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.
The stock market is in trouble. The Dow Jones Industrial Average printed its worst one-day point drop in history after plunging 1,191 points Thursday. The S&P 500 is also making history. Over the last six days, the index tumbled by 10% from the all-time high at a pace never seen before.
Numerous Senators In The Trump Adminstration Dumped Millions In Stock Weeks Before Coronavirus Pandemic Hit US!!!
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.
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U.S. Corporate Insiders Selling Shares At Fastest Pace Since 2008
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.”
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.
Fed Trading Saga Seen Modestly Hurting Powell’s Second-Term Odds
* Survey Finds Powell Still Economists’ Favorite To Remain Chair
* Most In Survey Say Powell Has Been Forceful In Taking Action
Jerome Powell is widely expected to be renominated to a second term as Federal Reserve chair, but his chances have been modestly dented by the revelations of stock trading by some senior Fed officials in 2020, according to economists surveyed by Bloomberg News.
As President Joe Biden considers openings for the Fed chair’s job and other slots, 79% of the economists expect Biden to keep Powell in the job — down from 89% in the September survey. Fed Governor Lael Brainard, a Democrat, is seen as the most likely alternative, with 13% of economists predicting she will be chosen as chair. Powell’s current term expires in February.
In October, the Fed announced it will ban top officials from buying individual stocks and bonds as well as limit active trading, moves which Powell said would assure Americans of the “single-minded focus on the public mission” of the central bank.
Dallas Fed President Robert Kaplan and Boston’s Eric Rosengren both stepped down following revelations of unusual trading during 2020. Rosengren cited a chronic illness in announcing his early retirement.
The economists, who were surveyed from Oct. 22-27, were mostly supportive of Powell’s actions to tighten up Fed ethics rules, with 70% agreeing with the statement that they were forceful and appropriate, while 28% viewed the response as too tentative or slow.
Even so, Powell’s odds of reappointment could have been diminished at least a little bit by the trading disclosures and subsequent criticism. In the survey, 69% said Powell’s odds of reappointment have been curbed modestly and 7% said significantly, while 24% said there has been no change.
“Powell may become a pawn in the struggle between progressive and moderate Democrats,” said Philip Marey, senior U.S. strategist at Rabobank in Utrecht. “Biden could offer the replacement of Powell by Brainard to appease the progressives in exchange for concessions to the moderates.”
Besides Brainard, Fed Bank of Atlanta President Raphael Bostic and former Fed Vice Chairman Roger Ferguson were named by economists as the most likely pick as the new chair. Either would be the first Black to serve as Fed chair.
Biden has started to meet with top White House and Treasury aides to review candidates, according to two people familiar with the process, even as the White House has been largely consumed with negotiations over the size and contents of the president’s multi-trillion-dollar economic agenda.
White House Team Weighing Fed Sees No Issue With Powell Trades
* Some Brainard Advocates Have Questioned A Stock Fund Sale
* Biden Decision Expected Soon On Powell Or Brainard For Chair
Top White House officials don’t believe that Federal Reserve Chair Jerome Powell’s sale of shares in a stock index fund last year disqualifies him from being appointed to a second term, according to people familiar with the matter.
Several key officials working on the nomination saw no reason for concern over Powell’s trading, according to people familiar with the deliberations. No one has brought up Powell’s trades in the meetings among a tight circle of advisers on the Fed chair search, two of the people said.
President Joe Biden has said he will decide “fairly quickly” on his Fed chair pick, and met last week with both Powell and Fed Governor Lael Brainard at the White House, people familiar with the search said. Powell’s term as chair expires in February.
Indications of the White House thinking on the trading situation don’t mean Powell will get the nomination. But they do suggest that area of contention over the current chair has receded.
Some within the administration who support Brainard for chair are still concerned about the trades, the people said.
Powell sold a stock index fund worth between $1 million and $5 million last October. The transaction was outside the Fed’s blackout period and months after the Fed had set its pandemic monetary policy.
Treasury Secretary Janet Yellen, who over the summer told the White House of her recommendation to reappoint Powell, does not want to see the choice of Fed chair to become politicized, according to people familiar with her thinking. She also values continuity of leadership, they said.
The White House did not respond to requests for comment. Communications staff at the Treasury Department and a Fed spokesperson declined to comment.
Some progressives have drawn attention to the trades to build the case for Brainard to replace Powell. Liberal columnist Robert Kuttner at the American Prospect raised questions about the propriety of the sales in a column last month.
In addition to Powell’s trade, two regional bank presidents left the Federal Reserve this year following disclosures of extensive trading in 2020. Powell has since launched a sweeping ethics overhaul at the Fed that will restrict trading by senior Fed officials. Some Democrats in Congress have also proposed legislation to ban stock trading by Fed officials.
If Brainard is nominated for the chair, she would likely also face questions about the trading scandal, given that she chairs the committee overseeing the regional banks, a point raised recently by the top Republican on the Senate Banking Committee, Pat Toomey of Pennsylvania.
“This episode does raise questions about the operations of the Committee on Federal Reserve Bank Affairs, which is chaired by Governor Brainard and is directly responsible for overseeing the Fed regional banks and their presidents,” Toomey said in a statement praising Powell when he announced the new trading curbs.
Elizabeth Warren Pushes Powell For Information On Fed Trading Scandal
* Unclear If Enough Done To Address Issue, Prevent A Repeat
* Senator Comments In Letter To Federal Reserve Chairman
U.S. Senator Elizabeth Warren renewed her call for the Federal Reserve to release more information about the investment activity of officials during the pandemic last year and the ethics guidance given to policy makers in March as the spread of Covid-19 caused financial markets to convulse.
In a letter sent to Fed Chair Jerome Powell on Monday, Warren said that the Fed released “an excerpt of the email warning the officials to ‘avoid unnecessary trading,’” but that it has yet to “release the full email or any other ethics guidance issued at the time.”
The March 23, 2020, email excerpt — sent from the Fed board’s ethics office to all participants of Federal Open Market Committee meetings — stated that officials should “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.” FOMC participants include governors, presidents of the 12 regional Fed banks as well as a number of senior staff.
Warren’s requests follow an ethics scandal that saw two regional Fed presidents step down following disclosures about their unusual trading activity last year as the Fed unleashed unprecedented policy support to shield the economy from the pandemic.
Powell subsequently announced a ban on top officials buying individual stocks and bonds and a limit on active trading. He also asked the Fed’s internal watchdog to examine the trading activity for senior central bankers last year.
Warren remains unconvinced that the remedies are sufficient.
“Given the paucity of information you have provided to Congress and the public about trading by Fed officials and your response to these breaches of Fed ethics rules, it remains unclear if you have done enough to address this scandal and prevent the next one,” she said in the letter.
The Massachussetts Democrat has been outspoken about her opposition to Powell, criticizing his handling of the trading scandal as well as his record on financial regulation more broadly. She also opposed his reappointment as Fed chair. President Joe Biden selected him anyway for another four years at the helm.
Elon Musk, Other Leaders Sell Stock At Historic Levels As Market Soars, Tax Changes Loom
Insiders like the Waltons, Mark Zuckerberg and Google’s co-founders have sold $63.5 billion through November, up 50% from 2020.
Company founders and leaders are unloading their stock at historic levels, with some selling shares in their businesses for the first time in years, amid soaring market valuations and ahead of possible changes in U.S. and some state tax laws.
So far this year, 48 top executives have collected more than $200 million each from stock sales, nearly four times the average number of insiders from 2016 through 2020, according to a Wall Street Journal analysis of data from the research firm InsiderScore.
The wave has included super sellers such as cosmetics billionaire Ronald Lauder and Google co-founders Larry Page and Sergey Brin, who have sold shares for the first time in four years or more as the economic recovery fueled strong growth in sales and profit.
Other high-profile insiders—including the Walton family, heirs to the Walmart Inc. WMT +0.42% fortune, and Mark Zuckerberg, chief executive of Facebook parent Meta Platforms Inc. FB +0.09% —have accelerated sales and are on track to break recent records for the number of shares they have sold.
Across the S&P 500, insiders have sold a record $63.5 billion in shares through November, a 50% increase from all of 2020, driven both by stock-market gains and an increase in sales by some big holders. The technology sector has led with $41 billion in sales across the entire market, up by more than a third, with a smaller amount but an even bigger increase in financial services.
“What you’re seeing is unprecedented” in recent years, said Daniel Taylor, an accounting professor at the University of Pennsylvania’s Wharton School who studies trading by executives and directors. He said 2021 marks the most sales he can recall by insiders in a decade, resembling waves of sales during the twilight of the early 2000s dot-com boom.
Insiders have a long history of selling at peaks and buying in troughs, Mr. Taylor said.
Investors sometimes worry that large sales by insiders mean they don’t expect significant further share-price increases, and big, unexpected sales can weigh on share prices. Companies often require top executives to hold stakes equivalent to several times their annual salary, but many high-profile executives easily exceed those thresholds even after selling.
Executives aren’t required to say why they sold, and few do. The heaviest selling came as lawmakers in Washington hashed out potential tax increases as part of the Democrats’ Build Back Better legislative package, at times considering raising the long-term capital-gains tax rate. In November, insiders unloaded a collective $15.59 billion.
The legislation, pending in the Senate, imposes a 5% tax on adjusted gross income above $10 million beginning in 2022, and another 3% on income over $25 million, including capital gains from stock sales. Congressional revenue estimates assume taxpayers will accelerate capital gains in 2021.
Wealthy taxpayers could save up to $8 million in taxes on every $100 million of shares sold ahead of the effective date, Mr. Taylor said. Such potential tax savings have been “a powerful incentive to sell this year,” he said.
Tesla Inc. CEO Elon Musk, considered the world’s richest person, with a net worth of about $270 billion, ridiculed a proposed tax on billionaires’ unrealized capital gains, saying on Twitter that eventually the government runs “out of other people’s money and then they come for you.”
He has moved to sell more than $10 billion in Tesla stock over about a month—including roughly $4 billion to cover tax withholding on option exercises—in his first sale of company shares since 2010, other than sales designated as made solely to satisfy tax-withholding obligations.
Microsoft Corp. CEO Satya Nadella last month sold half his total stake, for about $374 million before taxes. Analysts said the move could be related to Washington state instituting a 7% tax for long-term capital gains next year. A Microsoft spokesman said at the time that the sale was for “personal financial planning and diversification reasons.”
Another spike in insider-stock sales occurred in May when company leaders sold off $13.12 billion in shares, following strong corporate earnings reports.
The Journal examined data on company leaders’ stock transactions through Dec. 3, drawn from regulatory filings by InsiderScore. Sales marked as made solely to satisfy tax withholding requirements were excluded. Aggregate figures, through Nov. 30, exclude sales by major shareholders who aren’t also executives or directors.
About a dozen high-profile founders and CEOs sold millions of dollars in company shares this year after selling none in all of 2020, in several cases selling for the first time in five or 10 years.
Messrs. Page and Brin last sold stock in Google parent Alphabet Inc. GOOG -1.68% at about $800 a share in 2017, according to InsiderScore. When they returned to the market in May, shares had risen to $2,200. This year, they have each sold nearly 600,000 shares for about $1.5 billion before taxes. Each still owns about 6% of Alphabet, according to FactSet.
The duo’s sales came as the company reported record revenues and profits more than doubled from a year earlier, and seven months after the Justice Department and state attorneys general filed a civil antitrust lawsuit against Google. The company’s share price reached an all-time high of $3,019.33 on Nov. 19, and has since pulled back to about $2,950.
An Alphabet spokesman declined to comment. Messrs. Brin and Page didn’t respond to a request for comment.
Mr. Lauder, the son of Estée Lauder Cos.’ founders, has shed just over two million shares this year, for more than $600 million before taxes in his first sales since 2016.
Dell Technologies Inc.’s Michael Dell and the Carlyle Group’s David Rubenstein also came off the sidelines over the past year. Mr. Dell sold five million shares for nearly $253 million before taxes, his first since taking Dell public again in 2018.
Mr. Rubenstein sold 11 million shares this year for $495 million before taxes, after making his first-ever sale in November 2020. His sales have followed him stepping aside as co-CEO and transitioning into a role as co-chairman.
A spokesman for Mr. Lauder declined to comment. Spokespeople for Mr. Dell didn’t respond to requests for comment.
Other insiders continued selling but at a faster clip this year. The Walton family quadrupled the number of shares its members sold, receiving $6.5 billion before taxes so far in 2021, from $1.5 billion in 2020. The sales came in a year when Walmart’s share price flirted with all-time highs, and the company posted higher sales in three quarters.
Mr. Zuckerberg increased the number of Meta shares he sold nearly sevenfold from a year ago, collecting nearly $4.5 billion before taxes.
His selling came as the company reported record sales and earnings, despite challenges presented by iPhone privacy changes and congressional hearings over harms from its platforms following the Journal’s Facebook Files series.
Walmart and Meta spokespeople said the sales are generally governed by preset trading plans. They said the Walton family’s proceeds help fund nonprofit initiatives, and Mr. Zuckerberg’s fund the Chan Zuckerberg Initiative LLC, his family’s for-profit philanthropic company.
Executives often sell shares under advance trading arrangements, dubbed 10b5-1 plans, that trigger sales on a fixed schedule or at price thresholds to avoid running afoul of insider-trading rules. The plans were used in almost two-thirds of stock sales last year—up from 30% in 2004—but some investors and regulators worry they can be abused.
The Securities and Exchange Commission on Wednesday is scheduled to vote on a proposal that would change the rules governing the trading plans.
Finance executive Charles Schwab sold the most shares since 2015 in the company he founded, Charles Schwab Corp.: 5.3 million shares for $361 million.
“People are clearly being opportunistic,” said Ben Silverman, InsiderScore’s director of research. “These guys have been telling you all year that the market is overheated.”
Soaring stock prices mean some executives raised the same amount of money, or more, selling fewer shares. Snap Inc. CEO Evan Spiegel set a price target to sell between $60 and $80, receiving a total of $710 million before taxes on 10 million shares—more than doubling his 2020 proceeds despite selling three million fewer shares.
Amazon.com Inc. founder Jeff Bezos typically sells about $10 billion in stock annually to help fund his space venture, Blue Origin LLC. This year, he has sold 25% fewer shares while collecting roughly the same amount of money before taxes because the company’s share price has doubled over the past two years.
