the U.S. Courts said: “The Wall Street Journal’s report on instances where conflicts inadvertently were not identified before a case was resolved or transferred is troubling, and the Administrative Office is carefully reviewing the matter.”
It said the federal judiciary “takes very seriously its obligations to preclude any financial conflicts of interest” and has taken steps, such as conflict-screening software and ethics training, to prevent violations. “We have in place a number of safeguards and are looking for ways to improve,” the office said.
Chief Justice John Roberts, who heads the federal judiciary, didn’t respond to requests for comment.
The nation’s roughly 600 full-time federal trial judges, supplemented by about 460 semiretired jurists called senior judges, wield enormous power. Holding lifetime appointments, they preside over hundreds of thousands of civil and criminal cases each year in 94 court districts.
They have soup-to-nuts control over all elements of their courtrooms, from pretrial process and trial to criminal pleas, judgments and sentencing. Judges have wide latitude for fact findings and evidentiary rulings, most of which can be overturned only for abuse of discretion, a high hurdle.
Violations of the 1974 law almost never become public. Judges’ financial disclosures aren’t online, are cumbersome to request and sometimes take years to access.
Judges are informed if anyone requests to see their disclosures, creating a disincentive for lawyers who might fear annoying judges in whose courtrooms they frequently appear.
Judges rarely make public the lists of companies on whose cases they shouldn’t work. When judges disqualify themselves from cases, they typically don’t disclose details. No judges in modern times have been removed from the federal bench solely for having a financial interest in a plaintiff or defendant that appeared in their courtroom.
“I just blew it. I regret any question that I’ve created an appearance of impropriety or a conflict of interest.”
— Judge Timothy Batten Sr., When Notified Of His Violations
The Journal analyzed data from the Free Law Project, a nonpartisan legal-research nonprofit that is planning to post judicial disclosure forms online. The findings amount to a pervasive disregard for the judicial conflict-of-interest laws, legal experts said.
A recusal violation in isolation could be viewed as an oversight, but the Journal’s investigation “raises a more systemic problem of judges chronically neglecting their duty to disqualify in such cases,” said Charles Geyh, a law professor at Indiana University, who specializes in judicial conduct, ethics and accountability.
The findings “are both surprising and disappointing,” said Timothy Batten Sr., chief judge of the U.S. District Court for the Northern District of Georgia and a member of the Committee on Codes of Conduct for the Judicial Conference of the U.S.
“I believe in the vast majority of these cases, it is an oversight and indolence,” he added.
Judge Batten himself owned shares of JPMorgan Chase & Co. while he heard 11 lawsuits involving the bank, most of which ended in the bank’s favor, the Journal’s analysis shows.
“I am mortified,” Judge Batten said in a phone interview when notified about his violations, which occurred in 2010 and 2011, before he joined the Codes of Conduct committee in 2019. “I had no idea that I had an interest in any of these companies in what was a most modest retirement account” managed by a broker.
“I just blew it. I regret any question that I’ve created or appearance of impropriety or a conflict of interest,” he said.
Judge Batten, appointed by former President George W. Bush, said he stopped investing in individual stocks in 2012 and moved his portfolio to mutual funds, which don’t require recusal, and has since closed the account.
The Journal analyzed cases to determine whether judges made rulings on contested motions, such as those seeking dismissal or summary judgment. Judges ruled on contested motions in 21% of the nearly 700 cases in question.
Those rulings favored the judges’ financial interests in 94 cases, went against the judges’ interest in 27 cases and had mixed outcomes in 24 cases.
Already, several parties on the losing side of the rulings have petitioned for a new judge to hear their cases after they were alerted to the violations identified by the Journal.
Several judges misunderstood the law, initially saying that they didn’t have to recuse themselves because their shares were held in accounts run by a money manager.
The ban on holding even a single share of a company while presiding in a case involving the firm means judges must be vigilant. The 1974 law requires judges to inform themselves about their own financial interests and make a “reasonable effort” to do the same for their spouses and any minor children. The Judicial Conference of the U.S. requires courts to use conflict-checking software to help identify cases where judges should bow out.
Judge Janis Sammartino of California traded in stocks of Bank of America Corp. , CVS Health Corp. , Deutsche Bank AG , Hartford Financial Services Group Inc., HSBC Holdings PLC, JPMorgan, Pfizer Inc., Public Storage, Wells Fargo & Co. and Microsoft Corp. while hearing 18 lawsuits involving one or more of those companies, the Journal found. In all, she heard 54 cases involving companies held in her family’s trusts.
In the Microsoft case, a Chicago man alleged the software giant violated the Telephone Consumer Protection Act by sending an unsolicited text about its Xbox gaming console to his mobile phone. He filed suit in 2011. One of Judge Sammartino’s family trusts bought Microsoft stock twice in 2012 and added three purchases in 2013.
The plaintiff’s lawyers sought in 2013 to turn the case into a class action involving 91,708 people who allegedly received the text messages. Microsoft said that it had received permission to send the texts but that records confirming this had been destroyed. Had a class been approved, the case could potentially have cost Microsoft more than $45 million, according to court filings by the plaintiff.
Judge Sammartino denied the class-action motion as well as Microsoft’s motion to dismiss the case. She ruled that the law permitted the plaintiff to seek damages of $500 for one alleged violation, potentially tripled. He appealed but settled before the appeal was heard. A spokesman for Microsoft declined to comment. One of the plaintiff’s lawyers also declined to comment.
Judge Sammartino, an appointee of former President George W. Bush, initially referred questions from the Journal to William Cracraft, a spokesman for the Ninth U.S. Circuit Court of Appeals.
“She asked me to let you know” her stocks “are in a managed account, so she’s not seeing as how there could be a conflict,” Mr. Cracraft said. “She’s not inclined to discuss her private business with you since it is all in managed accounts, and she thinks that’s sufficient.”
An opinion by the Judicial Conference’s Committee on Codes of Conduct in 2013 confirmed that judges must bow out of cases involving stocks they own in accounts run by money managers.
Judge Sammartino later informed the court clerk’s office of the conflicts, and the office filed a letter notifying parties to the Microsoft case and other cases with violations identified by the Journal.
“Judge Sammartino was not aware of this financial interest at the time the case was pending,” the letter said. “The matter was brought to her attention after disposition of the case. Thus, the financial interest neither affected nor impacted her decisions in this case. However, the financial interest would have required recusal.”
Before the Journal contacted Judge Sammartino about her recusal violations, she disqualified herself in at least 10 other cases involving companies whose stocks were listed on her disclosure forms, a review of her cases shows.
Judge Rodney Gilstrap, chief of the U.S. District Court for the Eastern District of Texas, had the largest number of conflicts in the Journal’s analysis: 138 cases assigned to him involving companies in which he or his wife held an interest.
Judge Gilstrap said he believed he didn’t need to recuse himself from some cases because they required little or no action on his part, and in other cases because the stocks were in a trust created for his wife. Legal-ethics experts disagreed on both counts.
“I take my obligations related to potential conflicts/recusals seriously,” he said in an email. “Throughout my judicial career, I have endeavored to comply with all such obligations, and I will continue to do so.”
Judge Sammartino’s 54 conflicts were the second-most recusal violations. Brian Martinotti in New Jersey ranked third, handling 44 cases involving companies in which he had invested. Among his biggest holdings was Alphabet Inc., the parent of Google. He disclosed in 2016, 2017 and 2018 that he owned $15,001 to $50,000 of Alphabet shares.
In 2017, the judge threw out a lawsuit against Google alleging that videos on its YouTube unit falsely said the plaintiff was a sex offender, ruling that the Communications Decency Act let Google off the hook.
Judge Martinotti, an Obama appointee, didn’t respond to requests for comment, but after the Journal inquired, the district court clerk notified parties to 44 cases of Judge Martinotti’s stock ownership. His Alphabet holding didn’t affect the judge’s decisions but would have required recusal, the clerk wrote. A spokesman for Google declined to comment.
“I would like my case to be re-opened as Judge Brian R. Martinotti was unfairly biased and should have recused himself from my case,” the plaintiff, Nuwan Weerahandi, wrote in an August 2021 letter to the court, after receiving notice of Judge Martinotti’s violation.
The chief judge of the New Jersey federal court, Freda Wolfson, denied Mr. Weerahandi’s request on Sept. 2, saying the Communications Decency Act bars defamation-related claims against computer services such as Google.
“Importantly, in making this purely legal determination, Judge Martinotti did not engage in any factfinding that would bear on the credibility of any party, including you,” Judge Wolfson wrote.
In at least 18 instances, judges disqualified themselves over conflicts, only to have the case reassigned to a judge who also had a conflict but didn’t recuse.
In 2015, Judge Robert Cleland in Michigan, a George H.W. Bush appointee, bowed out of a suit by an injured motorist against insurer Allstate Corp. , whose stock the judge had been buying and selling that year.
The case was reassigned to Judge Gershwin Drain, who also owned Allstate shares. Judge Drain heard the case—and six others involving Allstate—and wrote a ruling denying a request by the motorist to move the dispute to state court. The case then settled on undisclosed terms.
Presented with his conflicts in 42 cases, Judge Drain, an Obama appointee, said he had added notices to the court’s public docket for each suit.
“I can say with absolute certainty that I never made any decision in favor of a company because I owned stock and was invested in that company,” Judge Drain said in an email. “To prevent any future issues, however, I have taken steps to review any new cases and if I am invested in any of the companies among the new cases that are assigned to me I will immediately recuse myself.” Allstate didn’t respond to requests for comment. A lawyer for the motorist declined to comment.
Frequent recusals can upset courts’ random drawing of judges for cases and lead to a smaller pool. In 20 federal districts, a third or more judges owned the same stock in the same year. In the U.S. District Court for the Eastern District of Virginia in 2017, fully a third disclosed a Microsoft stock holding.
More than 340 federal appellate and trial judges reported holdings in Apple Inc. at some point from 2010 to 2018 and 300 in Microsoft. About 500 judges owned Bank of America, Citigroup Inc., JPMorgan or Wells Fargo shares at some point.
Those numbers reflect only stock ownership, not recusal violations. However, the Journal found 37 judges who owned a bank stock while improperly hearing a case involving that bank.
Judge Emily Marks bought Wells Fargo stock two weeks after she was assigned a Wells Fargo case, a conflict that now threatens to upset a ruling she made.
In the suit, Jacob Springer and Jeanetta Springer of Roanoke, Ala., acted as their own attorneys in challenging Wells Fargo’s foreclosure of Ms. Springer’s father’s home.
In court filings, they said her ailing father missed a mortgage payment three months before he died, after which his daughter, who inherited the home, made payments. Wells Fargo foreclosed, saying the Springers missed payments of about $4,100 on an outstanding mortgage of more than $80,000; they said they had missed just one $695 payment.
“This is outrageous. How am I supposed to know she owns stock in Wells Fargo?”
— Jacob Springer, When Told Of The Judge’s Violation In The Case He Lost
Judge Marks, chief judge of the U.S. District Court for the Middle District of Alabama and an appointee of former President Donald Trump, was assigned the case in mid-August 2018. The judge bought Wells Fargo stock at the end of the month. In September, she adopted a magistrate judge’s recommendation to dismiss the Springers’ suit, a decision affirmed on appeal.
Judge Marks declined to comment. The court clerk told parties to the case that the judge had informed her of having owned the bank stock and directed the clerk to notify the parties. The clerk told them Judge Marks’s stock ownership didn’t affect her decisions in the case but would have required recusal.
Mr. Springer said, “This is outrageous. How am I supposed to know she owns stock in Wells Fargo?”
The Springers asked the court to reopen the case, saying in a filing that “a non-interested Judge” might have let them amend their pleadings. The court assigned a new judge to their suit in July. A spokesman for Wells Fargo declined to comment.
The nation’s 94 district courts are organized into 12 circuits, or regions. The Journal identified recusal violations in each region.
The U.S. Supreme Court wasn’t part of the Journal’s analysis. Nor did it include bankruptcy or magistrate judges.
Half of all federal trial and appellate judges in the Journal’s review disclosed minimum financial assets of $775,000 in 2018, while 31 reported a minimum of $10 million of assets. Some jurists joined the bench after lucrative careers in private practice.
Federal district judges draw an annual salary of $218,600, which isn’t much more than a first-year attorney at a top-tier law firm earns. Some judges said their salary level makes stock investments an attractive option.
“I have my judicial salary, but the law really restricts what else judges can do for additional income,” said Judge Susan Webber Wright in Arkansas. She said she held more stock when she was younger and trying to build a nest egg for her family.
Judge Wright, an appointee of former President George H.W. Bush, oversaw 2005 and 2006 cases involving Eli Lilly and Co. and Home Depot Inc. while owning shares of those companies. She issued no major rulings before one case settled and the other was transferred to another district.
“A judge has to be on her toes, and obviously I was not,” Judge Wright said.