AMC’s Meme-Courting CEO Sells $9.65 Million More of Shares
Adam Aron, chief executive officer of AMC Entertainment Holdings Inc., sold another $9.65 million in shares of the meme-driven theater stock, following sales that he had said were prudent for estate planning.
Aron, who has led the struggling movie-theater chain since 2016, sold 312,500 shares on Dec. 7 for $30.867, according to a regulatory filing Thursday after markets closed. That followed recent sales valued at more than $25 million.
AMC shares erased a 4.6% drop to trade little changed at $29.46 as of 8:21 a.m. in New York before Friday’s session. The stock has gained nearly 14-fold this year.
Separately AMC’s chief financial officer, Sean Goodman, sold all of his 18,316 shares for about $565,000, according to a filing. That doesn’t include almost 600,000 shares that are subject to continued service or targets.
Corporate executives routinely sell stock they get as compensation. But Aron has publicly wooed retail investors and touted AMC’s future prospects while selling the stock and benefiting from a mammoth rally in the shares.
Aron continues to own 95,997 shares, according to the filing, excluding about 2.9 million issuable in the future and based on performance targets. The company declined to comment.
AMC executives and board members have unloaded more than $70 million in shares this year in a flurry of sales that coincided with the surge in the stock. Forced to shut down during 2020 because of Covid-19, the chain is headed toward its third straight year of losses.
A frequent Twitter user who has embraced AMC’s popularity with retail investors, Aron has defended the preplanned stock sales. He has pointed out that he still owns millions of units of stock in the company, which are mostly in the form of equity grants, as well as performance-based awards.
Mark Zuckerberg Sells Stock Every Day As Billionaires Cash Out
Mark Zuckerberg sold Meta Platforms Inc. stock almost every weekday of this year. The founders of Google began to unload shares in May, which is also when two of the three Airbnb Inc. co-founders started diversifying their stakes.
The transactions are part of a surge of selling by the very richest Americans. They unloaded $42.9 billion in stock through the start of December, more than double the $20.2 billion they sold in all of 2020, according to an analysis of transactions by U.S. billionaires on the Bloomberg Billionaires Index, a daily ranking of the world’s richest 500 people.
The super-wealthy often hold onto shares in the companies that made their fortunes, because realizing gains triggers a tax bill. But many rich Americans are deciding to unload shares now, while stock valuations are at records and before their taxes potentially rise at the start of 2022.
“A lot of our clients are selling,” said Elizabeth Sevilla, a partner at Seiler LLP, an advisory firm based in the San Francisco Bay area. Founders and venture capitalists are deciding they want to diversify concentrated positions, or “they’re looking at the market and saying, ‘We’re at the top of the market.’”
Plus, biting the tax bullet in 2021 may mean avoiding rate hikes in future years, she said.
Several of the world’s richest people have been selling core holdings after years of hibernation, including Sergey Brin and Larry Page, the reclusive co-founders of Google. So far this year, Page has sold around $1.8 billion in stock of Google parent Alphabet Inc. and Brin around $1.7 billion. It was the first time either had sold shares since 2017.
Elon Musk, the world’s richest person, has unloaded about $12.7 billion in Tesla Inc. shares this year, the first time he’s sold stock since 2016. The selling streak was unleashed after the billionaire, who has a personal fortune of $253.6 billion, asked in a Twitter poll last month whether he should divest 10% of his shares in the electric-auto maker.
“Much is made lately of unrealized gains being a means of tax avoidance,” he tweeted, promising to abide by the poll’s results.
Michael Dell, founder and chief executive officer of Dell Technologies Inc., hadn’t sold shares of his company in at least two years, or since it returned to public markets in 2018. So far this year, he’s disposed of about $500 million.
Whether avoiding taxes was their goal or not, selling in 2021 could help these billionaires save billions of dollars. Even as Musk framed his sales as tied to the outcome of a Twitter poll, some of the sale was pre-planned and displayed canny awareness of tax liabilities, both at the federal and state level.
While Democrats have dropped several ideas to hike taxes on the top 0.1% to pay for President Joe Biden’s economic agenda, the bill that passed the House of Representatives last month included a millionaire’s surtax, a 5% levy on incomes over $10 million and an additional 3% tax on those above $25 million.
The surtax, which is projected by the Joint Committee on Taxation to raise $228 billion over the next decade, applies to a broader definition of income, including capital gains, making it harder to avoid through deductions. It wouldn’t go into effect until 2022, however, giving the super-wealthy an opportunity to sell now and over the next couple weeks, saving as much as 8% on taxes.
“It’s not an exodus from the market,” Seiler’s Sevilla said. Instead, planners are sitting down with wealthy tech clients and gauging the impact of the surtax and other tax proposals, then calculating how much investments would need to rise to justify holding onto them. “If they know they cannot exceed that, the decision is easy,” Sevilla said.
The 167 Americans on the Bloomberg index are worth about $3.6 trillion, up 47% since the beginning of last year. Their wealth gains have been driven by a rapid run-up in stock valuations during that period, with the S&P 500 Index up about 45% and the tech-heavy Nasdaq Composite Index gaining 75%.
The top billionaires’ stock sales have soared faster than their wealth. In 2019, the richest Americans sold just $6.6 billion of stock, a similar amount as in previous years.
The selling really picked up in 2020, as Democratic candidates were on the campaign trail proposing to raise rates on the rich. Advisers spent much of the year warning of higher taxes as early as 2021 if Democrats took over.
Meanwhile, stock valuations were surging last year, particularly in tech stocks benefiting from trends unleashed by the pandemic.
Nvidia Corp. co-founder and CEO Jensen Huang sold shares in the chipmaker in July 2020 as it was hitting new highs, his first sales in almost three years. The stock price has nearly tripled since then, and Huang’s sales have accelerated as well. He’s sold $426 million so far this year, on top of $168 million in 2020.
Another factor driving sales is a wave of initial public offerings, which made it possible for founders of successful startups to diversify their fortunes for the first time.
Two of Airbnb Inc.’s three cofounders — Joseph Gebbia and Nathan Blecharczyk — have together sold more than $1 billion worth of stock since the vacation-rental company went public in December of last year. Another co-founder, CEO Brian Chesky, hasn’t sold any shares this year, according to filings.
Even as U.S. billionaires sell more, their stock purchases are stagnant. Americans on the Bloomberg index bought $543 million of shares on the open market through Dec. 3, an increase from last year but less than half their purchases in 2018. The analysis doesn’t take into account other ways billionaires acquire shares, such as stock grants or option awards that are part of compensation packages.
The richest Americans could have a variety of personal reasons for selling now, including funding charitable endeavors.
Jeff Bezos, the world’s second-richest person, has sold more than $9 billion in Amazon.com Inc. this year, money that he could use to deliver on recent grants and pledges to fight climate change through his Bezos Earth Fund.
Zuckerberg is liquidating more Meta stock — formerly known as Facebook — than he has in years, largely to send to his Chan-Zuckerberg Initiative. He’s sold $4.5 billion this year, nearly eight times more than he sold in 2020. Six years ago he and his wife Priscilla Chan pledged to give 99% of their wealth to charity during their lifetimes.
Jack Dorsey, the founder of Twitter Inc., has sold nearly $500 million in stock this year of another company he founded, Block Inc. Last year he announced a promise to donate a large stake in the company, formerly known as Square, to Covid-19 relief. (The billionaire has mostly not touched his Twitter shares, which comprises less than 10% of his $10.4 billion net worth, according to the Bloomberg index.)
SEC Floats Rules To Shore Up Money Markets, Curb Insider Trading
Wall Street regulators moved forward on four plans, advancing far-reaching agenda under Chairman Gary Gensler.
The Securities and Exchange Commission issued a raft of proposals Wednesday including measures aimed at shoring up money-market funds and curbing executives’ ability to trade their own companies’ stock.
The proposals, some of which surprised Wall Street executives with their scope, indicate that Chairman Gary Gensler is moving quickly to enact a policy agenda that observers have called the SEC’s most ambitious in decades.
That stands in contrast to other financial regulators, for which President Biden has yet to fill key positions, and saw a nominee withdraw amid Senate skepticism during confirmation.
With a thin majority in Congress, Democrats are leaning on Mr. Gensler to advance progressive priorities such as fighting climate change and curbing the power of big business. The SEC’s authority to write rules for asset managers, publicly traded companies and the stock market provides powerful, if sometimes roundabout, tools for achieving such goals.
The proposals “will go a long way toward increasing corporate transparency and accountability,” Sen. Sherrod Brown (D., Ohio), chairman of the Senate Banking Committee, said, praising enhanced disclosures around stock buybacks. “The first step to workers getting their fair share is learning just how much corporate executives are spending on themselves.”
Mr. Gensler’s agenda reflects political divisions. Three of the four proposals garnered party-line votes from the SEC’s five commissioners. Republicans Hester Peirce and Elad Roisman supported only a plan to tighten rules on how and when corporate insiders can sell their companies’ stocks. The agency is independent of the Biden administration.
The other proposals “are a partisan overreach that will likely diminish investment opportunities, economic growth and capital formation,” Sen. Pat Toomey (R., Penn.), the top Republican on the Senate Banking Committee, said.
Two of the proposals put forward Wednesday seek to make the financial system more stable by reducing panicked investors’ tendency to flee money-market funds and by regulating opaque derivatives known as “swaps.” The other two rules would seek to enhance fairness and transparency in the stock market.
They would introduce new restrictions on corporate executives’ trading and heighten disclosure requirements around share buybacks by publicly traded companies.
The new rules for money-market mutual funds aim to prevent episodes that occurred during the past two recessions, in 2008 and 2020, when the Federal Reserve was forced to backstop the funds after they were hit with a wave of redemption requests that caused credit markets to seize up.
Money markets are typically used by corporate treasurers, pension funds and millions of individual investors as a safe place to park cash and earn a higher return than they could obtain in a bank account. They provide companies with liquidity for short-term loans, called “commercial paper,” to cover immediate expenses like payroll.
But money-market funds aren’t regulated like banks, which must meet minimum capital requirements and offer deposit insurance. Regulators say this makes them more susceptible to runs when markets are under severe stress, creating broader risks to the financial system.
“This is about resiliency,” Mr. Gensler said in an interview, noting that Americans have roughly $5 trillion invested in money markets. “Though there have been reforms in 2010 and 2014, we found again in 2020 some instability…with the dash for cash.”
The SEC’s proposed changes include a measure called “swing pricing” that firms including BlackRock Inc. and Federated Hermes Inc. have warned could destroy a subset of the industry that holds short-term corporate debt and caters to institutional investors.
The measure would require these funds to adopt policies for adjusting their share prices by a “swing factor” on days when they have net redemptions. The factor would be determined by transaction costs and the market impact of selling a slice of the fund’s portfolio.
The goal is to protect investors who remain in the fund from dilution by investors who redeem their shares, Mr. Gensler said.
The SEC’s timing caught money-market fund managers off guard, said John Tobin, investment chief at Dreyfus Cash Investment Strategies, which oversees $350 billion in money funds. Many didn’t expect to see the new proposed rules until next spring, he said.
The swing-pricing proposal is likely to draw universal industry opposition, said Mr. Tobin, whose business is a unit of Bank of New York Mellon Corp. He said the rule would create operational challenges and could encourage institutional investors to head for the exits before a fund executes any swing-price decision.
“It’s definitely a shot across the bow,” he said. “This is a watershed moment.”
The SEC also proposed significant restrictions on arrangements, known as 10b5-1 plans, by which corporate officers and directors schedule stock trades ahead of time to avoid running afoul of insider-trading rules. Among other changes, the agency would require executives to wait 120 days before buying or selling their employer’s stock after setting up or modifying the plans.
That proposal follows academic research suggesting the arrangements are being abused as company leaders cash in at historic levels on their companies’ shares.
“The core issue is that these insiders regularly have material information that the public doesn’t have,” Mr. Gensler said in a statement. Wednesday’s proposed changes seek to ensure their stock trading is done “in a way that’s fair to the marketplace,” he added.
Commissioners also voted 3-2 along party lines to propose increased disclosures around public companies’ stock buybacks, which are also hitting records this year.
Repurchases support stock prices by reducing the number of shares outstanding in a company, lifting the firm’s earnings per share. Like dividends, they enable companies to return cash to investors.
But critics, including many Democrats, say buybacks give executives who are partly paid in equity or options a roundabout way of boosting their own compensation, at the expense of workers’ wages or productive investments.
The SEC’s proposal would require stock-buyback disclosures to be more detailed and more frequent. Rather than disclosing monthly aggregate share repurchases once a quarter, companies would have to report buybacks on the next business day.
They would also have to indicate whether any executives bought or sold shares within 10 business days of a buyback program’s announcement.
“Companies may determine to allocate capital towards share repurchases for a number of different reasons,” Democratic SEC Commissioner Allison Lee said. “But one of those reasons should not be for the opportunistic, short-term benefit of executives.”
The SEC’s chief economist, Jessica Wachter, said during the meeting that the costs of complying with the increased disclosure requirements might discourage some companies from buying back stock. Ms. Peirce and Mr. Roisman issued strong dissents against the rule.
“Say ‘dividend,’ and nobody gets angry, but say ‘share buyback,’ and the rage boils over,” Ms. Peirce said. “Today’s proposal channels some of that rage against repurchases in a way that only a regulator can: through painfully granular, unnecessarily frequent disclosure obligations.”
Elon Musk Might Be Selling, But Other Insiders Are Buying Their Stock
* Buy-Sell Ratio At 19-Month High In Sign Of Business Confidence
* Yet Investors Urged Not To Read It As Green Light To Go All In
Elon Musk and Mark Zuckerberg have been unloading shares in their companies, but this doesn’t mean that lots of corporate insiders are following suit. In fact, the opposite is true.
More than 1,300 corporate executives and officers have snapped up shares of their own firms during the past 30 days, a rate that’s higher than any month since March 2020, according to data compiled by the Washington Service. Meanwhile, the number of sellers stayed below this year’s monthly average.
The willingness to jump in a market where share prices have doubled in 21 months can be viewed as a vote of confidence in their businesses. Insiders have proved prophetic in the past: Their buying correctly signaled the bear-market bottom in March 2020. While the extent of current purchases is far less robust, it’s evidence that the people with the clearest insights into corporate health are seeing bargains.