Judges who have many conflicts are “either being careless or have people working for them who are not exercising due diligence,” she said, though she added that judges bear the ultimate responsibility for steering clear of conflicts.
Judge Donald Graham in Florida held American depositary receipts of Alcatel-Lucent while assigned to a case involving the French telecom maker. He sold the ADRs in 2010, a day after he approved a $45 million civil settlement between the U.S. Securities and Exchange Commission and Alcatel-Lucent over allegations the company bribed foreign officials. The company neither admitted nor denied the allegations.
After being contacted by the Journal, Judge Graham, a George H.W. Bush appointee, notified the court clerk of the violation. In a publicly filed letter to the parties, the clerk said Judge Graham’s holding didn’t affect his decisions.
A lawyer for the SEC told the court the agency didn’t believe any further action was required. Alcatel-Lucent’s current owner, Nokia Corp., declined to comment.
Judge Benjamin Settle in Washington state sold as much as $15,000 of Amgen Inc. stock during a case that was settled in 2012. He sold the stock in 2008, while the suit was under seal, giving him access to nonpublic information about an allegation of kickbacks to doctors. The case contributed to a $762 million penalty against the biotech company in 2012.
Judge Settle, a George W. Bush appointee, said he hadn’t included all of his holdings on his recusal list when he inherited the case in 2007 as a newly commissioned federal judge. “Amgen was among those mistakenly omitted,” he said.
Judge Settle said he directed his broker in 2008 to sell all of his stocks. A spokesman for Amgen declined to comment.
The Journal’s tally of recusal violations is likely an undercount. In Mississippi, Judge Sharion Aycock’s husband owned as much as $15,000 in shares of Dollar General Corp. at a time when the Journal found two cases she heard involving the retailer. After being asked about the matter, Judge Aycock found five more violations involving Dollar General and notified the clerk about all seven.
A few of the judges with violations the Journal identified had legendary careers, including Jack Weinstein and Arthur Spatt in the U.S. District Court for the Eastern District of New York.
Judge Weinstein, a Lyndon Johnson appointee, oversaw four cases involving Medtronic PLC or Target Corp. while he or his family held their shares. Judge Spatt, who was named to the court by former President George H.W. Bush, had a violation involving Johnson & Johnson. Judge Spatt died in 2020 and Judge Weinstein died earlier this year, both having served into their 90s.
Judge Margo Brodie, chief of the Eastern District, which includes New York City’s Brooklyn and Queens boroughs, acknowledged the conflicts but said the judges’ “involvement was minimal, limited to ministerial actions” such as approving settlements or opinions by magistrate judges.
“These two judges have been revered by the practicing bar for their integrity and even handedness,” Judge Brodie said in an email. “There has never been a suggestion, much less an accusation, that either ever acted inappropriately.”
The Journal identified 36 conflicts by one judge in Colorado, R. Brooke Jackson. The cases included Apple, Chevron Corp. , Eli Lilly, Facebook Inc., General Electric Co. , Home Depot, Honeywell International Inc., Johnson & Johnson, JPMorgan, Pfizer and Wells Fargo.
“I have preferred to stay unknowledgeable about it.”
— Judge R. Brooke Jackson, On The Stocks In His And His Wife’s Portfolio
Reached by phone, Judge Jackson said he had no idea which stocks he owns because a money manager handles them and because his wife fills out his disclosure forms. He said that because he doesn’t know, he couldn’t have a conflict of interest.
“I’ve never really paid much attention to it,” Judge Jackson said of his and his wife’s investments. “I have preferred to stay unknowledgeable about it.”
Told he was required to know under the law, he said: “That’s news to me.”
In a later email, Judge Jackson, an Obama appointee, admitted his mistake. “I am taking immediate steps to provide a current list of stocks and other investments held by my wife and by me to our Clerk’s Office so that we can create an appropriate conflicts list and be sure that this does not happen again,” he wrote.
In a subsequent 21-page letter to the Journal, Judge Jackson said he should have recused himself in most if not all of the 36 cases.
“I am embarrassed that I did not properly understand and apply the stock ownership rule,” he wrote. “Being informed of what could be viewed as an ethical violation, even a technical one, is no fun.”
Judge David Norton in South Carolina presided over six asbestos suits beginning in 2012 while his disclosures show he held between $95,004 and $250,000 of stock in two defendants, 3M Co. and GE.
In 2015 he heard a case filed by James Chesher, who alleged that he developed cancer from exposure to asbestos in the Navy. Mr. Chesher and his wife sought damages from 3M, GE and about two dozen other companies. They reached settlements with 3M and GE in 2016.
Mr. Chesher died in 2017. His widow, Cheryl Ann Chesher, was surprised to learn from the Journal of the judge’s financial interest in GE and 3M.
“He should have policed himself,” Ms. Chesher said. “He knows what the law is on that and he should have followed through,” she said, adding: “You have to wonder if he’s looking out for himself…rather than the clients.”
In an emailed statement, Judge Norton said he didn’t recuse himself because 3M and GE played no significant role in the suits and were “defendants in name only.”
He added: “At the outset the lawyers involved in these cases assured me that 3M and GE would be dismissed and not involved in the case pursuant to a pre-existing agreement between the plaintiffs’ lawyers and GE and 3M.”
Peter Kraus, an attorney for the Cheshers, said he and his co-counsel “have no recollection about making any assurances to the judge that GE and 3M would be dismissed.” They “were sued because the evidence in the case implicated them, and were certainly not ‘defendants in name only,’ ” he said, adding that attorneys for both companies participated in depositions.
A 3M spokeswoman said neither the company nor its attorneys ever assured the judge regarding any dismissals. A spokeswoman for GE didn’t respond to questions about whether it had conveyed such an assurance. An attorney for GE said she didn’t recall the case.
Told what 3M and the plaintiffs’ attorney said, Judge Norton reiterated his recollection of the case.
As remaining asbestos defendants moved toward trial, Judge Norton, a George H.W. Bush appointee, issued rulings that broadly benefited companies with asbestos liabilities.
In hearings, he took aim at the theory behind the cases: that any exposure to asbestos was significant enough to contribute to their cancer. The defendants said the plaintiffs’ expert witness shouldn’t be allowed to testify because he was unable to show that the men more likely than not would have avoided the disease but for their exposure to the asbestos.
Judge Norton sided with the companies, ruling that the expert witness’s testimony—“scientifically sound as it may be”—couldn’t be presented to a jury.
The ruling drew national attention. Plaintiffs’ lawyers denounced it, while lawyers who often defend corporations embraced it as common-sense analysis. A Harvard Law Review article blasted it, saying that “unrealistic legal expectations of science could do great injustice.”
Mr. Kraus, the Cheshers’s attorney, called the decision out of sync with court precedent on liability in asbestos cases. Other courts have adopted Judge Norton’s analysis, including the Ohio Supreme Court.
Mr. Kraus said he has never asked to see a judge’s financial disclosure form. He said he wasn’t sure he ever would.
“If a judge who is considering a matter you have before him finds out that you’ve been snooping around about his finances, I’d be very concerned as a practitioner that it would cause a negative backlash that would affect my clients’ rights in the court,” Mr. Kraus said.
Judge Norton also violated an ethics rule when he bought a box of cuff links at an auction of the government-seized property of a man he earlier sentenced to prison for a Ponzi scheme, according to the chief judge of the Fourth U.S. Circuit Court of Appeals.
“The judge’s purchase did create an appearance of impropriety,” though it didn’t affect the sentence imposed, Chief Judge Roger Gregory wrote in 2017, without identifying the cuff links buyer.
Judge Gregory quoted the unnamed judge as saying he tried to “keep current on all ethical rules and take the yearly ethics test prepared by the Administrative office” but was unaware that his participation in the auction could create the appearance of impropriety.
Judge Norton, who confirmed in a separate filing that he bought the cuff links, told the Fourth Circuit: “Now that I have been made aware of this, my actions will not be repeated.”
‘Most Americans Today Believe The Stock Market Is Rigged, And They’re Right’
New research shows insider trading is everywhere. So far, no one seems to care.
Jimmy Filler made his considerable wealth buying and selling scrap metal in Birmingham, Ala. Now approaching 80 and mostly retired from business, he has dabbled as a collector of antique cars and casino memorabilia, acquired a 20,000-square-foot mansion in the hills outside the city, and donated $1 million to help build a practice facility for the University of Alabama at Birmingham football team. This largesse has made Filler a big name in his hometown—but he’s an even bigger deal among a certain class of stock trader.
That’s because Filler has an incredible track record buying shares in the companies he advises and invests in. Of the 496 trades he’s made since 2014 in Alabama’s ServisFirst Bancshares Inc., where he sits on the board of directors, and Century Bancorp Inc. of Massachusetts, where he’s the largest shareholder, 372 of them, or 75%, have shown a profit three months later.
That’s the kind of run the world’s best stockpickers dream of, the financial equivalent of making the final table of the World Series of Poker main event in consecutive years.
Filler is the most successful corporate insider in the U.S., according to TipRanks, a data company that rates executives by how good they are at timing trades. As a result of this status, every time Filler buys a share in ServisFirst or Century, 2,699 TipRanks subscribers get an alert. Some of them, assuming Filler’s past performance will continue, follow suit and buy some stock for themselves.
In the U.S., an insider is defined as a senior executive, board member, or any shareholder who owns 10% or more of a company. There are about 82,000 of them, and every time they trade they’re required by law to file a disclosure, known as a Form 4, within two days. These filings can be viewed on the U.S. Securities and Exchange Commission’s website, but scores are added each day, and most don’t offer much insight. “You have to know where to look,” says TipRanks Chief Executive Officer Uri Gruenbaum.
Directors typically receive a proportion of their compensation in stock options, giving them the right to buy shares at a set price before a certain date, so if an executive is simply exercising an expiring option, it probably doesn’t reveal a great deal about how he views the company’s prospects.
Selling may not tell you much either, because there are all sorts of reasons an insider might want to cash out—to buy a boat, for instance. It’s when insiders use their own funds to buy stock on the open market that it’s most worth paying attention.
TipRanks uses an algorithm to sort through the torrent of SEC filings, filter out what it calls “uninformed” transactions—that is, those that don’t seem to have predictive value—and come up with a rolling list of the top 25 insiders.
As well as looking at win rate, the service factors in how much, as a percentage, insiders are making per trade. Those with long track records, such as Filler, also score better. “Someone might pick heads five times in a row, but to do it 20 times or 50 times is really hard,” Gruenbaum says.
Besides Filler, other TipRanks stars include Steve Mihaylo, the CEO of telephone services company Crexendo Inc., where he owns a $60 million stake. Mihaylo has turned a three-month profit on 83% of his trades over the past five years even as Crexendo’s shares have seesawed.
His 1,985 followers understand that when the CEO is buying, there’s a decent chance the stock is about to go up. Then there’s Snehal Patel, CEO of pharmaceutical company Greenwich LifeSciences Inc., who’s made only five purchases but has earned an average 488% return on them, because four of the trades preceded the announcement of promising results from a cancer drug trial.
Filler says he’s a long-term investor in Century and has never been affiliated with the company; he also says he’s never sold a share in either Century or ServisFirst. Patel points out that the success of the Greenwich LifeSciences trial was referenced on the company’s website and IPO prospectus before he traded. Mihaylo declined to comment.
It’s not just those at the top of the rankings who constantly beat the market. Purchases made by U.S. executives outperformed the S&P 500 over the ensuing 12 months by an average of five percentage points between 2015 and 2020, according to a TipRanks analysis.
The gap might seem scandalous to those with only a passing acquaintance with U.S. insider trading rules, which make it illegal for insiders to trade using material—or financially significant—nonpublic information. And yet on Wall Street it’s long been an open secret that insiders trade on what they know.
In 1962, Perry Wysong, a bow-tie-sporting investor from Florida, started a newsletter identifying opportunities based on insider trades. Years later, a young stockbroker in Florida, George Muzea, set up a consulting firm to advise George Soros, Stanley Druckenmiller, and other hedge fund managers, often over games of tennis.
“We used to call the best prospects studs,” he recalls. In 2008 a group of quants from Citigroup Inc. published a paper that found a portfolio mirroring insiders’ trades could yield an astonishing 23.5% a year, more than all but the most profitable hedge funds.
No one is claiming to know if Filler or any of the other TipRanks stars are taking advantage of nonpublic information. Poker legend Doyle “Texas Dolly” Brunson made five final tables in his career, after all, and it’s possible to get lucky enough to flip a coin and hit heads a bunch of times in a row.
Plus, insiders will always have a better general sense than others about how their company is doing. But a growing body of research suggests that many insiders are trading well thanks to something more than luck or judgment.
It indicates that insider trading by executives is pervasive and that nobody—not the regulators, not the Department of Justice, not the companies themselves—is doing anything to stop it.