“That’s a surprise that there would be such a high number of insider purchases considering the markets are at lofty levels,” said Chad Morganlander, senior money manager at Washington Crossing Advisors. “It is a watermark for individual companies that their corporate insiders see a robust future.”
While share disposals from billionaires such as Tesla Inc.’s Musk and Meta Platforms Inc.’s Zuckerberg have grabbed attention, insider selling has stayed relatively subdued. Over the past month, there were fewer than 2,400 sellers, trailing the 2021 monthly average of roughly 2,500.
Compared to the previous two years, sales have been elevated, in part because Democrats have proposed to hike taxes for the rich to pay for President Joe Biden’s economic agenda.
“While high stock prices undoubtedly were one reason insiders sold, taxes may be another,” said Ed Yardeni, the president and founder of Yardeni Research Inc.
Energy Transfer LP’s founder Kelcy Warren and Aptinyx Inc. Chairman Norbert Riedel are among insiders who recently purchased their own stock.
As is generally the norm, the numbers of buyers in the past month still lagged behind sellers. And the buy-sell ratio of 0.58 — even at a 19-month high — was nowhere near the peaking reading of 2.19 during the pandemic trough. Still, it’s an improvement from earlier this year, when the ratio dipped to a record low of 0.19.
In a period when investor nerves were frayed with the Federal Reserve turning hawkish for the first time in three years, the data may help calm some anxiety. Corporate earnings have provided one key pillar support during this bull market as firms continued to beat estimates at an unprecedented clip, overcoming hurdles from commodity inflation to supply chain bottlenecks.
Insider purchases may solidify the bull case for individual stocks, though investors should be careful not to read the increase as a green light to double down on the broad market, according to Morganlander at Washington Crossing.
“At this inflection point, it should be company specific and investors should not take a broader viewpoint of the overall average based off of that type of sentiment indicator,” he said. “You still have to contend with the hurdle of a slowdown in fiscal policy in 2022, and, of course, an ever-changing shift in monetary policy across the globe that could compress multiples.”
The SEC Is Going Too Easy On Insider Trading
Investors need to know more about executives’ stock-selling plans.
At long last, the Securities and Exchange Commission has sketched out a plan to address a difficult issue in the U.S. stock market: how and when corporate insiders, who inevitably have better information than the investing public, can legally trade in the shares of their companies.
The proposal is good, as far as it goes. But it could do a lot more to assure regular investors that insiders aren’t taking advantage of them.
Under current rules, executives and directors can largely avoid charges of illegal insider trading by setting up a predetermined schedule of sales or purchases, known as a 10b5-1 plan. Yet if they know that their company is about to do a big deal or report some bad news, there are still plenty of ways they can use such plans to act on the information.
They can set one up for a single trade and act on it the next business day. They can set up multiple plans, then cancel the disadvantageous ones at any moment. It’s hard for the public to understand what’s going on, because many of the relevant details of the plans typically aren’t disclosed or are hard to find.
Now the SEC is moving to make the plans harder to game. Its proposed new rule would establish a 120-day cooling-off period before a first trade can be executed — long enough to erase any informational advantage the insider might have when a plan is created.
It would limit single-trade plans to one per year, and effectively disallow executives to have multiple plans simultaneously. All these are positive changes. But in other areas, particularly public disclosure, the SEC’s proposal falls short.
Right now, when an executive creates or terminates a 10b5-1 plan, it’s up to the company to decide whether or not to disclose the move.
For example, as far back as 2004, Cisco Systems would regularly file 8-K disclosures about such plans, including the executive’s name, the number of shares and the timeframe for the sales. But starting in 2018, the company stopped providing that level of detail, with no explanation. Absent any formal rules, the company and its lawyers could pick and choose what they wanted to reveal.
The new proposal would require companies to disclose the plans in their quarterly 10-Q financial reports, with some added information (on stock options, for example) in their annual 10-K reports. That’s not good enough.
To be truly useful to investors, the disclosure should happen as soon as the plans are created or canceled – for example, under 8-K rules that require filing within four business days, as the SEC’s own investor advisory committee recommended.
Why would the SEC go against investors’ recommendations? Most likely, to satisfy the two Republicans among the agency’s five commissioners – one of whom, Elad Roisman, publicly stated that “this wasn’t the rule I would have written.”
The proposal ultimately garnered unanimous support, a rarity in these times of political divisiveness. But even the modest disclosures it requires could yet be watered down or eliminated when corporate law firms start chiming in.
Recent history isn’t encouraging. The SEC was actually more ambitious in 2002, when it proposed that 10b5-1 plans be subject to 8-K disclosure. But various commenters, including large brokerage firms such as Charles Schwab, complained that the requirement would “confuse investors.” Others objected to the added paperwork. The idea was dropped.
As an avid reader of SEC filings, I’ve long argued that more and better disclosure benefits all investors, even if it means a bit more work for the folks that prepare these documents. The latest proposals, assuming they survive corporate lobbying, are a step in the right direction. But they still won’t provide nearly enough information in a way that matters for ordinary investors.
An Amazon Suit Encounters A Snag: A Judge With A Conflict Of Interest
Nearly two years into kickback case against ex-employees and a vendor, an Amazon stockholding by the judge’s wife threatens costly delays.
For nearly two years, U.S. District Judge Liam O’Grady has handed Amazon.com Inc. a string of court victories in a continuing suit in which it accuses two former employees of taking kickbacks from a real-estate developer and violating Amazon’s conflict-of-interest policies.
All that time, Judge O’Grady had a conflict of his own: a financial interest that under federal law barred him from hearing the case in the first place.
Throughout the case, Judge O’Grady’s wife owned Amazon stock. Judges are forbidden by a Watergate-era law to hear cases involving companies in which they or their spouses have a financial interest, however small.
After The Wall Street Journal contacted Judge O’Grady about the conflict, his wife’s investment adviser earlier this month sold the Amazon shares, valued at more than $20,000.
Now the question is whether he will continue overseeing the high-profile litigation.
“I should have disqualified myself,” Judge O’Grady said in a Dec. 1 email. He said he would remove himself from the case if asked to. After learning of the conflict, the defendants—the two ex-Amazon employees and a Colorado real-estate developer—asked the judge to step aside in a Dec. 21 court filing, on which he hasn’t yet ruled. A hearing is scheduled for Jan. 6.
Judge O’Grady is by all accounts a skilled and accomplished lawyer who has sat on the federal bench since 2007, handling major espionage, drug and government-leak cases, as well as complex patent litigation. Yet by his own admission he misunderstood how federal law applied to his situation. He said he mistakenly believed his wife’s account was a mutual fund, which doesn’t require judges to disqualify themselves.
A recusal by Judge O’Grady from the Amazon case would create duplication of work and compounded costs as a new judge gets up to speed. The case already has featured about a half-dozen hearings and has nearly 500 docket entries with more than 4,000 pages of court filings.
Defendants’ legal fees so far have totaled between $1.5 million and $2 million, according to people familiar with the case. Amazon’s are likely higher. The company is represented by Gibson, Dunn & Crutcher LLP, a global firm that charges more than $1,000 an hour for the services of some of its lawyers.
Corporate litigation in federal courts can be staggeringly expensive because it tends to be complex, said William G. Ross, a law professor at Samford University in Alabama who has written books on attorney billing. “Even a small amount of duplication of work by counsel for both plaintiffs and defendants as the result of a judge’s tardy recusal therefore can impose huge financial costs on both parties,” he said.
Judge O’Grady, in disclosing the Amazon stockholding to the parties, said in a Dec. 14 notice that his recusal would “substantially affect the progress of this case.”
A Journal review found 65 additional cases Judge O’Grady has heard in the Alexandria, Va., federal courthouse while his wife was invested in plaintiffs or defendants, among them Bank of America Corp., International Business Machines Corp. and Verizon Communications Inc.
That ranks him third in the list of federal judges with the most recusal failures in the Journal’s investigation of judges who presided in cases involving companies in which they, their spouses or their minor children were invested.
The Journal in September reported finding 131 such judges, who heard 685 conflicted cases between 2010 and 2018. It has since found violations by five more judges, and some of the 131 judges have identified more suits where they should have recused themselves, pushing the case total above 950. Parties in past litigation who are notified of judicial conflicts can request to have their suits reheard.
A new judge was assigned to an asbestos case in South Carolina last week after the widow of a deceased veteran objected to the previous judge’s ownership of investments in some of the defendant companies. In two other recusal violations, the appearance of a conflict for the judges has become enmeshed with arguments on appeal in circuit courts in New York and California.
Most cases in the Journal review are long since decided, in large part because the Administrative Office of the U.S. Courts hasn’t yet released the most recent financial disclosures.
Judge O’Grady’s Amazon case is a knottier situation: Not only is it a lawsuit that is still in progress, but it is a complex one.
The extent of judicial recusal failures contrasts with statements by the Administrative Office of the U.S. Courts describing a robust training and ethics program to make sure judges know how to comply with a 1974 federal law and the Code of Conduct for U.S. Judges.
Interviews and email exchanges with more than 40 federal judges revealed wide variation in their financial literacy and grasp of their obligations—which include a duty to be aware of any holdings they have that might pose a conflict with a case they’re assigned. Some judges said they didn’t know what was on their annual financial disclosure forms, despite having signed them.
“They aren’t paying attention, and some of them probably think they are fulfilling their ethical obligations by not paying attention,” said Renee Knake Jefferson, a legal-ethics professor at the University of Houston Law Center.
The House has approved a bill, awaiting Senate action, that would increase public access to judges’ financial disclosure forms, which now are available to the public only by written request and can take months or even years to process. The bill would put them online, and soon after they are filed.
Newly appointed federal judges get conflict-screening training in orientation sessions, said Judge Jennifer Elrod, who heads the ethics committee for the federal judiciary’s policy-making body. They also can participate in training seminars sponsored by the judiciary’s education and research arm, she said.
The director of the Administrative Office of the U.S. Courts, Judge Roslynn Mauskopf, reminded federal judges in an October memo that they are required to keep informed about the financial interests of their spouses, and that they may not rely on accounts controlled by financial advisers to avoid their recusal obligations.
Judge O’Grady said he hadn’t had a chance to read the memo. The judge has about 60 criminal defendants and 200 lawsuits on his docket currently and presides over more than twice that many matters in a full year.
Judge O’Grady said he believed he received instruction on conflicts during an orientation before he joined the federal bench but couldn’t recall. “I seriously doubt any course back then included any of the more sophisticated nuances that apply to my situation,” said the judge. He said he didn’t appreciate the difference between his wife’s managed account and a mutual fund.
He said he didn’t review her account statements and had no idea she owned Amazon stock.
Judge O’Grady, 71, said his wife never personally purchased or sold a stock in the account, instead relying on her adviser. He said that his wife’s family’s accountant prepared the portion of the judge’s disclosure forms covering the account, and that he and his wife have never had a conversation about buying or selling stocks. She confirmed that account.
Before joining the federal bench, Judge O’Grady was a federal prosecutor, a lawyer specializing in patent law and a federal magistrate judge. The U.S. attorney’s office for the Eastern District of Virginia named an annual award for him, given to the prosecutor who devotes the most time to mentoring.
Helen Fahey, a former U.S. attorney, called him “an attorney of the greatest integrity, whether he was a defense attorney or prosecutor.”
The Amazon case, filed in April 2020, centers on more than $400 million in development projects in northern Virginia, where Amazon has established huge data farms. They are the lifeblood of Amazon Web Services Inc., the retailer’s cloud-computing arm.
Beginning in 2018, Amazon entered into lease agreements with Denver-based Northstar Commercial Partners for nine data centers on three sites. The developer bought land and constructed shell facilities for Amazon, which then built out the interiors.
Amazon alleged in its suit that two employees, assigned to solicit developers and obtain bids for real-estate deals, steered the lease contracts to Northstar in return for millions of dollars in kickbacks.
The suit names as defendants the two ex-employees, Casey Kirschner and Carleton Nelson ; WDC Holdings LLC, which does business as Northstar, and Northstar founder Brian Watson ; and several other corporate entities created for the Amazon deals. It alleges racketeering, fraud, conspiracy, breach of contract and unjust enrichment, among other claims.
Amazon said it fired Mr. Nelson in 2019, for reasons unrelated to the Northstar leases, and fired Mr. Kirschner last year.
The two have said their contracts allowed for outside business activity. “My only hope in defending myself against its false allegations is that the process will be fair and impartial. This doesn’t feel like either,” Mr. Nelson said. Mr. Kirschner declined to comment.
Mr. Watson of Northstar said his company’s bid went through layers of review at Amazon and won on the merits. He said he was unaware that any referral fees Northstar paid in connection with the Amazon leases were destined for Messrs. Kirschner and Nelson.
“We delivered those buildings, and to our knowledge, Amazon is still fully occupying those buildings,” he said.
Amazon said in its suit that a confidential informant formerly associated with Northstar emailed Amazon founder Jeff Bezos in December 2019, triggering an internal investigation.
Federal prosecutors in Virginia have disclosed the existence of an FBI investigation involving Messrs. Nelson and Kirschner.
Lawyers for Northstar and Mr. Nelson declined to comment on the criminal probe, as did Mr. Kirschner. The U.S. Attorney’s Office for the Eastern District of Virginia also declined to comment on the criminal investigation, now nearly two years old. No charges have been filed.
The day after Amazon filed its suit, Judge O’Grady ordered Northstar to place millions of dollars in escrow, preserving funds for Amazon to collect if it won.
The judge issued the order at Amazon’s request, before giving Northstar a chance to respond. A month later, he converted his temporary order into an injunction, after hearing from both sides. Judge O’Grady said Northstar would have to secure about $21 million to ensure that Amazon would get relief if it won the case and Northstar collapsed. This represented fees the developer got from its contracts with Amazon, the judge said.
“We have a corporation and a CEO of a corporation who is under great stress, clearly looking at a criminal proceeding, as well as his termination of leaseholds and business partners having withdrawn from the company, and that there’s great risk that Northstar’s value is going to be insolvent,” Judge O’Grady said at the injunction hearing.
In a ruling in July 2020, he said the public interest favored the injunction, writing: “Amazon has brought significant development to the greater D.C. area, and hopes to continue to invest in northern Virginia in the coming years. Trusted business partners will be necessary to secure ongoing development in the public interest.”