“There is a lack of appreciation for the amount of opportunistic abuse that exists under the current system, the amount of egregiousness,” says Daniel Taylor, a professor at the Wharton School and the head of the Wharton Forensic Analytics Lab. “Most Americans today believe the stock market is rigged, and they’re right.”
In many ways, insider trading is the exemplar white-collar transgression. It’s what drives Bobby Axelrod’s nefarious profits in the Showtime series Billions and what Wall Street’s Gordon Gekko was engaged in when he said, “Greed is good.” In the real world, too, the crime captures, almost perfectly, the sense that the market is biased in favor of a corporate elite—a sentiment that undergirds both the recent meme-stock explosion and the rise of cryptocurrencies.
When an executive learns his company is about to lose its well-regarded CEO and offloads shares to an unwitting pension fund, or a board member hears about a potential takeover on the distant horizon and sets up a plan to start buying, they’re profiting at the expense of regular people.
Prosecuting insider trading is “a manifestation of America’s basic bargain,” wrote Preet Bharara, the former U.S. attorney for the Southern District of New York, in a 2018 op-ed article for the New York Times. “The well-connected should not have unfair advantages over the everyday citizen,” he wrote.
In theory, the law governing insider trading is clear-cut: Under the Securities Exchange Act of 1934, executives who abuse their access to nonpublic information, either by trading on it themselves or passing it along to someone else, can be charged with fraud and sent to jail.
But regulators and lawyers say identifying and prosecuting the offense is deceptively difficult, and lawmakers as diverse as Democratic Senator Elizabeth Warren of Massachusetts and Republican Representative Elise Stefanik of New York, prodded on by Taylor and other researchers, have been calling for reform.
Taylor’s focus on the topic dates to 2016, a few years after he arrived at Wharton, when he co-authored a draft paper showing that employees at banks who previously worked at the Federal Reserve, the U.S. Department of the Treasury, or some other regulator significantly outperformed the market during the 2008 financial crisis, as the government was handing out bailouts.
Not long after, a member of one of the enforcement agencies asked to meet up to discuss Taylor’s methodology.
Working with colleagues at Stanford and other institutions, Taylor has since put out a half-dozen papers that apply statistical analysis to SEC disclosures and other large datasets to look for evidence of potential insider trading. “Hopefully, we can help highlight what’s happening, and our collective institutions will start to tackle this behavior,” he says.
One area of Taylor’s research is how insiders respond when their employers are facing difficulties. Each year the SEC opens probes into hundreds of companies, but not all of them go anywhere, and there’s no obligation to disclose anything about the investigations to shareholders. It’s also up to companies to decide whether their staff must abstain from trading.
Most implement blackout windows in the runup to earnings reports, but beyond that they can be laid-back about letting their executives trade.
After a lengthy negotiation, Taylor persuaded the SEC to give him a 300-page list of probes opened from 2000 to 2017, which he cross-referenced with Form 4 disclosures. It demonstrated that, as a group, insiders consistently avoided losses by selling shares before their companies’ legal problems were reflected in the stock price.
Taylor says he got the idea from seeing shares of Under Armour Inc. fall by 18% on Nov. 4, 2019, after the Wall Street Journal reported that its accounting practices were being looked into. Before that, filings show, executives had been selling stock to unsuspecting buyers. It’s a surprisingly common story. At CBS, shareholders are suing board members for offloading shares before the media company disclosed CEO Les Moonves was under investigation for sexual harassment.
An executive at Boeing Co. sold $5 million of stock after managers were reportedly briefed that a software problem may have been responsible for downing Lion Air Flight 610 over the Java Sea in October 2018—an issue the company didn’t share with the public until five months later, after a second crash.
A spokesperson for Boeing said corporate officers are “only allowed to trade during an open trading window.” Under Armour didn’t return a request for comment. CBS said in a statement that all its executives’ transactions were either preplanned or approved internally.
In another paper, Taylor looked into insiders’ activity when their companies were being audited. He found elevated buying and selling that accelerated in the crucial weeks after the audit report had been relayed to the board of directors but before it had been made public.
The insiders who traded were able to avoid significant losses, particularly in instances when a company’s results ended up having to be restated. Time and time again, “insiders appear to exploit private information” for “opportunistic gain,” Taylor and his co-authors wrote. Cheating, they’d discovered, seemed to be everywhere.
At the heart of these findings are the U.S.’s somewhat woolly disclosure rules. Under something known as “disclose or abstain,” U.S. insiders in receipt of material nonpublic information are forbidden from trading unless they release it first. But unlike in the U.K. and the European Union, companies in the U.S. have a lot of discretion over what is considered material, and a gray area exists between what a company deems worthy of disclosure and what its directors might wish to trade on.
Legal advisers face a constant flow of judgment calls, such as when, if ever, to tell the world about merger talks, a fraud investigation, or a cyberattack. “If something is material enough to move the share price, then insiders should be restricted from trading on it,” Taylor says. “Unfortunately, that’s not how some lawyers see it.”
Early in the pandemic, several pharmaceutical company executives were criticized for making trades that seemed to be designed to profit from positive vaccine developments, highlighting another flaw in the regime.
The transactions were made through so-called 10b5-1 plans—trading schedules that lay out the timing and size of trades in advance and are then executed by third parties. These plans were introduced in 2000 as a way for executives to sell shares without being accused of wrongdoing, no matter how fortuitous their trades turned out to be.
But 10b5-1 plans are vulnerable to abuse, Taylor says, because there is no requirement for insiders to wait after establishing a plan to place their first trade. Three days before Moderna Inc. announced that its Covid-19 vaccine was ready for human testing, its then chief medical officer, Tal Zaks, implemented a plan to sell 10,000 shares a week for 10 weeks.
The program coincided with Moderna’s share price more than doubling, and Zaks netted $3.4 million. Moderna told the health-care news website Stat that the sales were part of “SEC-compliant plans” set up “well in advance.” Zaks, who didn’t respond to requests for comment, is far from alone.
A recent paper by the Rock Center for Corporate Governance at Stanford, which collaborated with Taylor on the research, showed that 14% of executives set up plans to transact within 30 days and 39% within 60 days, making it likely they were in receipt of some nonpublic information.
Another issue is that about half of all U.S. plans involve a single transaction as opposed to a series of trades, as the SEC originally envisioned. These single trades collectively avoided losses of as much as 4%, according to the Rock Center report, suggesting some executives use them to offload shares before bad news.
Perhaps the biggest flaw in the 10b5-1 framework is that executives don’t have to stick to their plans. They can cancel and reinstate sales whenever they choose, meaning that an insider could set up a new plan every quarter then decide whether to stick with it depending on how the next earnings report is shaping up.
In a speech in June, Gary Gensler, the new chair of the SEC, said his staff would look into forcing companies to implement a “cooling off” period between when executives set up 10b5-1 plans and when they place their first trades. He also said he’d consider preventing insiders from canceling planned sales to capture profits. “In my view these plans have led to real cracks in our insider trading regime,” Gensler said.
Gensler’s assessment may greatly understate the problem. In two decades the SEC hasn’t brought a single insider trading case involving trades made under a 10b5-1 plan. In recent years it hasn’t charged many individuals or companies with the violation at all. In 2019 the agency brought only 32 insider trading actions, the fewest in more than 20 years. Last year that number edged up slightly, to 33.
What cases the government does bring tend to involve insiders passing along tips to co-conspirators—referred to as “tipper-tippee” cases, such as the one that sent Martha Stewart to prison for five months—as opposed to the opportunistic trading by executives that Taylor’s work highlights. “It’s a huge blind spot,” he says. The SEC declined to comment or make anyone available for an interview.
Why, then, isn’t the government doing more? Part of the answer has to do with how insider trading law has developed. Unusually for a federal crime, there’s no standalone offense for insider trading. Instead, the notion that it’s illegal came into widespread acceptance only in 1961, when the SEC charged a stockbroker, Robert Gintel, with securities fraud for selling shares in an aviation company after getting wind of an impending dividend cut.
The Gintel case set a difficult precedent. To prove securities fraud, it’s not enough for prosecutors to simply show that someone profited from nonpublic information; prosecutors have to demonstrate that the defendant knew they had such information and intended to cheat. This helps to make it among the most difficult white-collar crimes to prosecute.
“Insider trading is hard to prove without some kind of smoking gun,” says Russ Ryan, a former assistant director in the SEC’s enforcement division who now works in private practice at the law firm King & Spalding. “And because there’s no statute, the law is vague and unpredictable. Jurors don’t like convicting people of crimes where the law is not clearly defined.”
Ankush Khardori, who worked as a prosecutor in the Fraud Section of the Justice Department until 2020, says it’s even tougher in cases in which the alleged tipper and the tippee are the same person. “In these insider cases, most of the crime is taking place within the executive’s mind,” he says. “There’s unlikely to be the kind of evidence you might hope to see in a tipper-tippee case, like an email or a phone call.”
Another hurdle, he explains, is that insiders have some legitimate advantage over everyone else. “Insiders have experience and expertise that allows them to put public information into context in a way others cannot. That allows a defense lawyer to say, ‘This wasn’t inside information. They were just better at reading what was already out there.’ ”
The widespread adoption of trading plans creates a further hurdle for prosecutors. “There’s this whole set of rules and conventions that has built up—10b5-1 plans, trading windows, compliance programs—that executives can use to say, ‘Look, I did everything by the book. I relied on the lawyers!’ ” Khardori says.
Prosecutors can theoretically argue that a plan wasn’t entered into in good faith, but that’s an additional burden to meet in court, and in practice they almost never do so. As Lisa Braganca, another former regulator at the SEC, says, “Nobody wants to be on the front page of the New York Times for losing.”
Nor do they want to go through the ignominy of seeing their convictions overturned. Bharara, the former U.S. attorney, built up a fearsome reputation targeting insider traders, including a number of high-profile hedge fund managers. But in 2014 several of his office’s convictions and guilty pleas were quashed after judges on an appeals court acquitted two hedge fund employees in a ruling that made it even harder for prosecutors to win cases.
On leaving the government, Bharara set up a task force of academics and lawyers to consider how to fix things. Last year it issued a report that proposed creating an entirely new statute defining insider trading as its own offense and severing the link to fraud.
The group also suggested strengthening the government’s hand by making insiders liable in criminal cases in which they should have known they were trading on material information—when they acted “recklessly”—even if there is no evidence that they actually did know.
Such drastic changes seem unlikely to make it into law, though a watered-down set of proposals, put forward by Connecticut Democrat Jim Himes, passed the House of Representatives by 350 votes to 75 in May. Himes’s Insider Trading Prohibition Act falls short of Bharara’s call to create a new offense, but it would at least define insider trading, going some way to clarifying and simplifying the rules.
“It’s time to take it out of the courts,” Himes says. “If we’re going to send people to prison for 20 years, then it’s important that we know exactly what for.” The next step is getting the bill through the Senate—something that’s scuppered prior insider trading bills over the years.
Apart from amending the law itself, Taylor says, the government would benefit from adopting a more sophisticated approach to both identifying and prosecuting insider trading. He gives the example of an insider who’s made unusually high returns over many years.
The government has some circumstantial evidence that the executive is cheating, but he attributes his performance to a mix of skill and good fortune. “We can now model exactly how much he would have made had he placed each of those trades on other random days,” Taylor says.
“Being able to say there’s literally no other sequence of trades that would have netted him more money could be incredibly useful.” Taylor has been sharing his insights with regulators, and the SEC recently set up a small analytics unit to explore this kind of data-led approach. Persuading judges to embrace new forms of evidence, however, has proved challenging so far. In 2019 a judge refused to allow a suit that relied on data to allege insider trading and accounting irregularities at Under Armour to proceed.
Of course there’s another possible reason the government isn’t charging scores of executives with insider dealing, which is that, deep down, many prosecutors don’t see it as much of a problem. Before the Gintel case, trading on sensitive information was widely considered a perk of being an executive at a publicly traded company, and that thinking seems to persist, even among those who are supposed to prosecute the crime.
Several former government lawyers interviewed for this story questioned how much damage well-timed trading by executives really causes when compared with, say, a Ponzi scheme that takes elderly investors for their savings or an Enron-style accounting fraud that causes a company to collapse when exposed. Anyone unlucky enough to sell stock to a company CEO right before the share price bounces will probably miss out on a few dollars per share at most.
One former government prosecutor recounted how, during his job interview, he was asked by his soon-to-be boss what he thought of the libertarian argument that regards insider trading as good because it helps disseminate information more quickly, making markets efficient. “I will prosecute the laws as they currently stand to the best of my ability,” he replied, stone-faced, declining to mention his sympathy for the idea.
That some government officials are ambivalent about the laws they’re charged with enforcing doesn’t come as a surprise to Mississippi College School of Law professor John Anderson, who’s written dozens of papers defending insider trading. “It’s really easy to say that our markets should be a level playing field, but the reality is that they never have been,” he says. “The whole reason people come to the market is because they think they have better information, better understanding than their counterparties.”