Mr. Watson and Northstar appealed the escrow ruling. Their lawyer told an appeals court that Judge O’Grady appeared to be favoring Amazon because of its market power. The Fourth U.S. Circuit Court of Appeals upheld the injunction this summer, saying: “We reject Northstar’s baseless charge against the integrity and impartiality of the district court.”
Northstar and Mr. Watson have yet to secure the $21 million. They can’t afford it, Mr. Watson’s lawyer, Stanley Garnett, said in an October filing.
Judge O’Grady held the developer in civil contempt later that month for failing to come up with the money. He has appointed a receiver to ensure compliance with the injunction.
In asking Judge O’Grady to step aside, defense lawyers cited his rulings in Amazon’s favor and said a reasonable observer might conclude that the judge knew about his wife’s Amazon stock but decided to hear the case anyway. “This litigation has, obviously, not gone well for the Northstar Defendants,” the lawyers wrote.
Amazon said in a Dec. 28 filing that Judge O’Grady had no reason to recuse after his wife sold the Amazon stock. “Defendants make much of their lack of success in the litigation, but the reason things have ‘not gone well for’ them in this case and related actions is that there is clear evidence of their widespread fraud and kickback scheme,” Amazon’s lawyers wrote.
A Trading Ban For U.S. Lawmakers That Makes Sense
Senator Jon Ossoff’s proposal to bar federal legislators and their family members from buying individual stocks deserves bipartisan support.
Thanks to ethics legislation that Senator Jon Ossoff is considering, Congress will have to focus more purposefully on one of Washington’s most persistent and egregious financial conflicts: stock trading.
The Georgia Democrat will seek to ban trading in individual stocks by federal legislators and family members; he is reportedly looking for a Republican co-sponsor before he introduces his bill.
Including family members goes beyond similar legislation other politicians have crafted recently; those measures focus only on legislators. Allowing, say, a spouse to trade securities whose value might be influenced by pending laws or regulations is an obvious loophole in ethics guidelines and should be closed posthaste. Insiders are often insiders, even if they aren’t officeholders.
The bleak prospects for Ossoff’s proposal and others like it indicate just how unwilling Congress has been to fully tackle this problem and plug loopholes that continue to undermine the Stock Act of 2012, which was enacted to blunt insider trading.
You can come up with many reasons to argue against tighter trading rules, and House Speaker Nancy Pelosi has offered one of the worst.
“We’re a free-market economy,” and spouses shouldn’t face trading bans, the California Democrat said in a press conference last month. “They should be able to participate in that.”
Pelosi’s husband, Paul, a wealthy real estate investor, certainly does participate. Last June, he earned millions of dollars exercising options on Alphabet Inc. shares, trades the speaker disclosed in July; she said she had no prior knowledge of the investment, and there were no allegations of wrongdoing.
Within days of the speaker’s December press conference opposing trading bans, she filed a disclosure form indicating that the Pelosis had bought options on shares of Alphabet, Micron Technology Inc., Roblox Corp., Salesforce.com Inc., Walt Disney Co. and a partnership investing in a collection of Marriot International Inc. hotels.
Come on. Even if there’s no wrongdoing here, the speaker has wide-ranging legislative powers and all of this, at a minimum, represents a financial conflict.
The problem is also robustly bipartisan.
Last August, Senator Rand Paul of Kentucky, a Republican, disclosed that his wife bought stock in Gilead Sciences Inc., the maker of a drug billed as a possible Covid-19 treatment, on Feb. 26, 2020 — just before the World Health Organization classified the outbreak as a pandemic.
Paul sits on a Senate health committee that the Trump administration privately briefed in January 2020 about the coronavirus. Paul disclosed the Gilead purchase about 16 months after a 45-day reporting deadline required by the Stock Act had lapsed.
The Stock Act has certainly curtailed many abuses as well as some of the financial windfalls federal legislators once enjoyed. Studies indicate that outsized gains from politicians’ stock holdings decreased after that bill was enacted. But there’s still much to be done.
A recent Business Insider examination of about 9,000 financial disclosure forms filed by every sitting federal lawmaker and their senior staff members found that only four members of the House and six from the Senate were trading using qualified blind trusts, which distance politicians from investment decisions.
The analysis also found that dozens of federal legislators were violating conflict-of-interest provisions of the Stock Act, while others had indulged in activities that created “clashes between their personal finances and public duties.”
Business Insider highlighted Representative Kevin Hern, an Oklahoma Republican, as a member of a group of lawmakers from both sides of the aisle who are especially exposed to ethical problems. I wrote about Hern’s financial conflicts in 2020 after learning that the legislator helped ensure that Covid-19 relief money funded by taxpayers was steered to franchise owners like his family. He doesn’t appear to be worried that any of this is problematic.
Congress has company, too. The Federal Reserve has had to show the door recently to officials who played too loosely with their investments. The Wall Street Journal has produced a series of startling reports on financial conflicts tied to securities trading within the federal judiciary.
And the Supreme Court remains oddly removed from stricter ethical guidelines and transparency, even though all of the justices either trade stocks, cash in on problematic book deals or accept pricey travel packages and expensive gifts. Chief Justice John Roberts, while acknowledging that even the appearance of financial conflicts is detrimental, has said he doesn’t consider it a widespread problem on the court or in the broader judiciary and doesn’t necessitate outside oversight.
However oversight continues to take shape in Congress, let’s hope that Ossoff’s bill gets further traction and bipartisan support. He is one of the 10 members of Congress whom Business Insider cited for maintaining a proper blind trust for his investments, and the website rated him a “solid” for his transparency and ethical vigilance. Many others in Congress should follow his example.
McCarthy Eyes Ban On Lawmakers Trading Individual Stocks
House Republican Leader Kevin McCarthy is considering banning lawmakers from trading individual stocks if his party wins control of the chamber in the November midterms and he becomes speaker, a person familiar with the matter said.
The plan could be put into effect in the package of House rules voted on at the beginning of the next Congress.
Government officials’ personal financial dealings are receiving fresh scrutiny following Federal Reserve Vice Chair Richard Clarida’s announcement Monday that he will resign before his term expires amid revelations about his own stock trading on the eve of a major central bank announcement.
McCarthy’s plans — first reported by Punchbowl News — put him at odds with Speaker Nancy Pelosi who has said she doesn’t support banning lawmakers from trading individual stocks “because this is a free market and people – we are a free market economy.”
“They should be able to participate in that,” she told reporters Dec. 15.
Republicans have sought to highlight stock trades made by Pelosi’s husband, Paul Pelosi, even though Pelosi’s husband acted legally and within the bounds of the 2012 Stop Trading on Congressional Knowledge, or Stock, Act.
Federal Judge Steps Aside From High-Profile Amazon Case, Citing Financial Conflict
The WSJ notified judge of his family’s Amazon stockholding; a new judge has been assigned.
A federal judge removed himself from a nearly two-year-old Amazon.com Inc. case, citing a financial conflict, after a Wall Street Journal report about his family’s Amazon stockholdings.
U.S. District Judge Liam O’Grady had ruled in Amazon’s favor during the 20 months he oversaw the civil case, in which the online retailer accuses two former employees of taking kickbacks from a real-estate developer and violating Amazon’s conflict-of-interest policies.
In December, Judge O’Grady notified parties in the case in a Virginia federal court that his wife had owned about $22,000 in Amazon stock. Following the Journal’s questions about the Amazon holdings, his wife’s investment adviser sold the stock on Dec. 3. Judge O’Grady’s conflict in the case was the subject of a Dec. 30 Journal article.
In an order Monday, Judge O’Grady said he was reluctant to step aside because his wife no longer owned the stock and the defendants in the case who had asked him to recuse offered no evidence that he was biased in Amazon’s favor. Judge O’Grady previously told the Journal he didn’t know his wife owned Amazon shares.
“However, perception of the fair administration of justice—both by the public and by the parties in the case—is of the highest importance to the Court,” Judge O’Grady wrote.
The recusal by Judge O’Grady, who has been on the bench since 2007, means a new judge will take over a busy case with nearly 500 docket entries and more than 4,000 pages of legal filings, likely creating costly delays for the litigants.
The case was reassigned on Monday to Judge Michael Nachmanoff, who took his seat on the U.S. District Court for the Eastern District of Virginia late last year.
The Amazon suit is one of 66 cases since 2010 that Judge O’Grady has heard in the Alexandria, Va., federal courthouse while his wife was invested in plaintiffs or defendants, a Journal review found. Judge O’Grady said in an email that he was reviewing his case lists and disclosure forms and would notify parties of conflicts.
His participation in those cases violated a 1974 federal law that requires judges to disqualify themselves from cases involving parties in which they, their spouses or their minor children have a financial interest, such as individual stocks. Investments in mutual or index funds are exempted.
At a Jan. 6 hearing in response to the defendants’ request for his recusal, Judge O’Grady said that he had mistakenly believed his wife’s account was a mutual fund and had “no familiarity with it.” A Georgia-based investment adviser handles all the trades for his wife, he said.
In the hearing, Judge O’Grady bemoaned an ethics regime in which “my docket is entirely dependent on some Atlanta broker’s decision on what stock to buy and sell at any given time when I get no notice about it until the end of the year.” He called it a “trap” for district judges.
Federal law mandates that judges make a reasonable effort to inform themselves about their spouses’ financial interests. They are required by the federal judiciary to maintain recusal lists of companies in which they or their families are invested and update it regularly.
“Up-to-date recusal lists are the most effective tool for conflict screening,” Judge Roslynn Mauskopf, director of the Administrative Office of the U.S. Courts, said in an October memorandum sent to all judges.
Judge O’Grady, 71 years old, is among 136 judges for whom the Journal has identified stock conflicts as part of a yearlong investigation. The investigation and further reviews by judges who were contacted by the Journal have identified more than 950 cases since 2010 with recusal violations.
The Amazon case, filed in April 2020, centers on more than $400 million in development projects in northern Virginia, where Amazon has established huge data farms. They are the lifeblood of Amazon Web Services Inc., the retailer’s cloud-computing arm.
The racketeering lawsuit alleges that two former employees steered contracts to a developer, Northstar Commercial Partners, in return for millions of dollars of kickbacks. The former employees and developer have denied the allegations.
At last week’s hearing, Judge O’Grady said that the “idea that I would steer this case in Amazon’s favor because I felt that my wife’s $22,000 investment in Amazon’s stock would be at risk if I didn’t is literally—is almost insane.” He noted that he had ruled against Amazon in a counterfeiting case in May.
A spokesman for Amazon, which opposed the request for Judge O’Grady’s recusal, didn’t respond to a request for comment.
“We look forward to resolving this case on the merits,” said Stanley Garnett, a lawyer for Northstar founder Brian Watson. The former employees declined to comment.
Congress’s Big Tech Stock Stakes Make Regulation Awkward
A proposed antitrust bill has cast a spotlight on the immense portfolios of dozens of lawmakers.
At a December press conference, House Speaker Nancy Pelosi was asked her opinion of proposed restrictions on stock trading by members of Congress. Her response was quick and clear: She hated the idea. “We are a free-market economy,” Pelosi, whose family’s shareholdings exceed $100 million, shot back. “They should be able to participate in that.”
Growing numbers of legislators from both sides of the aisle disagree. Following a series of recent abuses, at least five bills making their way through Congress would forbid lawmakers from owning individual stocks or force them to move their assets into a blind trust.
One would make violators turn over any profits they earn to the U.S. Treasury Department. Another would extend the ban to family members. A third would also encompass top staffers.
There’s plenty of politicking going on as both sides stake out populist positions ahead of the November elections. A Jan. 19 Morning Consult/Politico poll found that 63% of voters—including majorities from both parties—support a ban on congressional stock trading. “It’s hard to be against it, because it’s easy for people to see the conflict of interest and how it can be abused,” says Jeff Hauser, director of watchdog group Revolving Door Project.
Yet congressional trading persists—and has long failed to attract widespread notice—in part because it’s tough to police. Lawmakers’ financial disclosures are notoriously hard to decipher, sometimes handwritten, and often late or incomplete, and they require members to report only a value range of their holdings rather than a specific dollar figure.
And knowing how legislation will affect specific companies can be tricky, making it tough to sort out who stands to gain or lose.
That’s what makes a bipartisan antitrust bill moving through the Senate so interesting: It’s a rare case where the stakes of the legislation and the conflicts of interest are unusually clear. The American Innovation and Choice Online Act, introduced by Senators Amy Klobuchar (D-Minn.) and Chuck Grassley (R-Iowa), is aimed at curbing the power of four tech giants: Amazon, Apple, Google’s parent Alphabet, and Meta Platforms (what Facebook now calls itself).
It would prohibit those companies from “favoring their own products or services, disadvantaging rivals, or discriminating among businesses that use their platforms in a manner that would materially harm competition.” In other words, the measure seeks to end the gatekeeping practices that smaller companies and antimonopoly activists say the giants of tech use to keep rivals off their turf.
Last summer the House passed a version of the bill. With lawmakers across the political spectrum in favor of reining in Big Tech—albeit for different reasons—the measure has a strong enough chance of passage that Apple Inc. Chief Executive Officer Tim Cook and Alphabet Inc. CEO Sundar Pichai both felt compelled to spend the past few weeks lobbying senators to vote against it.
The fight over the measure highlights the potential conflicts of interest in lawmakers’ shareholdings. A Bloomberg Businessweek examination of financial filings found that at least 18 senators and 77 House members report owning shares of one or more of the companies, and the law could have a significant effect on the value of their portfolios. Pelosi disclosed that her husband has as much as $25.5 million in Apple stock alone.
Republican Representative Mike McCaul of Texas reported that his family holds shares of all four tech giants, with a collective value topping $8 million. Last year members of Congress filed more than 4,000 trading disclosures involving more than $315 million of stock and bond transactions, according to Tim Carambat, a researcher who maintains databases of lawmakers’ financial trades.
The tech giants claim the bill would cripple U.S. innovation and lead to all sorts of consumer frustrations. Apple says iPhone owners could be put at risk by unvetted apps downloaded outside its App Store, while Google warns that it may no longer be able to give accurate directions on Google Maps and might have to furnish “low quality” search results.
But many smaller tech outfits have argued aggressively on behalf of the proposed limitations, and on Jan. 19 several of them briefed White House officials in support of the bill. “The narrowly tailored legislation would go a long way in preventing the most egregious self-dealing by companies like Google,” Yelp Inc. CEO Jeremy Stoppelman wrote in a blog post.
On Jan. 20 the Senate Judiciary Committee approved the antitrust legislation on a bipartisan 16-6 vote. (Only two committee members, Democrats Jon Ossoff of Georgia and Sheldon Whitehouse of Rhode Island, own shares of the tech giants; both voted to advance the measure.)
Amazon.com Inc. slammed it as an “ambiguously worded bill with significant unintended consequences.” Despite the new momentum, its fate remains up in the air. There’s no guarantee Majority Leader Chuck Schumer will bring the bill to the floor, many lawmakers in both parties remain adamantly opposed, and the four companies are aggressively lobbying against it.
Supporters plan to ratchet up the pressure by spotlighting lawmakers’ stakes in the tech titans. “For senators who own stock in the companies that are the targets of this bill, voting against it will absolutely put their motivations into question, as it should,” says Sarah Miller, executive director of the American Economic Liberties Project, which advocates stronger antitrust laws.
With growing public anger about congressional trading, that’s a message that could soon come from the left and the right.
On Jan. 19 former President Donald Trump attacked the speaker for her family’s massive shareholdings and the conflict of interest that poses—without mentioning the cronyism that riddled his own presidency, from lobbyists and dignitaries running up big bills at his Washington hotel to charging the government for events at his Florida beach resort.
“She should not be allowed to do that with the stocks,” Trump said while promoting a new photo book. “It’s not fair to the rest of this country.” Speaking to reporters a day later, Pelosi reversed herself and signaled that she might be open to a ban on stock trading, after all. “If members want to do that,” she said, “I’m OK with that.”
Stock-Trading Ban For Members of Congress Gains Traction
Pelosi says she expects consensus to emerge pretty soon on legislation.
House Speaker Nancy Pelosi said she expected Democrats to reach consensus on restricting stock trading by members of Congress and called for new rules for federal judges, as proposals competed for bipartisan support.
“It’s complicated, but members will figure it out,” she said. “I assume they’ll have it pretty soon,” the California Democrat said, referring to the House Administration Committee tasked with reviewing the proposals. She also wanted any legislation to also require financial disclosures from the judiciary, including Supreme Court justices. “It has to be governmentwide,” she said.
Republicans have shown interest in new rules, even though some rank-and-file GOP lawmakers have balked. House Minority Leader Kevin McCarthy (R., Calif.) is considering backing new limits on lawmaker stock ownership, according to an aide.
And Senate Minority Leader Mitch McConnell (R., Ky.), who said he holds his investments in a mutual fund and advises colleagues to do the same, said he would need to examine the issue.
The comments by Mrs. Pelosi show how quickly momentum has grown for new rules. In mid-December, she had rejected further regulations, telling reporters that “we’re a free-market economy,” in reference to lawmakers’ trades. Last month, Mrs. Pelosi shifted her position, saying “I’m OK with that,” if lawmakers wanted to tighten restrictions on trading.
The developments come amid greater scrutiny of trading by top government figures. Late last year, the Federal Reserve imposed restrictions on senior officials in a bid to address a stock-trading controversy that prompted the resignation of two reserve bank presidents. Also, a Wall Street Journal investigative series found more than 100 federal judges violated federal law by hearing lawsuits involving companies in which they reported owning stock.
That was on top of scrutiny of stock trades by lawmakers, as they attended closed-door briefings in early 2020 about the threat of the coronavirus pandemic. Investigators later closed probes without action.
The issue featured in a pair of Senate races in Georgia, where Democratic challengers criticized Republican incumbents over their trading. Sen. Jon Ossoff (D., Ga.), who won his seat in one of those races, told reporters Wednesday that “we’ve changed the conversation on this issue in Congress.”
Currently, lawmakers are barred from trading on nonpublic information derived from their position and must publicly file and disclose any financial transaction involving stocks, bonds, commodities futures and other securities within 45 days.
Lawmakers and their immediate families bought $267.4 million of assets and sold $363.5 million last year, according to Capitol Trades, with both figures down from the prior year. The value of trading in stock options roughly doubled in 2021, to $25.9 million from $12.8 million a year earlier.
Administration Committee Chairman Zoe Lofgren (D., Calif.)—an ally of Mrs. Pelosi—has begun evaluating different bills to review the merits of different approaches, an aide said. Senate Majority Leader Chuck Schumer (D., N.Y.) said he asked Democratic colleagues to unify around a single bill, calling the issue an important one for Congress to address.
One bill, led by Reps. Abigail Spanberger (D., Va.) and Chip Roy (R., Texas), would require lawmakers, their spouses and dependents to put stocks, futures and derivatives into blind trusts managed by outside advisers. Another, led by Rep. Raja Krishnamoorthi (D., Ill.), would ban lawmakers and senior staffers, but not spouses, from trading in stocks and other investments.
Other issues to be ironed out include the treatment of capital gains, if lawmakers were forced to sell investments.
“The American public thinks that members of Congress are self-dealing, and the American public deserves to trust us more,” Ms. Spanberger said. She raised concerns that the bill could be delayed by negotiations over its scope.
“Should we be talking about the judicial branch? Should we be talking about staff?” she said. “We are the ones who are elected.”
As one gauge of the growing support, Ms. Spanberger’s measure has 46 sponsors, including more than a half-dozen Republicans. Mr. Krishnamoorthi’s has 50 sponsors, including three Republicans. In the Senate, Mr. Ossoff unveiled a companion bill to require lawmakers to put stock into blind trusts. And Sens. Elizabeth Warren (D., Mass.) and Steve Daines (R., Mont.) are advancing a measure to ban trades, including by spouses of senators and House lawmakers.
One of the issues involves how to regulate spouses who trade stocks. Several lawmakers, including Mrs. Pelosi, have spouses who regularly buy and sell investments. Mrs. Pelosi is one of the wealthiest members of Congress and for 2021 disclosed dozens of trades made by her husband in shares of Apple Inc., Salesforce.com Inc. and Amazon.com Inc., among others.
Several Democratic lawmakers argued that the trading by spouses must be included in any new law.
“If you were using classified information you had access to or privileged information, and you yourself weren’t trading, but your spouse was going back and forth?” said Rep. Elissa Slotkin (D., Mich.), a sponsor of both House bills. “It just contributes to a perception that Congress can enrich themselves off these jobs.”
According to a recent poll by the Trafalgar Group and Convention of States Action, 76% of voters think members of Congress should be barred from trading stocks while in office.
Rep. Mary Gay Scanlon (D., Pa.), who sits on the House Administration Committee, said that she thinks it ultimately will be important to ensure that congressional spouses cannot directly trade in individual stocks.
“I suspect it is because otherwise it’s too easy to evade,” said Ms. Scanlon, who is currently signed on as a co-sponsor of Mr. Krishnamoorthi’s bill. “But obviously, there’s all the problems that you start running into, say, for example, if one spouse trades stocks for a living.”
‘I think there’s a free market out there, and I’ve never seen any instances myself of insider trading.’
— Rep. Doug Lamborn (R., Colo.)
The executive branch bars cabinet members and other government appointees from owning individual shares. However, they are allowed to put off paying capital-gains taxes on sales as long as they reinvest their gains into other holdings such as mutual funds and Treasury bonds.
Not all lawmakers are on board with the idea of further regulating trades.
“I think there’s a free market out there, and I’ve never seen any instances myself of insider trading,” said Rep. Doug Lamborn (R., Colo.). “I don’t think that’s very likely because we do so much out in the open.”
Rep. Markwayne Mullin (R., Okla.) drew a distinction between members who served on committees relevant to their stock trades and those who didn’t. He also said that investment portfolios amassed before coming to Congress were different from positions built up during service in the legislature.
“You have to have the ability to invest like anybody else would in retirement, so we’ve got to be careful about where we move with it.”
Federal Reserve Employees, Family Members Including Senior Staff Grossly Abuse Insider Trading Laws (Sec Chair Commissioner Gary Gensler Is M.I.A.)
Fed says employees complied with rules, some trades made by family members.
Two senior Federal Reserve staffers reported a series of financial market trades in early 2020, as the central bank swung into action with a historic stimulus effort aimed at supporting the economy through the coronavirus pandemic.
Economists John Stevens and Diana Hancock, both currently senior associate directors in the Fed’s research and statistics division, reported in official financial disclosure forms a series of trades in February and March 2020, according to financial disclosure forms reviewed by The Wall Street Journal.
The transactions, by two senior Fed economists with access to the central bank’s policy deliberations, came as Fed Chairman Jerome Powell signaled in late February a monetary policy pivot in response to worsening risks to the economy due to the pandemic.
Mr. Stevens reported 46 financial trades on Feb. 27 and Feb. 28, 2020, buying and selling individual company stocks, mutual funds and other investments, his disclosure form showed. He reported 566 trades that year, making his list of market trades the most active among the 88 senior Fed board staff whose forms were reviewed by the Journal.
On Feb. 27, Ms. Hancock reported a sale of over $1 million in the iShares Edge MSCI USA Quality Factor exchange-traded fund, which holds shares in selected companies. She reported the purchase of between $500,001 and $1 million of shares in the same fund on March 18, 2020. These were among 14 trades she reported on her 2020 disclosure form.
The disclosure forms provide only ranges for the values of the transactions, rather than the exact amounts. Ms. Hancock, also noted a purchase of between $250,001 and $500,000 in Advanced Micro Devices Inc. stock on Feb. 12 and a sale of between $100,001 and $250,000 of those shares on Feb. 28—a day when stocks marked their biggest weekly losses since 2008, and Mr. Powell released a statement signaling a possible monetary policy response.
A Federal Reserve spokesperson said the trades were all compliant with both government rules and the Fed’s internal guidelines.
Mr. Stevens said, via a Fed spokesperson, that the transactions listed on his 2020 disclosure form were almost entirely tied to a spouse’s inheritance, and he didn’t direct that trading. He also said he apprised the spouse’s financial adviser about Fed-related trading restrictions, and the holdings were “rebalanced” to comply with central bank rules.
Ms. Hancock said, via the spokesperson, that her spouse made the iShares and AMD trades, and she didn’t have any control over those transactions.
The Fed spokesperson said the presentation of the disclosure forms is determined by the U.S. Office of Government Ethics, which doesn’t offer filers a way to say whether they or a spouse was responsible for a given transaction in the final form. The Fed is required to use this system when its senior staff file disclosures.
The early months of 2020 were a time of intense volatility in financial markets, with stocks falling and bonds rallying as coronavirus case counts rose around the world, prompting U.S. health authorities to warn the public about the potential for severe disruptions to daily life.
Mr. Powell, in a statement on Feb. 28, 2020, signaled that the central bank would cut interest rates, if needed. The central bank’s policy committee reduced rates in March and launched a slew of new programs to stop a financial crisis, stretching the boundaries of U.S. central banking.
Stock trading by government officials has since come under scrutiny. Three top Fed policy makers have resigned since September after news reports of their financial trading during 2020 raised concerns about officials’ potential to trade on nonpublic information, and triggering a reputational quandary for the central bank.
“I asked the inspector general to do an investigation, and that is out of my hands,” Mr. Powell said at a January news conference. “I play no role in it. I seek to play no role in it.”
A spokesperson from the inspector general’s office declined to comment on the investigation. The 12 regional Fed banks declined to provide financial disclosure forms for senior staff.
Sen. Elizabeth Warren (D., Mass.) called on the Securities and Exchange Commission to investigate trading at the Fed, which she said was potentially illegal. Congressional Democrats, meanwhile, are pushing new rules to restrict trading by legislators and judges.
Fed senior staff don’t vote on monetary policy, but many are actively involved in compiling data, doing research, and briefing Fed leaders to help them analyze the economy, financial markets and the central banks’ policy options.
Many senior staff also attended meetings of the central bank’s rate-setting Federal Open Market Committee, where top officials make policy decisions that affect the global economy and financial markets.
Mr. Stevens attended FOMC meetings in April, September and December 2020, while Ms. Hancock attended a FOMC meeting in September 2020, according to minutes of the gatherings. Mr. Stevens became a senior associate director in April 2020 and was at that time overseeing Fed research into industrial output and overall economic conditions, the Fed spokesperson said.
Ms. Hancock currently conducts research on monetary policy and financial stability, and has held her current role since 2015, the Fed said, adding that in early 2020, Ms. Hancock had responsibility for overseeing the central bank’s work on short-term funding markets, systemic financial market risk, among other issues.
The Fed didn’t respond to a question about whether the two Fed staffers had any direct meetings with Mr. Powell ahead of the Feb. 28, 2020, announcement.
Last October, the Fed announced new restrictions on investment activities by officials and senior staff. Under the new rules, sales and purchases must be limited to broad-based investments such as mutual funds, and they will have to be preapproved by the Fed and pre-scheduled, minimizing the potential for any appearance that officials were benefiting from nonpublic information.
The new rules will require Fed officials and senior staff to provide at least 45 days’ advance notice of their transactions, which won’t be allowed during periods of “heightened market stress.”
Under the ethics code in place in 2020, Fed officials and senior staff were banned from owning bank stocks, trading around FOMC meetings, and were directed to refrain from investments that might create the impression of a conflict of interest.
The new rules have yet to be implemented, but Mr. Powell said in early January that they would soon be in effect.
Mr. Powell announced the revamp in the wake of the Journal’s report last September that then-Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren both traded stocks and other investments in 2020. The regional reserve banks said the trading was consistent with Fed rules.
Both men announced their early retirements last fall, with Mr. Rosengren citing health reasons and Mr. Kaplan saying the controversy around his trading had become a distraction for the central bank.
Richard Clarida resigned as Fed vice chairman last month, two weeks before his Fed board term was due to end, following questions raised over financial transactions he conducted at the onset of the pandemic. A Fed spokesman said Mr. Clarida’s transactions conformed to the Fed’s ethics rules governing officials’ trading.
Mr. Clarida didn’t immediately respond to a request for comment. During a virtual interview at an international finance conference in October, Mr. Clarida said, “I’ve always acquitted myself honorably and with integrity with respect to the obligations of public service.”
Several other senior Fed board staffers listed more than two dozen financial trades in 2020 on their disclosure forms.