Anderson, who started his career as a white-collar defense attorney, says it should be up to companies and not the government to decide whether to allow their employees to trade on what is, he argues, the organization’s intellectual property. Under this approach it would still be fraudulent to take information and pass it along to others without permission from one’s employer.
But insiders, once approved, could buy and sell freely, happy in the knowledge they were making markets function better. “If investors object to a company having loose controls, they can take their capital elsewhere,” Anderson says. As with the legalization of drugs, the government would be released of the burden of fighting an expensive losing battle.
Viewed through this lens, services such as TipRanks’ can be seen as providing a benefit to society, helping information pass from the informed few to the masses more quickly and efficiently. You don’t have to be an Alabama scrap metal tycoon to trade like Jimmy Filler—you just have to pay $29.95 a month for a TipRanks subscription.
In April, TipRanks raised $80 million from investors; it’s started collecting filings from Canada and the U.K. Eliot Spitzer, the onetime New York attorney general and scourge of Wall Street, is on the board. “The appetite from retail traders is huge,” CEO Gruenbaum says.
Reforming insider trading rules is a difficult prospect. As a society, we want our executives to have a stake in the businesses they run; but if they receive shares, they have to be able to sell them. When they do, they’ll always be at an advantage. “No one really believes that corporate insiders are ever truly cleansed of material nonpublic information,” says Philip Moustakis, who left the SEC in 2019 to join Seward & Kissel, a law firm focused on Wall Street.
“Trading windows, 10b5-1 plans—they’re all part of this useful fiction that society engages in. If you really wanted to stamp out insiders trading on superior knowledge, you’d have to reassess our entire approach to corporate governance. Insiders would become more like trustees with no skin in the game, and that’s not going to happen.”
Taylor refuses to accept that idea, pointing to a slew of proposals currently under consideration, from tweaking 10b5-1 plans to ripping up the insider trading rulebook altogether and starting again. “Nothing in society worth fixing is easy,” he says. “The fact it’s not easy is not a reason not to do it.”
How To Limit Personal Trading At The Federal Reserve
Requiring qualified blind trusts for all of the central bank’s senior officials would restore public confidence.
The Federal Reserve System is remarkably complex. It’s designed, in its own words, with “a blend of private and governmental characteristics.” It has 12 regional banks, many with multiple branches, where the majority of directors are elected by member banks in the district.
Then there’s the Fed’s board of governors in Washington, whose members are selected by the president, approved by the Senate and are permanent voters on the policy-setting Federal Open Market Committee.
This is no excuse for questionable trading among the central bank’s most senior leaders. Two regional bank presidents decided to step down after their 2020 financial disclosures revealed that they bought and sold financial assets that were sensitive to monetary policy.
Boston Fed President Eric Rosengren retired early last week, citing health reasons, and Dallas Fed President Robert Kaplan will depart Friday.
Meanwhile, Vice Chair Richard Clarida is taking heat for shifting from bonds to stocks mere days before the start of sweeping central bank actions to combat the Covid-19 pandemic. Collectively, it’s a terrible look.
However, the construction of the Fed and the current rules across the system are important to understand before jumping to conclusions. Democratic Senator Elizabeth Warren of Massachusetts, who is no fan of Chair Jerome Powell, has rushed to link the transactions to insider trading and has called on the Securities and Exchange Commission to investigate.
Never mind that a spokesman has said Clarida’s move was a “pre-planned rebalancing to his accounts” and there’s no reason to think otherwise.
Instead of making accusations about an institution already prone to baseless conspiracy theories, how about a solution? Here’s an easy one: All “senior officials” at the Fed should be required to put their assets in a blind trust.
Fortunately, the Fed already specifies what constitutes a senior official: members of the board of governors, as well as presidents and first vice presidents of the regional Fed banks.
In a document titled “ETHICS — Voluntary Guide to Conduct for Senior Officials,” it lays out the guidelines that Warren and others have quoted. These 31 leaders “have a special responsibility for maintaining the integrity, dignity, and reputation of the System.”
Specifically, “their personal financial dealings should be above reproach, and information obtained by them as officials of the System should never be used for personal gain.”
As was made clear recently, the current approach falls short. After all, the public was made aware of Clarida’s February 2020 shift with a 19-month lag, while Kaplan last year traded more than a dozen stocks and exchange-traded funds in chunks of more than $1 million without any sort of accountability.
The solution should go beyond just a regular blind trust. These officials should be required to hold what’s known in Washington as a qualified blind trust, which mandates they select legitimate third parties (not spouses or friends) to control their portfolios. Trustees are responsible for divesting each asset (save for $1,000 or less) and then repurchasing new securities.
While it may sound onerous, qualified blind trusts make the most sense given the outsized influence the Fed has on today’s markets and the economy. Virtually every asset class moves on its policies.
At other government agencies, it’s clearer what kinds of holdings could pose a conflict of interest — for instance, the head of the Health and Human Services Department shouldn’t buy and sell health-care stocks. But for central bankers, even trading the broad S&P 500 Index (which Kaplan did) could create the appearance of skewing monetary policy to bolster risky assets.
Mandating qualified blind trusts would restore public faith that officials are truly in the dark about their holdings and not making trades that could ultimately benefit them. And such a trust is less harsh than an outright ban on buying or trading individual stocks. This way, a Fed official could still theoretically own an individual stock in her portfolio — she just would have no idea about it.
Some may argue that those with sizable portfolios shouldn’t be leading the Fed in the first place. That seems like a step too far. It’s not a bad thing to have those with real-world experience and financial success making policy decisions in Washington and across the country. But the nation needs a better system to ensure an end to conflicts or even the appearance of them.
In addition to requiring blind trusts, there has to be better enforcement and ways to penalize those who don’t comply. Currently, the main agency responsible for overseeing conflicts of interest for senior government officials, the U.S. Office of Government Ethics, serves more of an advisory role than a policing one.
As it stands, the Fed also has guidance for the scores of directors of regional Fed banks and branches across the country. It uses much of the same language: Among other things, they should avoid any action “that might result in or create the appearance of using their position as directors, including their access to Federal Reserve officials, for private gain.”
It would be overkill to subject this group to the same blind-trust standard. The decentralized nature of the system seems destined to create headaches. Here’s a summary of how the director process works:
Each of the 12 Reserve Banks is subject to the supervision of a nine-member board of directors. Six of the directors are elected by the member banks of the respective Federal Reserve District, and three of the directors are appointed by the Board of Governors.
Most Reserve Banks have at least one Branch, and each Branch has its own board of directors. A majority of the directors on a Branch board are appointed by the Reserve Bank, and the remaining Branch directors are appointed by the Board of Governors.
So a minority share of directors are picked by officials on the Fed board in Washington, who were themselves selected by the president and approved by the Senate. The rest are out of their control. “The framers of the Federal Reserve Act purposely rejected the concept of a single central bank,” notes a manual on the roles and responsibilities of Fed directors.
An edict from the federal government on trading activity would run counter to that vision. At this level, the central bank’s current guidelines are appropriate.
But the Fed needs to do more for senior officials. It’s a bit unnerving that in a statement last month the central bank noted that its rules on the personal financial practices of Fed officials are the same as those for other government agencies, and it also has a set of supplemental rules “that are stricter than those that apply to Congress.”
It’s worth adding more restrictions on members of Congress from trading stocks, too — that’s hardly a defense that the Fed’s policies are adequate.
Insisting upon qualified blind trusts for Fed leaders would firmly put this embarrassing episode in the rearview mirror. Given the rapidly evolving economic outlook, it will be crucial for the public to have confidence that policy makers entrusted with promoting maximum employment and stable prices are making decisions without considering what it might mean for their portfolios.
If handing off control of their assets is too unbearable, then perhaps a job at the Fed isn’t right for them.
Trading Furor Complicates White House Decisions On Fed Leadership
Questionable trading activities by two Fed officials cast cloud over Jerome Powell’s path to reappointment.
Federal Reserve Chairman Jerome Powell’s chances for a second term leading the central bank so far have been dented but not derailed by a reputational crisis over stock-trading disclosures by senior officials.
Mr. Powell, a Republican, has been the front-runner to keep the job when his term expires early next year. But questionable trading activities by two Fed bank presidents, first reported last month by The Wall Street Journal, cast a cloud over his prospects by giving a vocal minority of Democrats who already opposed his nomination new grounds to call for his replacement.
President Biden’s decision on who should lead the Fed when Mr. Powell’s term ends in February comes as economic data shows signs of broadening inflation pressures, which threaten to complicate coming decisions over unwinding monetary stimulus put in place to support the economy when the Covid-19 pandemic hit last year.
“The trading scandal has thrown a wrench into the [White House personnel] machinery that was slow moving to begin with,” said Tim Duy, chief U.S. economist at SGH Macro Advisors, in a note to clients. “Progressive groups have been looking for the crack in Powell’s defenses and think they have found it.”
For now, no Senate Democrats have publicly joined Sen. Elizabeth Warren (D., Mass.) after she ratcheted up her criticism of Mr. Powell’s leadership last week. People familiar with the administration’s deliberations said Ms. Warren’s attacks haven’t landed and that the trading imbroglio is viewed as unfortunate but not scandalous. That is at least in part because Mr. Powell has taken initial steps to quell the controversy.
Some analysts said the issue could also be a headache for the White House if they choose not to reappoint Mr. Powell because governor Lael Brainard, a Democratic economist seen as the most viable candidate to succeed him, has been responsible for oversight of the system’s 12 reserve banks for the past several years.
Mr. Duy said that a “scorched earth effort” to stop Mr. Powell could have unintended collateral damage by raising questions over why others at the Fed, including Ms. Brainard, weren’t aware of the trading disclosures.
While neither leader is necessarily to blame for the trading decisions of other officials, “at the very least, if this implicates Powell, it also implicates Brainard, too,” said Roberto Perli, a former Fed economist who is now an analyst at research firm Cornerstone Macro.
A Senate Republican staffer said that to the extent Mr. Powell faces questions in a prospective confirmation hearing over the investment inquiries, so too would Ms. Brainard, given her role overseeing the reserve banks.
Those responsibilities include annual reviews of each reserve bank, including budgets and general operations. Dallas Fed President Robert Kaplan ‘s trading activities have been reported annually since he joined the bank in 2015, and his investment patterns in 2020 were similar in the preceding years.
In January, the Fed formally reappointed the reserve bank presidents to new five-year terms following what Ms. Brainard called a “rigorous process” in a press release.
The crisis is serious because the Fed’s imprint over the economy is as large as it has ever been, and questions over whether the institution is acting in the public’s best interest tarnish its credibility.
Mr. Kaplan resigned his position last week after his financial disclosures showed he last year bought and sold at least $1 million in stock of companies including Chevron Corp. , Delta Air Lines Inc., Marathon Petroleum Corp. , and Johnson & Johnson.
Separate disclosures by Boston Fed President Eric Rosengren, who cited health reasons in retiring last month, showed he had made more than three dozen trades, albeit in much smaller sums than Mr. Kaplan, in stocks of four real-estate investment trusts that buy mortgage-backed securities.
Both banks have said the trades followed the Fed system’s code of conduct, but ethics experts said they showed poor judgment; in the latter case, for example, the Fed last year was buying large quantities of mortgage bonds to stabilize dysfunctional markets.
Some critics have raised questions over whether the transactions flouted broader guidance to senior Fed officials that instructs them to “avoid engaging in any financial transaction, the timing of which could create the appearance of acting on inside information.”
Ms. Warren called last week for the Securities and Exchange Commission to review the investment activities, including disclosures from May that Vice Chairman Richard Clarida had moved money between mutual funds as the coronavirus pandemic began buffeting markets. She had earlier declared her opposition to Mr. Powell’s potential nomination on the basis of his record easing bank regulations.
Mr. Clarida, who listed five transactions involving broad-based index funds last year occurring on two dates six months apart, has said those transactions were part of a preplanned rebalancing. “I’ve always acquitted myself honorably and with integrity with respect to the obligations of public service,” he said during public remarks Tuesday.
In a Senate speech last week, Ms. Warren cited the transactions as evidence of a “culture of corruption” at the Fed and said Mr. Powell, who she had previously characterized as a “dangerous man,” had “failed as a leader.”
The Fed said last week it engaged its inspector general’s office to conduct an independent review of the trading. At congressional hearings last month, Mr. Powell promised to revamp policies covering how senior officials manage personal investments to minimize even the appearance of conflicts of interest.
The rules that allowed the trading by Messrs. Kaplan and Rosengren to occur aren’t adequate to sustain the public’s confidence, he said.
Mr. Powell was confirmed on a bipartisan basis in 2018, and his reappointment has been endorsed by lawmakers in both parties. Ms. Warren was the only senator on the 23-member Senate Banking Committee to oppose his confirmation in 2018.