Fed senior adviser Steven Sharpe, also of the research and statistics division, disclosed 61 trades. They included purchases of stock in Chipotle Mexican Grill Inc., Netflix Inc. and Groupon Inc., all on March 6 of that year, to cover short positions in those companies, or bets designed to benefit from falling share prices for those companies.
A Fed spokesperson said short selling was consistent with the ethics rules then in place. Mr. Sharpe declined to comment on his 2020 trading activity.
Min Wei, a senior associate director in the Fed’s monetary affairs department, listed 184 trades that year. The Fed spokesperson said Ms. Wei was on leave and didn’t have access to FOMC information from the start of May until the end of August in 2020. Ms. Wei said her transactions were done by a family member and she wasn’t involved with them.
Daniel Covitz, deputy director in the research and statistics division, listed 32 financial transactions, some of which were worth as much as $500,000, in a variety of companies and investment funds.
Mr. Covitz said, via the Fed spokesperson, his 2020 transactions were directed by a financial adviser of a family member, and his name wasn’t on those trades. The adviser conducting the trades was made aware of Fed trading restrictions, according to Mr. Covitz.
Senate Passes Bill Requiring Judges To Promptly Post Stock Trades
Measure would detect financial conflicts exposed by Wall Street Journal investigation that found more than 130 judges broke the law.
The U.S. Senate unanimously passed legislation Thursday evening to require Supreme Court justices and federal judges to promptly post online their stock trades and financial holdings.
The bill now goes to the House, where similar legislation passed by a vote of 422-4 in December.
Republican Sen. John Cornyn of Texas and Democratic Sen. Chris Coons of Delaware, the bill’s sponsors, said increased transparency would allow litigants to detect the kind of violations of a conflict-of-interest law exposed in a Wall Street Journal investigation last year.
The Journal found that more than 130 judges broke the law by hearing cases in which they reported having a financial interest. Litigants in virtually all of the cases had no idea of the judges’ conflicts.
If enacted, the law would require the judiciary to post both the stock-trade reports and annual disclosure report forms online within 90 days of being filed. Currently, annual reports aren’t due until May of the following reporting year and periodic stock-trade reports aren’t required at all.
Congress and senior administration officials for years have had to report stock trades periodically as they occur under what is known as the Stop Trading on Congressional Knowledge Act.
“Federal judges should never have been excluded from the STOCK Act’s disclosure requirements, and this oversight has resulted in conflicts of interest that erode public trust in our judiciary,” Sen. Cornyn said in a statement. “I look forward to these important transparency and disclosure provisions becoming the law of the land.”
In recent months, Congress has been drafting legislation to address concerns over stock trades and possible conflicts of interest by federal judges and central bank officials. House Speaker Nancy Pelosi this month said she expects Democrats to reach consensus on restricting stock trading by members of Congress.
Mrs. Pelosi also said she wanted any legislation to require financial disclosures from the judiciary, including Supreme Court justices. “It has to be governmentwide,” she said.
The Senate bill, the Courthouse Ethics and Transparency Act, amends the Government in Ethics Act of 1978. The reporting requirements also would apply to Supreme Court justices.
Supreme Court Chief Justice John Roberts recently pushed back on congressional intervention adding requirements and said the high court has never addressed whether Congress can impose regulations on the Supreme Court. Justices nonetheless voluntarily comply with financial-disclosure rules set out for federal judges, he said.
The bill would require justices for the first time to promptly report financial transactions and stock trades as they happen, as is required for Congress and senior administration officials. Currently, judges detail their transactions in annual reports that generally don’t become available for at least a year.
Gabe Roth, who runs the judicial-ethics reform group Fix the Court, said in an email to supporters last month that the bill had briefly stalled in the Senate because of objections from lobbyists for the Administrative Office of the Courts who said “they’d need several years to set this system up (they don’t) and that knowing judges’ financial holding would lead to forum shopping (it wouldn’t.)”
David Sellers, spokesman for the Judicial Conference of the U.S., said the judiciary has taken no position on the legislation. “Fix the Court is not always the most accurate reflection of our position,” Mr. Sellers said.
Judicial resistance led to one change in the Senate bill: Senate drafters allowed for the extension of the deadline of enactment of the online database, according to congressional aides.
While the Senate bill calls for the database to be online within 180 days of the president signing the bill into law, it also allows for an extension by notifying Congress in writing seeking additional time needed to implement the law. The earlier House bill contained no such provision. It isn’t known whether the House will accept the change.
Sens. Cornyn and Coons also have added a provision to make it clear that the law would apply to bankruptcy and magistrate judges. The leading authors of the House bill, Reps. Deborah Ross (D., N.C.), Hank Johnson (D., Ga.) and Darrell Issa (R., Calif.) believed their bill applied to bankruptcy and magistrates, though it didn’t specifically name them.
Rep. Ross in a statement praised the Senate passage as a boon to transparency, accountability and trust in the American promise of blind justice. The congresswoman, however, didn’t indicate whether the House would move to pass the Senate bill as is or make amendments and work out differences in conference.
“I will continue working with my House and Senate colleagues to send the best possible legislation to President Biden’s desk,” Rep. Ross said.
The Senate bill passed after routine business by unanimous consent, something that requires every senator to sign off on the bill in advance.
“The bipartisan Courthouse Ethics and Transparency Act will help ensure that our legal system is free from conflicts of interest so that everyone can have clarity and confidence when they enter a courtroom,” Sen. Coons said in a statement. “I’m glad to see this common-sense reform pass unanimously in the Senate, and I look forward to President Biden signing it into law.”
Fed Adopts Sweeping Trading Curbs After Ethics Scandal
* Powell Had Announced Plans For The New Rules In October
* Trading Of Three Top Officials Came Under Scrutiny Last Year
The Federal Reserve formally adopted tough, sweeping restrictions on officials’ investing and trading, aiming to prevent a repeat of the ethics scandal that engulfed the U.S. central bank last year.
The changes codify new guidelines announced in October to restrict active trading, prohibit the purchase of individual securities and boost disclosure requirements among policy makers and senior staff members. The measures follow revelations of unusual trading activity by three top officials in 2020 — as the Fed intervened aggressively to shield the economy from Covid-19 — who subsequently resigned.
The new rules “aim to support public confidence in the impartiality and integrity of the Committee’s work by guarding against even the appearance of any conflict of interest,” the Fed said in a statement Friday.
The new rules were approved unanimously by the Federal Open Market Committee this week, Fed officials said during a briefing call with reporters. Any violations will be reviewed on a case-by-case basis, according to officials on the call, who didn’t provide details on what sanctions might be applied.
Fed Chair Jerome Powell’s request for the new rules was an admission that the Fed’s old ethics standards were not sufficient. He was also responding to demands for change by lawmakers, with Senator Elizabeth Warren calling out a “culture of corruption” at the central bank after the activity came to light.
A probe of Fed trading is under way by the central bank’s inspector general.
Boston Fed President Eric Rosengren and his Dallas counterpart Robert Kaplan resigned last year after their trading records raised questions about adherence to ethical guidelines. Rosengren cited ill health in announcing his early retirement.
Disclosures by Vice Chair Richard Clarida showed he sold at least $1 million of shares in a U.S. stock fund in February 2020 before buying a similar amount of the same fund a few days later, on the eve of a major Fed announcement that signaled its readiness to buffer the economy from the coronavirus. Clarida stepped down on Jan. 14 ahead of the expiration of his term as a governor on Jan. 31.
Rosengren’s 2020 financial disclosure showed multiple transactions in real estate investment trusts, even as the Fed was intervening in that sector of the economy via massive purchases of mortgage-backed securities. Kaplan, a former senior Goldman Sachs Group Inc. executive, disclosed multiple $1 million-plus transactions that year.
The new rules essentially force senior Fed personnel to limit their investments to highly diversified investment vehicles, like mutual funds and exchange-traded funds, an official said on the briefing call Friday.
Some questions still surround the full extent of Kaplan’s trading. The Dallas Fed has denied a request by Bloomberg News to provide the dates of the trades. Asked at a January press conference for the dates, Powell said that the Fed’s Washington-based Board didn’t have that information.
The ethics scandal at the Fed has helped fuel momentum for stricter rules for members of Congress. Progressive Democrats and conservative Republicans alike have joined in proposals that run the gamut from requiring securities be held in a blind trust to complete bans on individual stock ownership.
Senate Majority Leader Chuck Schumer has endorsed the idea, though no specific proposal, and House Speaker Nancy Pelosi has said she is open to restricting trading after initially opposing limits. Numerous questions have been raised by some lawmakers, including whether the restrictions or bans would apply to spouses and dependent children.
Current law, known as the Stock Act, prohibits members of Congress from using nonpublic information gleaned in the course of their duties for personal benefit and requires disclosure of securities trades by members, spouses or dependent children of more than $1,000. Critics say the law is too easily skirted, the disclosure requirements too loosely enforced and the penalties too lenient.
President Joe Biden has nominated Fed Governor Lael Brainard to succeed Clarida as vice chair, and she awaits Senate confirmation for the post. The Boston Fed last week announced that economist Susan Collins will be the bank’s new president.
Under The The New Fed Ethics Rules:
* Officials Are Prohibited From Holding Individual Stocks, Sector Funds, Agency Securities, Bonds, Commodities, Cryptocurrencies, Foreign Currencies And Derivatives Contracts, And From Engaging In Short Sales Or Buying Securities On Margin.
* Officials Must Provide 45-Day Non-Retractable Notice For Transactions, Receive Pre-Approval For Purchases And Sales And Hold Investments For At Least One Year.
* The Time Periods Straddling Fomc Meetings During Which Transactions Are Prohibited Were Extended By One Day To Align With The Fed’s Communications Blackout Period.
* Transactions Will Be Prohibited During Periods Of Heightened Financial Market Stress.
* Regional Presidents Will Be Required To Disclose Transactions Within 30 Days, As Officials And Staff Of The Board Of Governors Already Do.
* The Rules Will Apply To All Members Of The Fomc, Regional Bank First Vice Presidents, Fomc Staff Officers, The Manager And Deputy Manager Of The Fed’s System Open Market Account, Fed Board Division Directors And Other Individuals Designated By The Chair, As Well As The Spouses And Minor Children Of All Affected Individuals.
* The Rules Take Effect May 1, With The Pre-Clearance Requirement Taking Effect July 1.
* Affected Individuals Will Have 12 Months To Dispose Of Prohibited Holdings And New Employees Will Have Six Months.
Federal Reserve Security Trading Ban Formally Adopted And Extended To Cryptos
The move follows last year’s controversial disclosures of top central bank officers actively trading markets, often ahead of key policy decisions.
Under the comprehensive new investment and trading activity rules, senior Federal Reserve officials will be prohibited from the purchase of individual stocks, bonds, agency securities, foreign currencies, commodities, sector funds and cryptocurrencies.
* The rules were initially announced in October, but cryptocurrencies were not included at that time. Friday’s formal order, however, does include crypto.
* For now, the regulations apply only to senior Fed officials, but the U.S. central bank expects them to eventually become applicable to lower ranked employees.
* Disclosures last year of active trading in a wide range of securities by a number of top Fed officials – particularly ahead of the emergency measures adopted amid the initial period of the COVID-19 pandemic in March 2020 – claimed the scalps of the Boston Fed’s Eric Rosengren and the Dallas Fed’s Robert Kaplan.
* Other rules of note in Friday’s order include the demand for 45 days non-retractable notice for purchases and sales of securities, and the need to hold investments for at least one year. Trades will also be prohibited during periods of heightened market stress (left undefined at this point).
* The new policy takes effect on May 1, and current officials will have one year to get rid of all impermissible holdings.
Fed Sets Trading Restrictions For Top Officials
The central bank says new rules, which were outlined last fall, are aimed at ‘guarding against even the appearance of any conflict of interest’.
The Federal Reserve formally adopted new ethics rules aimed at limiting financial-market trading by its top officials, senior staff and close family members.
The central bank revealed the broad contours of these new rules last fall following disclosures of active trading by some of its officials, and it expanded the scope of the restrictions in their final form.
The Fed on Friday said the new rules “aim to support public confidence in the impartiality and integrity of the [interest-rate-setting Federal Open Market] Committee’s work by guarding against even the appearance of any conflict of interest.”
The central bank revealed the broad contours of these new rules last fall following disclosures of active trading by some of its officials. The Fed on Friday said the new rules “aim to support public confidence in the impartiality and integrity of the [interest-rate-setting Federal Open Market] Committee’s work by guarding against even the appearance of any conflict of interest.”
The rules, which take effect May 1, apply to top Fed officials like Chairman Jerome Powell, the governors in Washington, senior Fed staff in Washington, regional Fed bank presidents and their senior staff, as well as the spouses and minor children of these central bank employees.
The Fed also said Mr. Powell can designate others he believes should be under the new ethics rules, and that other Fed employees may come under the ethics rules in the future.
The Fed said senior officials are banned from buying stocks and sector funds and from holding cryptocurrencies, individual bonds, agency securities, commodities, foreign currencies and derivative securities. The rules also ban selling securities short—a trade that seeks to benefit from a security’s price falling—or buying securities on margin.
The new rules also require preapproval and 45 days’ notice for financial-market transactions and for enhanced disclosure around any such activity. Also, permitted investments must be held for a year. Those affected by the rules have 12 months to get their personal financial situations in line with the new ethics regime, and new Fed employees will have six months to bring themselves into compliance.
The rules also extended the period around monetary policy meetings when trading is prohibited. That period is now aligned with the existing “blackout” period in which officials refrain from public comment on monetary policy around FOMC meetings. The rules also prevent any transactions in what the Fed called “periods of heightened financial market stress.”
The Fed said the new rules build on existing ones that prevented Fed officials and senior staff from owning bank stocks, prohibited trading around FOMC meetings and cautioned against any investment activity that creates a perception of a conflict of interest.
The Fed’s new ethics rules are “a big step forward” and these tighter regulations place the central bank “on the leading edge of their peer agencies in the U.S. and globally,” said Norman Eisen of the Brookings Institution, who served as the chief ethics lawyer in the Obama White House.
Mr. Eisen added that the expansive new restrictions take account of the evolution of the financial sector, and he said the Fed should continue to take stock of what sort of financial activities its leaders and top staff engage in. “They are keeping a sharp eye out and they should not get complacent,” he said.