Potential GOP opposition to Ms. Brainard, meanwhile, creates “at least an open question over whether she could get confirmed,” said Sarah Binder, a political scientist at George Washington University, who co-wrote a history of the Fed.
Democrats control the Senate with Vice President Kamala Harris able to break a 50-50 tie. But securing a party-line confirmation on the Fed chair may “not be the message that the Biden White House wants to send to the world,” said Ms. Binder.
Even before the latest controversy, the Fed appointment decision had opened a divide among Democrats, with one group urging that Mr. Powell be replaced so the central bank would more explicitly pursue progressive priorities on bank regulation and climate change. Another group argued Mr. Powell’s bipartisan backing had insulated his objectives of promoting a stronger labor market recovery against more intense partisan attacks. Members of Mr. Biden’s economic team, including Treasury Secretary Janet Yellen, have supported reappointment.
The last three presidents selected their nominee for Fed chair by early November to allow enough time for Senate confirmation ahead of the new term, which starts in February. Mr. Biden already has one vacancy to fill on the Fed’s seven-member board. Mr. Clarida’s term as vice chair expires in January, giving Mr. Biden two slots to fill in addition to the decision on whether to retain Mr. Powell.
A potential leadership reshuffle kicked off this week when the four-year term of Randal Quarles as the vice chairman of bank supervision expired. Mr. Biden hasn’t nominated anyone for the job, and the Fed said it wouldn’t designate any of the existing governors to handle Mr. Quarles’s portfolio.
Mr. Biden is making his decision at a particularly consequential moment for his domestic-policy agenda. He is trying to secure Democratic agreement on a $3.5 trillion proposal to address healthcare, education, child-care and climate policies while advancing a separate bipartisan infrastructure spending bill. Congress also will need to raise the federal borrowing limit later this year.
Both the tax-and-spending debates and the personnel decisions at the Fed represent significant sources of policy uncertainty heading into the final months of 2021. The Fed could face tougher choices next year if a more persistent inflation forces the central bank to accelerate plans to raise rates next year.
A White House spokeswoman said Mr. Biden is engaged with his senior economic team on personnel decisions and will make them “in a thoughtful manner.”
The trading debacle is a blow to an institution whose culture has prized impartial research and analysis, preferring to stay out of the rough-and-tumble partisan debates of Washington.
“They are on a very high pedestal, and so it is unsettling,” said Norman Eisen, who served as the chief ethics lawyer in the Obama White House, who also applauded Mr. Powell’s early response. “He has talked the talk. He has not been defensive, and the two regional presidents have left. If he walks the walk, the Fed can emerge from this stronger.”
Mr. Powell met with at least four Democratic senators last week, including Sens. Chris Van Hollen (D., Md.) and Raphael Warnock (D., Ga.). In at least one of the meetings, Mr. Powell didn’t wait for the subject of the trading controversy to come up and instead explained what had happened and what the central bank was doing to address it, according to a person familiar with the meeting.
Federal Judges or Their Brokers Traded Stocks of Litigants During Cases
Dozens of judges have reported share purchases and sales made while they presided in suits involving those companies, a WSJ investigation found.
Mary Geiger Lewis acquired Walmart Inc. stock. Charles Norgle Sr. reported nearly a dozen buys and sells of Pfizer Inc. shares. Charles Siragusa had two accounts that bought Medtronic PLC stock.
None of that would be a problem, except for this: All are federal judges, and at the time of the trades, all were hearing cases involving those companies.
The Wall Street Journal discovered this trading in a broad investigation that identified 131 federal judges who heard hundreds of cases between 2010 and 2018 involving companies in which they or a family member owned stock—in violation of federal law and judicial-ethics rules.
Judges Lewis, Norgle and Siragusa were among 61 judges who didn’t just own stocks of companies that were litigants in their courtrooms. Accounts held by the judges or their families traded shares as suits were progressing, the Journal’s investigation found. Nearly half of the judges reported more than one trade while a case was in progress.
Federal law and ethics rules say judges must recuse themselves if they, their spouse or any minor children own even a single share of a company that is a plaintiff or defendant in a case before them.
Some judges, when contacted by the Journal, said they were unaware that brokers or advisers who managed accounts for them traded shares of the companies during the cases. But there is no exception for holdings in managed accounts. And federal law requires judges to inform themselves about their financial interests and make a reasonable effort to do the same regarding their spouse and any minor children.
Other judges said they failed to update their “recusal lists”—tallies that judges keep of parties they shouldn’t have in their courtrooms—in the middle of hearing cases. Federal courts use software to identify such parties, but the software can’t spot stocks judges buy unless the judges update their conflict lists.
Trading during a case “can happen only if the judge is recklessly indifferent to the conflict-of-interest rules in the statute and the Canons of Ethics,” said Arthur Hellman, an ethics specialist and law professor at the University of Pittsburgh, who was briefed on the Journal’s findings.
While Judge Walter Rice was hearing a case involving International Paper Co., his financial disclosure form shows, he sold between $15,001 and $50,000 of the company’s stock in December 2015. The sale earned a profit of between $15,001 and $50,000, the form shows. Judge Rice said that later that month, he gave his remaining shares to five charities. International Paper doesn’t appear on his later disclosure forms.
The case involved an effort to recoup cleanup costs from International Paper and other companies that operated a mill in Dayton, Ohio. During the case, which is pending, Judge Rice, an appointee of former President Jimmy Carter who serves in the Southern District of Ohio, has issued rulings both favorable and unfavorable to International Paper.
After being contacted by the Journal, Judge Rice informed parties to the case of the appearance of the conflict. “In all candor, I am remiss at checking this as thoroughly as I should,” he said.
Judge Rice said the stock was in an account whose manager “can buy or sell without getting my permission.” He said he wasn’t aware he owned International Paper shares, likely because he wasn’t reading the statements.
“In all candor, I am remiss at checking this as thoroughly as I should.”
— Judge Walter Rice
A spokeswoman for International Paper declined to comment.
The Administrative Office of the U.S. Courts on Wednesday warned judges in a memo they are required to keep informed about their finances and maintain timely lists of parties that are off limits. Judge Roslynn Mauskopf, director of the office, wrote that judges may not rely on accounts managed by financial advisers to avoid their recusal obligations. “Up-to-date recusal lists are the most effective tool for conflict screening,” she wrote.
In response to Journal articles on judges’ recusal failures, lawmakers are proposing far-reaching changes. A bill being drafted by House Judiciary Chairman Jerrold Nadler (D., N.Y.) and Rep. Hank Johnson (D., Ga.), would require judges to report financial transactions, such as stock trades, within 90 days, a congressional aide said.
Judges would also have to post their financial disclosures in a searchable database, and there would be civil penalties for recusal violations. The committee plans a hearing this month, the aide said.
Judge Lewis, who owned Walmart stock, reported on a disclosure form five purchases of the shares in a six-day span while she presided in a suit against the company in August 2017.
Walmart and the plaintiff, a former employee seeking short-term disability benefits, told the judge early in August of that year that they were exploring a settlement. Judge Lewis extended court deadlines to give them time to resolve the matter.
Her financial disclosure form recorded five purchases from three different accounts in quick succession. The form shows Walmart stock bought on Aug. 25, Aug. 29 and Aug. 30, the day Judge Lewis dismissed the case.
At the time, her retirement account and a trust each held as much as $15,000 of Walmart stock, and another trust held $15,001 to $50,000 worth, her disclosure form shows.
Judge Lewis, who is based in Columbia, S.C., and was named to the court by former President Barack Obama, declined requests for comment. After the Journal contacted her, the court clerk notified parties to the suit about her stock ownership, saying it “neither affected nor impacted” her court decisions but would have required her to recuse herself.
The clerk’s letter invited the parties to respond and said a different judge would consider any response they filed. The parties didn’t reply by an Aug. 9 deadline the letter set. Walmart didn’t respond to requests for comment.
Judge Norgle’s 2010 financial disclosure form shows 11 purchases or sales of Pfizer shares while he oversaw a suit against the pharmaceutical company.
Before the suit, he acquired Pfizer shares worth between $15,001 and $50,000 on Feb. 3, 2010, and made three smaller purchases that month, the last on Feb. 17. Less than a week later, Judge Norgle was assigned to hear a lawsuit alleging that Pfizer falsely marketed an expired patent on packaging of Advil products.
His disclosure form shows trading continued in March with four more purchases and one sale of Pfizer stock—three of the purchases valued at up to $15,000 each and one purchase and one sale valued at between $15,001 and $50,000. The form records six additional Pfizer trades in April and May, the last a sale of $15,001 to $50,000 of Pfizer stock on May 20.
Judge Norgle rejected Pfizer’s motion to dismiss the case early the next year, and in May 2011 granted Pfizer’s motion to transfer it to New Jersey federal court.
Judge Norgle, a Ronald Reagan appointee based in Chicago, didn’t respond to requests for comment. The court clerk sent the lawsuit’s parties a notice this month saying that the judge’s stock ownership didn’t affect his courtroom decisions but would have required his recusal. The parties hadn’t filed a response as of Tuesday. Pfizer declined to comment.
Some judges ruled in favor of companies in which they reported purchasing shares during the case. An example was Judge Siragusa, who heard a suit against Medtronic involving an injured boy.
When the boy was 8, he fell off a motorized toy car and broke his neck, requiring surgery to implant a titanium rod. A surgeon inserted a Medtronic bone graft in his neck when he was 12. His family sued Medtronic in April 2014 alleging the graft was defective.
Judge Siragusa handled pretrial motions, scolding the family’s attorney for missing deadlines. Eight months into the case, on Jan. 27, 2015, two purchases of Medtronic shares, each valued at up to $15,000, were made in two separate brokerage accounts of Judge Siragusa, his financial disclosure form shows.
Later in the year, Judge Siragusa asked the family’s attorney at a hearing, “So where are you going with this case? I don’t know how…there would be a manufacturing defect.”
He dismissed the case “with prejudice,” meaning the plaintiff couldn’t amend and refile it. His 2015 financial disclosure form wasn’t filed until 10 months later, in August 2016.
“That’s not to say I shouldn’t have picked up on some of these, but we have a conflict checking system that is supposed to alert me if there’s a conflict.”
— Judge Charles Siragusa
Judge Siragusa, a Bill Clinton appointee based in Rochester, N.Y., said an investment adviser made the purchases without consulting him.
“They control what stocks are bought and sold,” he said. “I’m sure they’ll send me notifications of what’s bought and sold.” He said he doesn’t keep track.
“That’s not to say I shouldn’t have picked up on some of these, but we have a conflict checking system that is supposed to alert me if there’s a conflict,” the judge said.
A spokesman for Medtronic declined to comment. An attorney for the family didn’t respond to requests for comment.
In some cases, judges or their families made repeated trades in cases that spanned years. Judge Janis Sammartino in California heard 18 cases during which her family traded shares of plaintiffs or defendants in the suits.
In one, her family owned Pfizer stock in two trusts when she was assigned a Pfizer case in 2011. A biotech company accused Pfizer of infringing its patents for technologies used to research cancer treatments.
Judge Sammartino’s disclosure forms recorded 14 trades of Pfizer shares during the nearly six years the case was in her court or on appeal, including eight sales that brought combined profit of $7,506 to $19,500.
The first trade, a sale for a profit of up to $1,000, came in December 2011, nearly a year after plaintiff AntiCancer Inc. filed suit.
Judge Sammartino, a George W. Bush appointee, threw out part of AntiCancer’s case the following year. She offered the plaintiff a choice: Accept defeat on the remaining claims or amend its filing and continue, but only if it paid Pfizer’s legal fees.
AntiCancer appealed that ruling in late 2012. The judge’s family continued to trade Pfizer stock in the trusts, gaining a total of as much as $6,000 in profit in two sales, then buying more Pfizer shares in the latter half of 2014.
AntiCancer won its appeal. “The district court exceeded its discretionary authority in imposing a fee-shifting sanction as a condition of proceeding with the litigation,” a federal appellate court said in October 2014, sending the case back to Judge Sammartino’s court.
The judge’s family traded Pfizer stock nine more times—four purchases and five sales, each for a profit of $1,001 to $2,500—before the parties reached a settlement in October 2016, according to disclosure reports. In it, AntiCancer agreed that Pfizer hadn’t infringed its patents. Each side bore its own legal costs.
After the Journal asked Judge Sammartino about the matter, she directed a court clerk to tell parties to the suit that she should have recused herself and that she hadn’t been aware a family member owned Pfizer stock.
Robert Hoffman, AntiCancer’s founder and chief executive, said that though his company settled, he believed Pfizer had infringed. “We got this funny ruling in front of [Judge Sammartino], and here we are against this giant, and they aren’t budging, and we were afraid we were going to have to pay the fees,” he said.
Dr. Hoffman said he wants to reopen the case. “This is such a disappointment. This never should have happened, ever,” he said. Pfizer declined to comment.
Some judges’ violations stem from a spouse’s trading. In Philadelphia, Judge Petrese Tucker presided over a suit against Eli Lilly and Co. for four years while her husband traded the drug company’s stock, according to her financial disclosure forms and a letter filed in court after the Journal reached out to her for comment.
In the suit, several female former sales representatives made employment-discrimination claims against Eli Lilly. They alleged that their boss at the company insisted on hugging them, called them “dolls” and “Barbie girls,” referred to one as “honey” and permitted rowdy behavior and nudity at work functions.
Judge Tucker got the case in 2011. At the time, her husband owned two chunks of Eli Lilly stock, each worth up to $15,000, according to her financial disclosure form.
Over the next two years, as she ruled on pretrial motions, he bought or sold Eli Lilly stock on five occasions, for total profit of as much as $3,000, disclosure forms show.
In April 2013, Judge Tucker threw out all but one claim against Eli Lilly, writing that the boss’s alleged conduct wasn’t “severe or pervasive enough” to make out a claim for a hostile work environment.
Judge Tucker’s husband made two more Eli Lilly trades after the rulings. He sold up to $15,000 of the stock in December 2013, for a profit of as much as $1,000, and in January 2014 bought shares in the same value range as the sale, according to a disclosure form.
Eli Lilly went to trial on the sole surviving claim of retaliation by one former sales representative. A jury found for the company in December 2014.
While the case was on appeal, Judge Tucker’s husband made two more sales of Eli Lilly stock, each involving up to $15,000 worth.
In February 2016, an appeals court upheld Judge Tucker’s spiking of most claims. Her husband still held up to $15,000 of Eli Lilly at the time, her 2016 disclosure form shows.
After the Journal reached out to Judge Tucker, a Clinton appointee, the court clerk notified the parties of the recusal violation. The clerk’s letter said that Judge Tucker recently had become aware of her husband’s Eli Lilly stock and that it had no effect on her decisions.
Maggie Tourtellotte, one of the plaintiffs, said she told her lawyer she wanted a new judge to hear her case after learning of the recusal violation. She has until Oct. 22 to respond to the clerk’s letter.
“I was shocked. I was relieved,” Ms. Tourtellotte said. “We never even got to tell our side of the story.” Eli Lilly declined to comment.
Although a 1974 law requires judges to disqualify themselves from cases if they have a financial interest in a lawsuit party, Congress updated the law in 1988 to create an exception. It says that if judges discover this interest “after substantial judicial time has been devoted to the matter,” they can sell the stock and stay on the case.
Lawmakers intended the exception for complex, multidistrict cases where a disqualifying financial interest might not be apparent to a judge until deep into the litigation, making recusal disruptive and costly for litigants, according to a House Judiciary Committee report on the bill. An aide to the committee said on Thursday that lawmakers are drafting legislation to tighten these rules to narrow the exception.
The Code of Conduct for U.S. Judges sets no such condition. And the ethics committee for the federal judiciary said in an advisory opinion, published in 1981 and later updated, that a judge can sell a stock and continue to preside regardless of how much or how little time the judge has spent on the case.
Stephen Gillers, a judicial ethics specialist at New York University School of Law, said a judge is bound by both documents, “so the most restrictive controls.”
Federal courts seem divided on when divestiture fixes a conflict. Some district courts have said Congress never meant to curb the practice of judges’ getting rid of disqualifying financial interests at the outset of a case to fix a conflict. By contrast, the Fifth U.S. Circuit Court of Appeals said judges could remain on a case only if they had already devoted substantial time to it.
Judges themselves appear to be at odds over whether it is OK to sell all of a stock and stay on a case.
Four who owned shares of companies that were in their courtrooms told the Journal they didn’t believe they had violated recusal rules, since they had divested themselves of the shares. The Journal excluded those cases from its list of 685 recusal violations.
Twelve other judges also got rid of their conflicting stock while cases were already under way, but these judges later said in court filings they should have disqualified themselves. The statements came in notices filed by court clerks after the Journal contacted them about their stockholdings.
Only one judge’s notices mentioned the stock sales made during the cases.
Elizabeth Warren Doesn’t Get Fed Trading Ban Proposal by Oct. 15 As Requested
Regional Fed banks told the senator in a letter that a central bank review of its ethics code would drive any changes the Fed makes.
Regional Federal Reserve Banks haven’t presented Sen. Elizabeth Warren with a plan to ban stock trading by senior central bankers as the Democrat from Massachusetts requested last month.
Ms. Warren had written to the 12 bank presidents on Sept. 16 asking for the ban, following disclosures that the leaders of the Dallas and Boston Fed banks had been trading stocks and other investments even as they helped set the nation’s monetary policy. Both officials later resigned.
The senator had asked for a response by Oct. 15 on plans for a trading ban, followed by its implementation within 60 days of her letters.
Meanwhile, the Fed’s second in command, Richard Clarida, is also facing questions about a large trade he made in February 2020, shortly before the Fed signaled a potential interest-rate cut due to concerns over the budding pandemic.
The Dallas and Boston Fed banks said the trading of their then presidents was consistent with the Fed’s code. Meanwhile, Mr. Clarida said last week, “I’ve always acquitted myself honorably and with integrity with respect to the obligations of public service.”
St. Louis Fed President James Bullard wrote to Ms. Warren on Sept. 20 on behalf of all the regional Fed bank leaders, saying that a broader central bank review of its internal ethics code, announced the same day as Ms. Warren’s letters, would drive any changes the Fed makes. On Oct. 4, Ms. Warren called on the Securities and Exchange Commission to investigate the Fed officials’ trading.
The senator’s office declined to comment on the passing of the deadline that she set.
Fed leaders haven’t provided a timeline for action in their review. But officials like Chairman Jerome Powell have acknowledged that current rules—which ban senior officials from owning bank stocks, limit trading around monetary policy meetings and warn against activities that could suggest a conflict of interest—need updating.
Mr. Powell has said it is critical for the public to have confidence that the central bank is setting policy with the nation’s interests in mind, and not to benefit the financial positions of policy makers.
A trading ban could end up being imposed on the Fed from the outside. Sen. Sherrod Brown, (D., Ohio), chairman of the Senate Banking Committee, said at a hearing last month he would introduce a bill to prohibit Fed officials from trading stocks. The Fed declined to comment on Mr. Brown’s planned bill.
Some, including at least one central banker, believe rules on how central bank officials move money around may require a more nuanced change than an outright ban.
Minneapolis Fed President Neel Kashkari said in a recent interview that a system that puts officials’ investments on something like autopilot makes sense, as that would insulate officials from any perception that they used information gained as a policy maker to make investment decisions. He favors rules that would impose long holding periods and automatic investment inflows to guard against active trading.
Andrew Levin, who was a top Federal Reserve staff member and now teaches at Dartmouth College, agreed that outright bans of securities holdings may not be the best fit. He supports creating a system that would allow Fed officials to put their assets in a blind trust. Mr. Levin also said he could support something akin to a limited, once-a-year opportunity for central bank leaders and staff to rebalance their investments.
Dennis Kelleher, who leads Better Markets, a group that presses for tighter financial regulation and has been critical of Fed officials’ trading, believes blind trusts for central bank officials and anyone at the Fed with access to confidential information should be mandatory, and he wants a ban on any active trading.
He also wants the Fed to formalize stronger oversight of officials’ financial activities, and ensure officials have any financial transactions cleared ahead of time by ethics officers. Mr. Kelleher also calls for increasing transparency in the process that discloses this information.
More complete disclosure would help clarify questions about financial transactions made by Fed officials.
Messrs. Kelleher and Levin said they have concerns about Mr. Powell’s disclosures, pointing to an Oct. 1, 2020, sale of $1 million to $5 million of Vanguard Total Stock Market Index Fund shares, as well as entries on Mr. Powell’s forms that don’t provide exact transaction dates.
A Fed representative said Mr. Powell’s financial transactions squared with central bank rules and were signed off on by government ethics officers. The representative said transactions without specific date information were reported under rules that allowed things like regular reinvestments to be lumped together, and that the Vanguard sale was for family expenses.
Some believe real change requires a deeper shift at the Fed. Benjamin Dulchin, who leads the Fed Up Campaign of the left-leaning Center for Popular Democracy, said changing the people who serve on the central bank is the key to ensure there won’t be a replay of the trading controversy.
He said the central bank should increase the diversity of its policy makers and those who serve on boards overseeing the regional banks, and bolster representation of those who aren’t in big business or finance.
How Big a Deal Is Powell’s Million-Dollar Stock Trade?
There’s no way that insider knowledge would have helped Jerome Powell’s one big stock trade. In fact, his timing was lousy.
The American Prospect, a revered journal of the American progressive left, has published a piece highlighting that Jerome Powell, chairman of the Federal Reserve, sold between $1 million and $5 million in stock on Oct. 1 last year. He did so through a Vanguard fund that tracks the total market. How big a deal is this?
I would argue, not very. The full disclosure form can be found here. It looks like the Fed chairman, a rich man from his career in private equity, holds an impeccably dull investment portfolio, virtually all passive and spread across asset classes. He appears not to have done much trading last year, apart from small purchases and sales that look like either rebalancing, or the use of income to reinvest.
The one big trade was that sale on Oct. 1. It covered the whole market so no inside knowledge of particular sectors would have helped. Here is that trade, mapped on the Wilshire 5000 index which covers the broad U.S. market.
On the face of it, if that trade was made for investment reasons, it was lousily timed. Selling just before the top in February, or buying at the bottom a month later, would have been lucrative. It would have also been very suspicious. Selling on Oct. 1 meant that Powell missed out on a 35% gain in the year since (between $350,000 and $1.75 million given what we know about the scale of the trade).
He had already made his hugely important speech at Jackson Hole in August, and followed through with the Fed’s regular meeting in September. At that point, his publicly expressed intentions, on which he subsequently followed through, were dovish. That should have made him keen to buy rather than sell.
The American Prospect puts together a narrative that makes the transaction seem more sinister. Apparently, Powell had four conversations with then Treasury Secretary Steven Mnuchin that day. The Fox Business Network, popular with conservatives, followed the story and headlined it: Fed’s Powell sold up to $5M in stock in 2020 before market tanked.
That seems an extreme use of the verb “to tank” to me. The stock market’s performance was unremarkable over the days that followed, wobbling ahead of the election, and it soon went into overdrive.
There is a real issue here. Senior figures at the Fed must be careful to avoid any sign of impropriety. But unless they are to be barred from trading altogether, it’s hard to see anything wrong with this. The trade lost money, and it conflicted with inside knowledge of the Fed’s intentions.
Powell needs to be reappointed, or his successor chosen, by early next year. There are arguments for and against renewing him. This is how the contract on Powell getting a second term moved on the PredictIt betting market in the 24 hours to 6 p.m. New York time. It’s plain where the story comes out.
Bettors commented that the mere fact the story had emerged and been promoted by outlets at both ends of the political spectrum suggested a serious effort was afoot to bring Powell down.
This is a dangerous game. Whoever is Fed chairman next year will have difficult decisions to make and communicate. There is a history of the market misunderstanding new occupants of the chair. There are other good candidates, but the bar for replacing Powell should be high. His sale of an index fund isn’t a valid reason to replace him.
Fed Imposes New Restrictions On Officials’ Investment Activities
Rules prohibiting trading of individual stocks and bonds, when officials can buy diversified securities follow revelations of active trading last year as the Fed responded to Covid-19.
Federal Reserve Chairman Jerome Powell imposed sweeping personal-investing restrictions on senior officials in a bid to address a stock-trading controversy that prompted the resignation of two reserve bank presidents and hurt his prospects of being reappointed to lead the central bank next year.
The Fed on Thursday said the new rules will restrict senior officials’ trading to broad-based investment vehicles such as mutual funds. They also will require any trades to be preapproved and pre-scheduled, removing the potential for any appearance that officials were benefiting from inside information to bolster their personal investments.
The rules will apply to the system’s 12 reserve bank presidents and the seven governors on the central bank’s Washington-based board, as well as an unspecified number of senior staff who are heavily involved in preparing for meetings of the rate-setting committee.
Mr. Powell, a Republican, has been the front-runner to keep his job when his term expires early next year. But questionable trading activities by two Fed bank presidents, first reported last month by The Wall Street Journal, were seized upon by a vocal minority of Democrats who already opposed his nomination because they think he is too friendly to Wall Street on bank regulation.
The conflict-of-interest controversy for the Fed has dented but not derailed Mr. Powell’s chances for a second term. The other main contender for the job is Fed governor Lael Brainard, who has been responsible for oversight of the reserve banks.
People familiar with the Biden administration’s deliberations said the trading imbroglio hasn’t loomed large in internal discussions regarding Fed personnel decisions.
A White House spokeswoman on Thursday declined to address the Fed developments, but said President Biden, a Democrat, “believes that all government agencies and officials, including independent agencies, should be held to the highest ethical standards, including the avoidance of any suggestions of conflicts of interest.”