The rules are being put in place after disclosure forms revealed a number of senior officials had been actively trading in financial markets in 2020. That led critics to question whether these officials had been setting monetary policy for the nation’s benefit, or their own.
The leaders of the Dallas and Boston Fed banks retired last fall amid questions about their investing activity, and this year Fed Vice Chairman Richard Clarida resigned amid similar scrutiny. Some Fed senior staff also reported trading that would be banned under the new rules.
A Fed official on Friday said any violations of the new rules would be handled the same way the central bank already deals with violations of its other rules and regulations. Factors such as whether the violation was accidental, its significance and how many times it occurred would be considered.
The official also said that by law Fed disclosure forms must be completed accurately, and those who don’t do so face penalties.
You Shouldn’t Really Be Banking On WhatsApp
Probe of HSBC bankers’ chats is the latest reminder of the porous line between what’s business and what’s personal.
Smart phones have made life so much more convenient for everyone — well, apart from compliance sheriffs and record keepers at global banks.
HSBC Holdings Plc alerted investors on Tuesday that it was being investigated in the U.S. for its bankers’ use of WhatsApp and other personal messaging services for business purposes. It put the news in a single line in its 2021 results and declined to give more detail.
This is the latest of several signs of a growing crackdown by U.S. market regulators worried that communications convenience has led to complacency. But this isn’t about finance alone. In an era of greater freedom to work wherever, monitoring messages is going to become an uncomfortable issue for employers and their bosses in many more industries.
Bankers’ use of WhatsApp and similar tools has grown alongside the rest of society, but bankers have serious regulatory responsibilities to track information and record who has had access to privatenews about companies or pending trades.
Concern about this has been bubbling for years, but the unavoidable switch to remote working for most people during the Covid pandemic over the past two years has sharpened regulators’ attention on communications in financial markets.
Deutsche Bank AG has begun tightening up its rules and monitoring around messaging apps, Bloomberg reported this month, while Credit Suisse last year asked employees for access to their personal mobile phones.
It’s not that banks or regulators think they can block people from quick and easy modern technology, it’s about ensuring that complete records are kept. Banks need to be able to show that inside information has been controlled and procedures for things like risk management were followed – for banks’ own financial safety as well as for preventing wrongdoing.
JPMorgan Chase & Co.’s failures to ensure proper records were kept, including among senior bankers, led to $200 million in fines late last year from the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC said the failures had hindered several investigations.
HSBC, which is being investigated by the CFTC, declined to say whether or not it could face any fines. But Ewen Stevenson, its chief financial officer, said the bank “obviously” has procedures and requirements governing staff use of non-official communications.
Banks aren’t alone. Politicians’ use of personal communications – private email accounts and messaging apps – has been tied up in several scandals. In the U.S., Hilary Clinton’s personal email use became a major point of contention in the 2016 Presidential election. In the U.K., there have been calls for inquiries into health ministers’ use of non-official emails to deal with people seeking government business related to pandemic-fighting equipment.
In fact, most companies of any size ought to think harder about what communications they need to archive. It’s not only tightly regulated financial activities that can be investigated. In late 2019, the Dutch competition authority said it hit an unidentified company that was being investigated for anticompetitive practices with a roughly $2 million fine because staff deleted WhatsApp messages during a dawn raid.
Most of us want to resist our work lives bleeding into our personal lives. Companies have growing reasons to keep a good barrier there too.
SEC Probes Trading By Elon Musk And Brother In Wake Of Tesla CEO’s Sales
Investigation looks partly at Kimbal Musk’s trades before brother’s pledge to sell based on Twitter poll.
The Securities and Exchange Commission is investigating whether recent stock sales by Tesla Inc. Chief Executive Elon Musk and his brother, Kimbal Musk, violated insider-trading rules, according to people familiar with the matter.
The SEC’s investigation began last year after Kimbal Musk sold shares of Tesla valued at $108 million, one day before the Tesla chief polled Twitter users asking whether he should unload 10% of his stake in the electric-car maker and pledging to abide by the vote’s results.
Elon Musk had framed the potential sale as a way to cover any taxes he would need to pay if lawmakers imposed new taxes on unrealized capital gains. He began selling billions of dollars worth of stock a few days after his tweet.
Kimbal Musk sold 88,500 shares one day before the Tesla CEO tweeted about the potential sales of his own.
The company’s shares fell sharply in the wake of Mr. Musk’s poll—58% of voters said he should sell—indicating the tweet was viewed as negative news.
Spokesmen for the SEC and Tesla didn’t respond to a request to comment.
Tesla has recently accused the SEC of harassing the company and its chief executive by repeatedly launching new enforcement investigations.
The friction dates to a 2018 lawsuit in which regulators accused Mr. Musk of misleading investors with a tweet that said he could take the company private and had the funding to do so.
One question for regulators, according to securities lawyers, would be whether Mr. Musk told his brother about his upcoming tweet or about the timing of his sales before Kimbal Musk traded on Nov. 5—or if Kimbal Musk otherwise learned of the poll and then traded. Kimbal Musk serves on Tesla’s board of directors.
Kimbal Musk’s trading could violate rules that generally prohibit employees and board members from trading on material nonpublic information.
Employees and directors of public companies generally can’t buy or sell shares when they are aware of undisclosed material information.
Insider trading law historically covers the misuse or theft of information that belongs to a public company. Mr. Musk’s plans to trade, however, arguably belonged to him, and not to Tesla and its shareholders, said Adam Pritchard, a law professor at the University of Michigan.
In that case, it is unclear whether insider trading prohibitions would apply to Mr. Musk’s actions or to his brother’s trades, Mr. Pritchard said.
“What follows is that if the SEC wanted to pursue this, it would be a hard-fought question in court,” Mr. Pritchard said. “If they decided to pursue it, Elon Musk would be willing to spend a little bit to pursue it in court.”
Mr. Musk told The Financial Times Thursday that Kimbal Musk was unaware he planned to conduct the Twitter poll, while the company’s lawyers did know about it.
Officers and directors can avoid insider-trading charges when they buy or sell under a preset trading plan.
Using such a program, known as a 10b5-1 plan, insiders can trade at predetermined intervals provided they don’t change the plan when they have material nonpublic information.
Kimbal Musk has often traded Tesla stock under a 10b5-1 plan, according to securities filings. He has made more than 40 disclosures since 2011 indicating the sales were made under a plan, according to regulatory filings.
But a disclosure filed with the SEC on Nov. 5 didn’t say that he used such a program for those trades. The filing said he donated 25,000 shares to charity in addition to selling 88,500 shares. After the sale, he still owned 511,240 shares.
Kimbal Musk’s second-biggest sale of Tesla shares was in February 2021, when he sold $25 million of stock at around $852 a share—a price the stock wouldn’t reach again until October.
The disclosure for that sale also didn’t say Kimbal Musk used a 10b5-1 plan for those trades.
Elon Musk had created his own 10b5-1 plan to sell Tesla shares on Sept. 14, according to a filing that disclosed his November trades.
The disclosure said the trades were “automatically effected” pursuant to the plan and involved stock options that had vested and were scheduled to expire this year.
The price of Tesla’s shares began declining after Mr. Musk began selling on Nov. 8 and have fallen 33% since then.
The SEC’s civil investigation, which began last year, could end without the regulator making formal allegations of wrongdoing. The SEC sometimes closes probes without taking enforcement action.
Mr. Musk, Tesla and the SEC have been feuding since 2018, when the CEO landed in trouble over a tweet that regulators said was misleading. Mr. Musk wrote that he had “funding secured” to take Tesla private at $420 a share.
After an investigation, the SEC said that Mr. Musk had never discussed such a going-private deal and that his statement, which caused Tesla’s stock to skyrocket, constituted fraud.
Mr. Musk and Tesla settled the SEC lawsuit in 2018 by each agreeing to pay $20 million, and Mr. Musk stepped down as chairman. He also agreed to preclear tweets that were deemed material to Tesla shareholders with Tesla’s lawyers.
A Manhattan federal court approved the policy, which covered a list of events, financial metrics and product announcements.
Despite the settlement, Mr. Musk has maintained a combative posture with the SEC. A lawyer for Tesla and Mr. Musk last week accused the SEC of harassing Mr. Musk with “serial investigations” of him and the company.
The claim was made in a letter that the attorney, Alex Spiro, filed with a federal judge who oversaw the 2018 settlement.
In another letter to the court, Mr. Spiro alleged the SEC had leaked information about an investigation.
On Thursday, U.S. District Judge Alison Nathan issued an order, writing that she couldn’t force the SEC to respond to the claim because the letter “does not contain specific facts or legal authority to justify this request.”
The SEC has repeatedly questioned whether Mr. Musk violated the pact by tweeting about Tesla production numbers, the company’s stock price, and other matters. SEC attorneys wrote Tesla in 2019 and 2020 asking why certain tweets weren’t cleared by company lawyers.
Tesla pushed back, saying the statements weren’t covered by the court judgment.
Mr. Musk tweeted on Wednesday: “I didn’t start the fight, but I will finish it.”
Five Questions About The Federal Reserve Trading Scandal
The central bank won’t be able to move on until these are answered.
The U.S. Federal Reserve has acted swiftly to adopt new rules regarding the investing and trading activities of senior officials, seeking to resolve what has been the most intense ethical scandal in the central bank’s 109-year history. Yet questions remain about what went wrong— questions that must be answered before the Fed can move on.
The trouble began in September 2021, when journalists unearthed financial disclosures showing that Fed officials — most egregiously Robert Kaplan, then president of the Dallas Fed — actively traded individual stocks and financial assets in 2020 while the central bank was undertaking vast market interventions to keep the U.S. and global economy afloat.
It deepened when then Vice Chair Richard Clarida later disclosed that he had bought at least $1 million of shares in a U.S. stock fund on the eve of a major Fed announcement in February 2020, after selling a similar amount just a few days earlier.
Ultimately, Kaplan, Clarida and Eric Rosengren of the Boston Fed resigned, and a number of senior staff came under scrutiny.
Fed Chair Jerome Powell announced the new rules in October, and the central bank’s policy-making committee formally adopted them earlier this month. Policy makers and senior staff members are no longer allowed to own individual stocks and bonds or transact in derivatives.
Also, they must provide 45 days’ non-retractable notice before making any transactions, must hold investments for at least a year and are completely barred from trading “during periods of heightened financial market stress,” as defined by the chair and general counsel of the Fed’s Board of Governors.
The rules are well designed, and much tougher than those governing Congress or the judiciary. But they shed no further light on what actually happened.
The public needs to know the whole truth about the Fed officials’ trading activity, who knew what when, and what, if anything, anyone tried to do about it.
To that end, Chair Powell — at the time under consideration for reappointment but not yet nominated nor guaranteed the post — requested that the Fed’s Inspector General produce a definitive account, and promised that he would “play no role” in the investigation.
To Satisfy The Public And The Fed’s Congressional Overseers, The Inspector General’s Report Should Answer The Following Questions:
* Did Investigators Receive Full Access To All Individuals, Institutions And Materials Involved? This is a real concern because, for example, the reserve banks aren’t legally required to adhere to Freedom of Information Act requests.
* What Were The Exact Dates Of The Officials’ Transactions? The existing disclosures are troublingly vague, simply saying “multiple” for most assets, meaning the officials made more than one trade during the year. The ethical rules of the time forbade active trading in the 13 days surrounding a scheduled meeting of the policy-making Federal Open Market Committee. But the Fed held dozens of emergency meetings in 2020 and took many actions outside of the preset meeting schedule. Also, the ethics officer of the Board of Governors sent a notice to officials in March, warning against making unnecessary trades.
* How Were The Transactions Approved? At least three groups of people beyond the officials in question could have been involved: the ethics officers, the general counsel, and the reserve bank boards of directors. The report should detail what these people knew, when they knew it, whether their formal approval was given and why.
* What Role Did The Fed’s Board Of Governors Play? In January 2021, months before the scandal broke but after the transactions had taken place, the board — in a process led by Governor Lael Brainard — approved all 12 reserve bank presidents for another five-year term. Were the transactions part of the review process? Was anyone on the board (other than Clarida) aware of the transactions?
* Are The New Rules Sufficient? Some have argued that they should limit officials to a single asset allocation or require that assets be placed in a qualified blind trust. I think the rules are adequate, that blind trusts are not as effective as they sound and that the marginal benefit of single asset allocation is not worth the cost. But the Inspector General should formally weigh in.
The trading scandal has cast a shadow over the Fed. If the central bank wants to maintain the high degree of political and public support it has historically enjoyed, the Inspector General’s report must offer the necessary illumination.
Stock-Trading Ban On Track For Vote This Year, Schumer Says
* Democratic Leader Hopeful Lawmakers Can Agree On Bill
* Tighter Restrictions On Trades Have Bipartisan Support
Senate Majority Leader Chuck Schumer said he’s optimistic negotiations on legislation to restrict stock trading by members of Congress will produce a bill that can be voted on later this year.
“We’ve have had several meetings with a group of senators who are pursuing this, and we hope to have legislation and vote on it this year,” Schumer said Tuesday after a closed-door meeting of all Democrats in the chamber.
Democratic Senator Jeff Merkley of Oregon is holding talks with Senators Jon Ossoff of Georgia and Mark Kelly of Arizona, sponsors of the Ban Congressional Stock Trading Act, which would require members of Congress and their families to place their stock portfolios in blind trusts.
They said last month they are still discussing whether the blind trusts would be required and what restrictions would apply to spouses and other family members of lawmakers.
The House is moving on its own track, with the Committee on House Administration looking at options for limiting trading and at enforcement of current rules, which require lawmakers to disclose trades.
Merkley, Ossoff and other proponents have expressed concern that time is running out for Congress to act before the November midterm election.
Proposals to ban lawmakers from trading individual securities have percolated in Congress for several years without getting very far. The momentum shifted earlier this year, after revelations about tardy disclosures by members and stock trading by Federal Reserve officials.
The result was a flurry of new proposals from Democrats and Republicans in the House and Senate.
Schumer endorsed the idea of a ban on stock trading in February, giving more juice to an idea that’s being pushed by progressive Democrats and conservative Republicans.
House Speaker Nancy Pelosi initially opposed a ban, but then earlier this year said she would be supportive if that is what other lawmakers want to do.