The new rules will require Fed officials and senior staff to provide 45 days’ advance notice for any purchases and sales of diversified investment vehicles, such as mutual funds. Officials will also be required to obtain prior approval for any investment purchases and sales, and they will be required to hold investments for a minimum of one year. Transactions won’t be allowed during periods of “heightened financial market stress,” the Fed said in a statement.
The rules go beyond what other government agencies require of senior leaders, as well as what some congressional lawmakers have proposed in recent legislation that would broadly cover executive-branch officials. Previously, the Fed restricted officials from buying or selling stocks of banks and other financial companies regulated by the central bank.
Norman Eisen, who served as the chief ethics lawyer in the Obama White House, said the latest provisions “meet or exceed” what any other U.S. financial regulator requires. “The new rules are spot-on,” he said. “Of course, the proof of the pudding will be in the implementation, and we will all be watching closely….They have taken a negative situation and turned it into a major step forward ethically.”
Bringing the Fed’s reserve banks “under a tighter systemwide ethics regime…is long overdue,” said Sarah Binder, a political-science professor at George Washington University.
Fed officials opted against requiring officials to put their assets into a blind trust—a separate option for distancing official decisions from personal finance matters—in part because of concerns that they could be unable to impose some of the requirements announced Thursday on those trusts. Government ethics officials have generally discouraged executive branch officials from using blind trusts.
Mr. Powell announced a review last month after disclosures by Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren revealed a series of investments in companies or individual funds last year.
Those trades spurred a heavy backlash because they coincided with extensive market interventions by the central bank to prevent a financial panic from the Covid-19 pandemic.
Mr. Kaplan’s financial disclosures showed he had bought and sold last year at least $1 million in stock of companies including Chevron Corp. , Delta Air Lines Inc., Marathon Petroleum Corp. , and Johnson & Johnson.
Disclosures for Mr. Rosengren, who cited health reasons in announcing his retirement last month, showed he had made more than three dozen trades, albeit in much smaller sums than Mr. Kaplan, in stocks of four real-estate investment trusts that buy and sell the same types of mortgage bonds that the Fed was buying in large quantities last year.
The crisis is serious because the Fed’s imprint over the economy is as large as it has ever been, and questions over whether the institution is acting in the public’s best interest tarnish its credibility.
In a written statement, Mr. Powell said the new rules “raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve.”
Sen. Elizabeth Warren (D., Mass.), who has said she would oppose Mr. Powell’s nomination due to disagreements over regulatory policy, ratcheted up her criticism of the Fed’s leadership following the ethics controversy. She has called for the Securities and Exchange Commission to review Fed officials’ investment activities, including disclosures made in May that Vice Chairman Richard Clarida moved money between two mutual funds as the coronavirus pandemic began buffeting markets.
Mr. Clarida, who listed five transactions involving broad-based index funds last year occurring on two dates, six months apart, has said that those transactions were part of a preplanned activity. “I’ve always acquitted myself honorably and with integrity with respect to the obligations of public service,” he said last week.
Ms. Warren cited the transactions earlier this month as evidence of a “culture of corruption” at the Fed and said Mr. Powell had “failed as a leader.”
The Fed has separately engaged its inspector general’s office to conduct a review of the trading, which remains separate from the policy changes announced on Thursday.
Ms. Warren called on Thursday for that investigation, and an SEC investigation, to be “completed promptly and without Fed interference.” She added, “There can be no reform without accountability.”
Mr. Powell said at a press conference last month that the disclosures by Messrs. Kaplan and Rosengren revealed a blind spot in the Fed’s code of conduct. Even if the trading had conformed to the policies of the respective reserve banks, that code of conduct “is now clearly seen as not adequate to the task of really sustaining the public’s trust in us,” he said. “We need to make changes, and we’re going to do that as a consequence of this.”
The disclosures of the trades by Messrs. Kaplan and Rosengren triggered additional scrutiny of investment activities reported by Mr. Powell. On Oct. 1 of last year, he sold between $1 million and $5 million of Vanguard Total Stock Market Index Fund shares to raise funds for a family expense.
The new rules allow Mr. Powell and other Fed officials to hold such investments but are designed to further minimize any appearance of a conflict by requiring pre-scheduling and preapproval.
The rules also impose tougher restrictions over the 12 reserve banks. The stock-trading controversy raised new questions over how much oversight the Washington-based board conducts over the quasi-private regional banks.
Some regional Fed presidents have described a process by which ethics lawyers in Washington provide regular feedback on their annual disclosure statements. “They’ll ask some questions or suggest changes to the forms. I’ll respond to those changes,” Minneapolis Fed President Neel Kashkari said in a September interview.
On March 23, 2020, when the Fed announced a set of unprecedented emergency-lending programs, a Fed lawyer wrote to the participants in the rate-setting Federal Open Market Committee—as well as some senior staff and the ethics officers for the 12 reserve banks presidents—to underscore the need to minimize appearances of conflicts of interest.
“In light of the rapidly developing nature of recent and likely upcoming system actions, please consider observing a trading blackout and avoid making unnecessary securities transactions for at least the next several months, or until FOMC and Board policy actions return to their regularly scheduled timing,” the email said. The email was first reported by the New York Times.
The email reflected heightened sensitivity over potential appearances of conflicts of interest during what was the most acute phase of the Fed’s crisis response. Normally, Fed officials are barred from engaging in financial transactions before the bank’s eight regularly scheduled annual policy-setting meetings, but the Fed last spring was making market-moving announcements frequently in between scheduled meetings.
Federal Judges Would Face Tougher Stock-Trading Rules Under Bipartisan Bill
House hearings set; planned actions follow Wall Street Journal reports on financial conflicts in the judiciary.
Federal judges would be required to report stock trades over $1,000 within 45 days and post their financial-disclosure forms online under legislation proposed by a bipartisan group of lawmakers in the Senate and House of Representatives.
The two bills were drafted by both Democrats and Republicans in response to a Wall Street Journal investigation finding 131 federal judges violated federal law by hearing lawsuits involving companies in which they reported owning stock, according to congressional aides.
The House Judiciary Committee also is considering a range of new accountability rules for the judiciary. It has scheduled a hearing Tuesday to examine “breaches identified in The Wall Street Journal’s report” about federal judges who hold stocks, and will question the chairwoman of the federal judiciary’s ethics committee and judicial ethics professors.
Narrower bills in the House and Senate increase reporting requirements for judges who trade stocks frequently. The Journal investigation found 61 judges who didn’t just own stocks of companies that were litigants in their courtrooms. Accounts held by the judges or their families traded shares as suits were progressing.
The Senate version of the stock-trading reporting bill, called the Courthouse Ethics and Transparency Act, would require judges to comply with the same law that applies to the president, vice president, presidential-appointed administration officials, senators and House members, according to congressional aides and a draft of the bill.
That law, known as the STOCK Act—for Stop Trading on Congressional Knowledge—requires government officials to report their financial transactions over $1,000 within 45 days.
“This legislation would subject federal judges to the same disclosure requirements of other federal officials so we can be sure litigants are protected from conflicts of interest and cases are decided fairly,” the bill’s sponsor, Sen. John Cornyn (R., Texas), said.
A second provision would require the Administrative Office of the U.S. Courts to create an online database of all judges’ financial disclosures. The agency would be required to post the reports online within 90 days of receiving the information in “a full-text searchable, sortable, and downloadable format for access by the public.” The bill would take effect six months after passage.
In response to the proposed legislation, David Sellers, spokesman for the Administrative Office of the U.S. Courts, the agency that administers the federal courts, said the judiciary publicly releases in electronic form judges’ financial-disclosure reports at no cost to the requesting party. In the past, the Administrative Office of the U.S. Courts has resisted proposals to make financial disclosures more readily available online, citing security concerns.
“We are considering ways to automate the release of these reports so they are available more quickly and in a manner more convenient to the public, while also balancing the serious safety and security considerations that exist,” Mr. Sellers said.
The text of the legislation referenced the Journal articles, saying “recent reports indicate certain Federal judges have failed to recuse themselves from cases and controversies in which the financial interests of the Federal judges are implicated.”
The bill is co-sponsored by Senate Judiciary Committee members of both parties. Drafted by U.S. Sens. Cornyn and Chris Coons (D., Del.), the bill is co-sponsored by Democrats Sheldon Whitehouse of Rhode Island, Jon Ossoff of Georgia and Senate Judiciary Committee Chairman Dick Durbin of Illinois, and Republicans John Kennedy of Louisiana, Ted Cruz of Texas and ranking member Chuck Grassley of Iowa.
“Litigants need confidence that they will receive an unbiased hearing free from outside influence and based only on the facts and the law,” Sen. Coons said.
On the House Judiciary Committee, Reps. Deborah Ross (D., N.C.) and Darrell Issa (R., Calif.) are sponsoring the companion bill, along with House Judiciary Chairman Jerrold Nadler (D., N.Y.), Rep. Hank Johnson (D., Ga.) and Rep. Chip Roy (R., Texas).
Separately, Rep. Nadler is writing what he is calling the 21st Century Courts Act, which is expected to include sanctions for judges who commit recusal violations, according to congressional aides.
Mr. Nadler had introduced a similar courts bill in early 2020 that included the requirement to post judges’ financial-disclosure forms online; the effort lost momentum during the pandemic.
Mr. Nadler plans to revive the legislation, after the Journal reported that judges have improperly failed to disqualify themselves from 685 court cases around the nation since 2010. Mr. Nadler and Mr. Johnson, who is chairman of the subcommittee that oversees the federal courts, said late last month they would hold hearings and reintroduce the bill.
“This would appear to constitute a massive failure of not just individual judges but of the entire system that is ostensibly in place to prevent this illegal conduct,” Messrs. Nadler and Johnson said in a statement about the Journal’s report.
The changes in how and when federal judges are required to disclose financial transactions would be the first in decades. The bill amends the Ethics in Government Act of 1978, which requires the financial-disclosure reports.
Nothing bars judges from owning stocks, but federal law since 1974 has prohibited judges from hearing cases that involve a party in which they, their spouses or their minor children have a “legal or equitable interest, however small.” Violations of the 1974 law hardly ever become public.
Jan Baran, an ethics lawyer who served on the American Bar Association commission that last revised the Model Code of Judicial Conduct, said the Journal’s findings highlighted the need for reforms to bring “better transparency, more timely disclosure and improved policing of conflicts.”
Mr. Baran said he believes judges have become complacent because of lack of transparency. “Since access to federal judges’ annual disclosures is so difficult and feared by lawyers, judges have not benefited from the scrutiny other public officials receive when making similar public disclosures,” he said.
Currently, judges’ financial disclosures are filed annually by May of the following year. The Free Law Project, a nonpartisan legal research nonprofit group that recently posted judges disclosures for 2010 to 2018 online, said it is waiting for judges’ disclosures from 2019 to be released.
Litigants generally don’t see the forms, and they aren’t released in most cases soon enough to be informative. If plaintiffs or defendants learn that a judge on their case has a financial interest that may require a recusal, they can move for a disqualification. In general, it often falls to the judge with the potential conflict to make the decision.
At this week’s hearing, Judge Jennifer Elrod, who is chairwoman of the Committee on Codes of Conduct of the Judicial Conference of the United States, is set to testify, along with law Profs. Jamal Greene of Columbia University, Renee Knake Jefferson of the University of Houston and Thomas Morgan of George Washington University.
Both Parties In ‘Total Agreement’ On Need To Toughen Judicial-Disclosure Law, GOP Lawmaker Says
Congressional hearing follows reports in The Wall Street Journal on widespread financial conflicts; judge says judiciary can fix gaps on its own.
Democrats and Republicans are “in total agreement” on the need for legislation that would require judges to adhere to the same financial disclosure requirements as Congress, Rep. Darrell Issa (R., Calif.) said at a hearing Tuesday.
The hearing came a day after a bipartisan group of lawmakers, including Mr. Issa, introduced a bill in both the House and Senate that would require the judiciary to accelerate public release of the disclosure forms by months and in some cases years. Currently, judges’ financial disclosures are filed annually by May of the following year.
Lawmakers scheduled the hearing in response to a Wall Street Journal investigation that found 131 federal judges violated federal law by presiding over cases involving companies in which they reported owning stock. In their comments to the Journal, some judges blamed court clerks. Others said their lists of companies to avoid had misspellings that foiled the conflict-screening software.
“The damage has been done,” said Rep. Hank Johnson (D., Ga.), the subcommittee chairman. “Federal judges did not follow the law.”
Judge Jennifer Elrod, who chairs the ethics committee for the federal judiciary’s policy-making body, said the judiciary on its own could address the gaps revealed by the Journal’s reporting through improved technology and training.
She said the Judicial Conference would work toward full compliance with the law. “You have my word,” Judge Elrod said.
Judge Elrod declined several questions about specific judges mentioned in the Journal reports, and couldn’t say whether any judges have been reprimanded for failing to properly recuse from cases in which they reported a financial interest.
Nothing bars judges from owning stocks, but federal law since 1974 has prohibited judges from hearing cases that involve a party in which they, their spouses or their minor children have a “legal or equitable interest, however small.”
However, the law exempts investments in mutual or index funds. Lawmakers questioned whether judges should be barred from holding individual stocks.
“Holding mutual funds does simplify the process for judges,” said Judge Elrod, who added that she avoids individual stocks to make it easier for her to comply with her ethical obligations.
But she said banning ownership of individual stocks wouldn’t solve the problem of judges’ failing to recuse, because stocks represent just one category of financial interest that requires disqualification.
The hearing in the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet is likely to inform court accountability and transparency measures under consideration in Congress.
House Judiciary Chairman Jerrold Nadler (D., N.Y.) is working on legislation that contemplates sanctions for judges who commit recusal violations, and restricting judges from owning shares of individual companies, according to congressional aides.
House Democrats are seeking Republican support for the legislation.
The bipartisan legislation introduced Monday, which Mr. Nadler also supports, includes only transparency measures.
The bills, sponsored by Sen. John Cornyn (R., Texas) and Rep. Deborah Ross (D., N.C.), would require judges to report their financial transactions over $1,000 within 45 days.
The legislation would bind federal judges to an existing law, the Stop Trading on Congressional Knowledge Act, that requires periodic transaction reports by the president, vice president, presidential-appointed administration officials, and members of Congress.
“I am predicting that we will act, and it is likely that we will act consistent with the STOCK Act,” said Mr. Issa, who is co-sponsoring the House bill along with Mr. Johnson, the subcommittee chairman, and others.
A second provision would require the Administrative Office of the U.S. Courts, the agency that administers the federal courts, to create an online database of all judges’ financial disclosures.
The agency would be required to post the reports online within 90 days of receiving the information in “a full-text searchable, sortable, and downloadable format for access by the public.” The bill would take effect six months after passage.
Currently, people who want a judge’s disclosure form must fill out a form swearing that they are requesting the information for themselves. The disclosure form is then sent to the judge, who can decide what to redact. Those redactions then are reviewed by a committee before the form is released. The process can take months.
Ms. Ross, the bill’s sponsor, said the transparency measures would preserve the ability of judges to request redactions on their forms due to a security concern.
The federal judiciary is planning a new system to automate the processing of financial disclosure reports that “may” accelerate the release of the forms, Judge Elrod said, but she stopped short of promising an end to delays.
The Free Law Project, a nonpartisan legal-research nonprofit group, recently posted judges’ disclosures for 2010 to 2018 online. The group said that despite timely requests, it hasn’t received disclosures for 2019 or 2020.
The disclosure delay “frustrates the purpose of the Ethics in Government Act,” Mike Lissner, executive director of the Free Law Project, said in written testimony for the committee. “What might the public—and this subcommittee—have learned if those records were available now?”
Several judicial ethics experts also testified at the hearing. They recommended that judges’ financial disclosures be more accessible and filed more frequently and that judges provide written explanations for recusals, among other proposals.
University of Houston law Professor Renee Knake Jefferson said the judiciary should collect and publish information about judges who fail to properly recuse.
“If anyone should be following the law, I think the public would expect our judges to be following the law,” Prof. Jefferson said.
Fed Bankers Face Penalties For Ethical Breaches Under Senate Proposal
Democrats plan to introduce legislation enforcing rules after two regional presidents stepped down from posts following investment trades.
A group of Senate Democrats plans to introduce legislation that would restrict the type of investments Federal Reserve officials could make and impose penalties for violating these rules or the Fed’s own new code of ethics.
The bill is co-sponsored by Senate Banking Committee Chairman Sherrod Brown of Ohio and Sens. Kirsten Gillibrand of New York, Jeff Merkley of Oregon and Raphael Warnock of Georgia.
The legislation would prevent Fed officials from trading individual stocks, but allow investments in diversified mutual funds, investment trusts and U.S. Treasury securities. If enacted, the law would allow a window to sell prohibited securities, or officials could hold them while in office or place them in a blind trust.
If officials didn’t comply with the law, they would face fines of at least 10% of the value of the investment that was either bought or sold. The bill would make the Fed responsible for administering its provisions.
“The American people need to be able to trust that the Federal Reserve works for them, and that officials aren’t abusing their positions for personal gain,” Sen. Brown said in a statement. The senators said in a press release that the bill was a companion to legislation that would impose similar restrictions on members of Congress, who have faced criticism for their own stock trading.
The Federal Reserve declined to comment on the legislation.
Some of what the senators are proposing for the Fed lines up with changes the central bank is already making. The Fed last week imposed personal-investing restrictions on its senior officials in response to a stock-trading controversy that prompted the retirement of two Fed bank presidents.
The new ethics code came after The Wall Street Journal reported that both presidents had been actively trading stocks and other investments while helping to set the nation’s monetary policy. The Fed said it would formally codify the new rules over the next few months.
The Fed’s new rules would limit officials to trading broad-based investments such as mutual funds to manage their personal wealth. They would have to preschedule and seek preapproval for any financial trades, and they wouldn’t be allowed to trade during periods of market tumult.
The Fed’s restrictions apply to all of the members of the Fed board of governors in Washington, the presidents of the 12 regional Fed reserve banks and senior central bank staff. The rules are designed to remove the potential for any appearance that officials would personally benefit from inside information about the markets or the central bank’s policy intentions.
Robert Kaplan, who became president of the Dallas Fed in 2015, bought and sold millions of dollars of stocks and other investments through 2020, the year the Fed confronted the economic and financial tumult caused by the Covid-19 pandemic with a historically aggressive monetary-policy response. Eric Rosengren, who became president of the Boston Fed in 2007, traded stocks and other investments related to the real-estate industry.
Messrs. Kaplan and Rosengren retired after Fed Chairman Jerome Powell refrained from offering them public support, saying at his September press conference that “no one is happy” about the trading revelations.
Both the Dallas and Boston Fed banks had said that the trading of their leaders was consistent with Fed rules prohibiting officials from owning bank stocks and from trading around monetary-policy meetings. That code was put in place just over two decades ago.
Mr. Powell has faced criticism over his personal financial holdings. He owned municipal bonds when the central bank started buying the assets as part of its efforts to support financial markets last year. “Munis were always thought to be a pretty safe place for a Fed person to invest because…as you know, the lore was that the Fed would never buy municipal securities,” Mr. Powell said at the central bank’s September press conference. “So it was not an uncommon thing.”
Fed Vice Chairman Richard Clarida has drawn criticism over transactions he made early last year that took place just before the Fed’s signal to markets of a looming rate cut aimed at offering support to the economy. Mr. Clarida disclosed that he had moved money between two mutual funds as the coronavirus pandemic began buffeting markets.
Mr. Clarida, who listed five transactions involving broad-based index funds last year occurring on two dates, six months apart, has said that those transactions were part of a preplanned activity. “I’ve always acquitted myself honorably and with integrity with respect to the obligations of public service,” he said last week.
Sen. Elizabeth Warren (D., Mass.) has called for a Securities and Exchange Commission investigation into central-banker trading and has lamented what she called a “culture of corruption” at the Fed.
Riksbank Governor Called To Parliament To Explain Stock Policy
The Swedish parliament’s committee on finance will summon Riksbank Governor Stefan Ingves after revelations about his stock holdings in companies whose corporate bonds the central bank has bought, Svenska Dagbladet reported.
The committee wants to discuss potential changes to the bank’s policies on trading and security ownership with Ingves, chairperson Asa Westlund told the newspaper. Westlund didn’t immediately return Bloomberg phone calls seeking comment and a Riksbank spokesman had no further information on the hearing.
Svenska Dagbladet and Bloomberg News reported Monday that Ingves and his first deputy governor own shares in Swedish companies firms whose corporate debt is eligible for acquisition under a quantitative-easing program unveiled amid some controversy last year.
The Riksbank’s current rules don’t prohibit the ownership of shares by executive board members, but the bank has launched a review of its guidelines, after a routine check earlier this year unearthed unethical transactions.
Why US Officials Ignore Ethics And STOCK Act By Trading Stocks?
No wonder the crypto crowd is losing faith in our institutions and seeking autonomously driven technology like blockchain to cleanse us and give everyone a level playing field.
About two weeks ago, The Wall Street Journal ran an expose on the number of judges who held or traded the stock of companies over which they presided in legal proceedings. The article identifies 131 federal judges nationwide who did this during the period of 2010 to 2018. Of those 131 members of the judiciary, 61 judges purportedly traded the public company stock of litigants during the case. Imagine that! It’s quite incredible, actually.
It seems there would be ethical reasons for judges to not allow themselves to fall into that situation. When I litigated cases, parties were required to disclose the public companies affiliated with the party so that the judges could assess if they had any possible conflict in handling a particular case assigned to them. These conflicts could be that the judge knows the parties in the action personally, or the witnesses.
The parties’ written disclosure is also supposed to trigger an obligation for the judge to see if they, or a family member, own stock in the public corporation involved in the lawsuit.
There is also a 1974 law that prohibits a judge from presiding over a case when their family members own shares of stock of a public company litigant. It was passed shortly after the Watergate crisis and President Richard Nixon’s resignation from office. This is an outright ban; it is not discretionary by the jurist.
It cannot be waived by the parties. The judge is supposed to disqualify, or recuse, themself from the litigation. So, why does this happen, and should we tolerate it from our judicial branch of government?
The Federal Reserve
Now, let’s turn to the Federal Reserve, which is part of the executive branch of our government, and its 12 reserve bank presidents. The Boston and Dallas Federal Reserve Bank presidents — Eric Rosengren and Robert Kaplan, respectively — both resigned in the last month, perhaps from allegations coming to light that they traded stocks over the last year while helping direct macroeconomic policy for our country. To me, this was, for sure, ill-advised conduct by these former presidents.
They know on a continuous, confidential basis how the Fed might use certain monetary tools that tend to favor certain industries and, as a corollary, the stock prices of companies in those industries.
In another publication by The Wall Street Journal just last week, it was reported that Fed Chairman Jerome Powell imposed sweeping personal-investing restrictions on the Fed presidents and the seven governors on the central bank’s board. These include prohibiting the purchase or sale of individual stocks, a one-year holding period, and a 45-day pre-approval process for buying or selling mutual funds.
No wonder the crypto crowd is losing faith in our institutions and seeking autonomously driven technology like blockchain to cleanse us and give everyone a level playing field.
The STOCK Act of 2012
Now, while it may seem to many that there was nothing prohibiting judiciary or Federal Reserve officials from owning or trading stock before this new investment policy by Powell, I disagree. Enter The STOCK Act of 2012, passed by Congress in April of that year during the administration of Barack Obama. “STOCK” stands for “stop trading on congressional knowledge.” Catchy, right? Congress loves its acronyms.
The STOCK Act applies to members of Congress, executive branch employees — including the president and vice president — and judicial officers and employees. The stated purpose of the act is:
“To prohibit Members of Congress and employees of Congress [and the executive and judicial branch] from using nonpublic information derived from their official positions for personal benefit [or profit], and for other purposes.”
It was in part enacted because “political intelligence” companies started popping up, advising hedge funds on the likelihood of governmental action.
Sometimes, these companies learned information from government officials, information not otherwise readily available in the public domain, and passed it on to hedge fund managers who traded stocks based on that information. There is also a requirement to report stock transactions.
Before the law’s passage, it became a problem for regulators and prosecutors that the securities law on insider trading was somewhat gray as to whether the source of the information — the government officials — did anything wrong by passing it on to the intelligence company. This law makes clear that it is wrong and, in fact, a felony to do so.
A section of the act explicitly addresses these government officials, stating that “Each Member of Congress or employee of Congress owes a duty arising from a relationship of trust and confidence.” It also states that the covered government workers are “not exempt from the insider trading prohibitions arising under the securities laws.”
So, with the disclosure of the trading activities by certain jurists and Fed presidents, the question that now arises is whether they were in possession of nonpublic information and used it to trade stocks.
For argument, I think a judge is clearly in possession of nonpublic information before they rule in favor of one party in a litigation, before the decision is rendered in writing or orally in court.
For a Fed president, it gets even more problematic. Don’t they always possess nonpublic information, meaning any stock trades to avoid losses or to gain profits from upcoming Fed policies can be arguably in violation of this law?
To date, I am unaware of even one criminal prosecution under the STOCK Act. The closest thing to using the act was the 2018 indictment of former Congressperson Chris Collins.
But the insider trading charge related to his purported learning of information while sitting on a public company’s board, not from his congressional duties. It will be interesting to see if the Securities and Exchange Commission or criminal investigations are made known in the coming days or months arising from the reports by the WSJ.
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