US Pries Into Over 100 Trader And Banker Phones In Texting Probe
* SEC Prompts Banks To Each Copy And Examine Dozens Of Devices
* Goldman, Morgan Stanley And Citi Have Mentioned Related Probes
The US is forcing Wall Street banks to embark on a systematic search through more than 100 personal mobile phones carried by top traders and dealmakers in the largest-ever probe into clandestine messaging on platforms such as WhatsApp.
The Securities and Exchange Commission has been sending firms lists of key positions — in some cases pointing to around 30 people including heads of certain investment banking teams or trading desks — that are subject to the review, according to people with direct knowledge of the requests. Personnel in those roles are being ordered to hand over phones so devices can be examined by lawyers.
The aim is to gauge how pervasively Wall Street professionals use unauthorized messaging platforms to chat with each other or clients as regulators decide which firms to punish, and how hard, for failing to preserve business-related messages sent via unapproved platforms.
Banks including Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc., HSBC Holdings Plc and Credit Suisse Group AG have said they’re in the midst of fielding US inquiries into messaging apps, though it’s not clear whether all are now accessing phones.
The requests to access devices are so sensitive — potentially rooting through years of office banter and even personal texts — that banks are arranging for outside attorneys to help conduct the reviews, acting as intermediaries and preserving some semblance of privacy, the people said.
The lawyers are being asked to look for business-related messages, with a definition that may offer the industry’s denizens a bit of comfort: Venting to a coworker about a terrible boss probably won’t be deemed business-related. And the boss won’t find out. Plus, regulators generally aren’t seeking message content at this stage, but rather information on who used illicit messaging channels and how often.
Still, the notion that the government and securities firms might embark on a broad, methodical look at phones has been sending shivers through the industry since word emerged about a year ago that JPMorgan Chase & Co. was examining some employees’ use of external apps.
That review culminated with ousters and $200 million in regulatory fines as JPMorgan admitted failing to monitor business-related messages on external channels. The SEC expressed particular frustration with the use of apps by supervisors who were supposed to prevent such activity, and it vowed to keep investigating.
“Unfortunately, in the past we’ve seen violations in the financial markets that were committed using unofficial communications channels,” SEC Chair Gary Gensler said at the time.
Since JPMorgan’s punishment, other banks have disclosed inquires or taken steps to rein in app use. Though Bank of America Corp. hasn’t mentioned the issue, it’s also included in the regulatory examination of the industry, according to people with knowledge of the matter.
Earlier this year, Deutsche Bank AG warned staff not to delete communications on WhatsApp. The Frankfurt-based firm hasn’t disclosed a US probe, but it has received information requests from German financial watchdog BaFin, people with knowledge of the requests said this week.
Spokespeople for the banks and the SEC declined to comment.
Under industry rules, securities firms are required to set up surveillance systems and archive written communications. Yet workers across the industry embraced messaging apps in their personal lives, and many began using them to chat with each other, potentially splicing jokes, gripes, gossip and tales of weekend adventures with messages about trades and deals.
The texting became all the more common when the pandemic forced legions to work from home, out of bosses’ sight.
The danger for Wall Streeters is that efforts to tally business-related messages could still single out people who were especially prolific on apps. Aside from the potential for big penalties, it’s unclear what might happen if the reviews uncover evidence of blatant misconduct.
JPMorgan’s settlement with the SEC in December didn’t allege that anything fraudulent or untoward was found in recovered texts. But the bank did admit, among other things, that one manager texted with more than 100 colleagues and dozens of outsiders including clients, racking up more than 2,400 messages over the course of a year.
Another set up a WhatsApp group chat and invited 19 other members of the desk to join, where they discussed markets, business and client meetings.
The bank ended up ousting a few employees and disciplining more behind the scenes, in some cases lowering bonuses, people with knowledge of the matter have said. Such moves can help demonstrate to regulators that banks are serious about clamping down.
US officials are trying to stamp out clandestine messaging while simultaneously ramping up a series of other inquiries into suspected market abuses. Pushing banks to do a better job of preserving messages could ultimately help those inquiries.
Authorities are scrutinizing, for example, whether bankers tipped off market participants to large stock transactions, known as block trades. They also opened inquiries into short sellers and signs of insider trading ahead of deals announced by blank-check companies.
Amid those complex cases, the SEC’s approach to the texting probe conserves resources by relying on banks to do much of the work, which is where the look at so many mobile phones comes into play. The agency is essentially asking banks to gather and summarize a representative sample of texting. From that the agency may infer how severe lapses were at different firms.
A number of firms are angling to pay less than what JPMorgan, the nation’s largest lender, ended up forking over to the SEC and Commodity Futures Trading Commission, people with knowledge of the initial talks said. JPMorgan had hoped to pay less, too.
As Bloomberg reported earlier this month, the bank’s negotiators were caught by surprise when they entered talks armed with a list of past precedents, pointing out that the heftiest penalty ever levied was less than $20 million. The SEC made it pay more than six times that.
Crypto Might Have An Insider Trading Problem
Anonymous wallets buy up tokens right before they are listed and sell shortly afterward.
Public data suggests that several anonymous crypto investors profited from inside knowledge of when tokens would be listed on exchanges.
Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users.
Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.
Four minutes after Binance’s announcement, the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000—netting a profit of about $140,000 and a return of roughly 40%, according to an analysis performed by Argus Inc., a firm that offers companies software to manage employee trading.
The same wallet demonstrated similar patterns of buying tokens before their listings and selling quickly after with at least three other tokens.
The crypto ecosystem is increasingly grappling with headaches that the world of traditional finance tackled decades ago. The collapse of a so-called stablecoin from its dollar peg earlier this month stemmed from crypto’s version of a bank run. How cryptocurrency exchanges prevent market-sensitive information from leaking has also become a growing topic of concern.
The focus comes as regulators are raising questions about the market’s fairness for retail users, many of whom just booked major losses on steep declines in crypto assets.
The wallet buying Gnosis was among 46 that Argus found that purchased a combined $17.3 million worth of tokens that were listed shortly after on Coinbase, COIN -1.88% Binance and FTX. The wallets’ owners can’t be determined through the public blockchain.
Profits from sales of the tokens that were visible on the blockchain totaled more than $1.7 million. The true profits from the trades is likely significantly higher, however, as several chunks of the stakes were moved from the wallets into exchanges rather than traded directly for stablecoins or other currencies, Argus said.
Argus focused only on wallets that exhibited repeated patterns of buying tokens in the run-up to a listing announcement and selling soon after. The analysis flagged trading activity from February 2021 through April of this year. The data was reviewed by The Wall Street Journal.
Coinbase, Binance and FTX each said they had compliance policies prohibiting employees from trading on privileged information.
The latter two said they reviewed the analysis and determined that the trading activity in Argus’s report didn’t violate their policies. Binance’s spokesperson also said none of the wallet addresses were linked to its employees.
Coinbase said it conducts similar analyses as part of its attempts to ensure fairness. Coinbase executives have posted a series of blogs touching on the issue of front running.
“There is always the possibility that someone inside Coinbase could, wittingly or unwittingly, leak information to outsiders engaging in illegal activity,” Coinbase Chief Executive Brian Armstrong wrote last month. The exchange, he said, investigates employees that appear linked to front running and terminates them if they are found to have aided such trades.
Paul Grewal, Coinbase’s chief legal officer, followed up with a blog post Thursday. The company has seen information about listings leak before announcements through traders detecting digital evidence of exchanges testing a token before a public announcement, he said. Coinbase has taken steps to mitigate that in addition to its efforts to prevent employee insider trading, he said.
Wallets like these have caused debate in the crypto community over whether targeted buying of specific tokens ahead of listings on exchanges points to insider trading. The crypto markets are largely unregulated.
In recent years, regulators have looked more closely at the market’s fairness for individual investors. The largest cryptocurrency bitcoin has fallen 24% in May, causing steep losses for individual investors across the market.
Insider trading laws bar investors from trading stocks or commodities on material nonpublic information, such as knowledge of a coming listing or merger offer.
Some lawyers say that existing criminal statutes and other regulations could be used to go after those trading cryptocurrencies with private information. But others in the cryptocurrency industry say a lack of case precedent specific to crypto insider trading has created uncertainty over whether and how regulators might seek to tackle it in the future.
Argus CEO Owen Rapaport said that internal compliance policies in crypto can be undercut by a lack of clear regulatory guidelines, the libertarian ethos of many who work in the space and the lack of institutionalized norms against insider trading in crypto compared with those in traditional finance.
“Firms have real challenges with making sure the code of ethics against insider trading—which almost every firm has—is actually followed rather than being an inert piece of paper,” Mr. Rapaport said.
Securities and Exchange Commission Chairman Gary Gensler said Monday that he saw similarities between the influx of individual investors into crypto markets and the stock boom of the 1920s that presaged the Great Depression, which led to the creation of the SEC and its mandate to protect investors.
“The retail public had gotten deeply into the markets in the 1920s and we saw how that came out,” Mr. Gensler said. “Don’t let somebody say ‘Well, we don’t need to protect against fraud and manipulation.’ That’s where you lose trust in markets.”
Spokespeople for the exchanges said that they have policies to ensure that their employees can’t trade off of sensitive information.
A Binance spokeswoman said that employees have a 90-day hold on any investments they make and that leaders in the company are mandated to report any trading activity on a quarterly basis.
“There is a longstanding process in place, including internal systems, that our security team follows to investigate and hold those accountable that have engaged in this type of behavior, immediate termination being minimal repercussion,” she said.
FTX CEO Sam Bankman-Fried said in an email that the company explicitly bans employees from trading on or sharing information related to coming token listings and has a policy in place to prevent that. The trading highlighted in Argus’s analysis didn’t result from any substantive violations of company policy, Mr. Bankman-Fried said.
CEO Stock Sales Raise Questions About Insider Trading
A WSJ analysis of preset trading plans by company insiders shows that executives benefit when sales happen quickly after the plans’ adoption.
Academics and the SEC say some corporate insiders might be using nonpublic information to game the system.
As Plug Power Inc. shares soared to a 15-year high in January 2021, longtime Chief Executive Andrew Marsh unloaded some of his stock in a well-timed sale.
In his biggest-ever payday from selling the company’s shares, Mr. Marsh netted $36 million by selling about 40% of his holdings under an automatic trading plan.
The plan, it turned out, had been set up only the month before. And shortly after he sold, a string of negative company announcements sent the fuel-cell maker’s shares plunging—down 60% over three months.
Prearranged trading plans, created by a regulation put in place two decades ago, have become a popular way for top executives and other company insiders to sell shares.
Under the rule, corporate insiders can be shielded from allegations of trading on inside information as long as they sell using an automated trading plan set up when they didn’t know about any impending news.
The rule allows these arranged trades to begin immediately.
A Wall Street Journal analysis of 75,000 prearranged stock sales by corporate insiders, using a comprehensive compilation of the data, shows that about a fifth of them occurred within 60 trading days of a plan’s adoption.
The timing in aggregate made the trades more profitable: On average, those trades preceded a downturn in share price more often than when insiders waited longer to trade, the analysis found.
Collectively, insiders who sold within 60 days reaped $500 million more in profits than they would have if they sold three months later, according to the analysis, which examined trades from 2016 through 2021 and adjusted returns to remove the effect of sector-wide moves in the market.
For those who waited 120 days or more after adopting a plan, roughly half sold before a downturn and half before a stock upturn, suggesting that the sellers reaped no unusual gains after more time had passed.
Academic researchers have suggested some corporate insiders might be using nonpublic information to game the preset trading plans, and the Securities and Exchange Commission has called trades that are initiated soon after plans are adopted “potentially abusive.”
The fall in Plug Power’s stock started just a week after Mr. Marsh sold. On Jan. 26, the company announced a large new stock offering that diluted existing shares and drove down the price.
Then, on Feb. 25, Plug Power reported a steeper-than-expected loss and negative revenue for the quarter ended Dec. 31. In March, Plug Power said it would have to restate financial results back to 2018.
The sharp decline in share price meant that if Mr. Marsh had waited three months to sell, his gain would have been $23 million less. Shares have continued to fall over the past year—a sale this month would have netted around $27 million less than his sale in January 2021.
Mr. Marsh didn’t respond to requests for comment. The company and Mr. Marsh, in legal responses to a pending shareholder lawsuit alleging that Mr. Marsh exploited an inflated stock price, said the chief executive’s 2021 trades were routine and not timed just before the earnings restatement.
“Plug Power remains focused on running our global business, operating and complying with all securities laws,” the company said in a statement to the Journal.
Annual Stock Grants
Stock trading by corporate insiders is common and legal unless it breaks insider-trading laws, which prohibit taking advantage of nonpublic information that can affect the stock price.
Many insiders get annual stock grants and sell regularly, in part to diversify their holdings, even though much of their wealth is tied to their company’s long-term performance.
One 2009 study by Alan Jagolinzer, then at Stanford University, found that trades made under preset plans on average outperform similar trades not conducted under such plans.
A 2021 study by researchers at Stanford, University of Pennsylvania’s Wharton School and the University of Washington found insiders who trade soon after adopting trading plans “systematically avoid losses and foreshadow considerable stock price declines.”
A CEO using a recently adopted plan to sell stock ahead of a spate of negative news “isn’t a smoking gun, it’s a smoking bazooka,” because it raises a reasonable suspicion that the CEO could have been trading on inside information, said Nejat Seyhun, a University of Michigan finance professor who has studied trading by corporate insiders under preset plans.
Federal authorities rarely have brought insider-trading cases against executives that allege abuses of preset trading plans.
Trading under the plans generally has been viewed as a “get-out-of-jail-free card,” said Bradford Lynch-Levy, an academic at the Wharton School who was a co-author of the 2021 study.
Corporate insiders often possess market-moving information, including on coming deals or the direction of earnings, and many companies restrict insiders’ trading to tight windows around quarterly results.
Insiders with preset plans can trade outside these windows. Under the plans, corporate executives typically instruct a brokerage firm to carry out a trade or trades on their behalf, using a written formula or algorithm to determine when the trades should be made.
An executive might instruct the brokerage firm to, say, sell 10,000 shares on the third trading day of every month, or sell 10,000 shares each time the stock rises by $5.
Some executives and directors are required to have the plans reviewed and approved by their companies. None of the trading instructions are required to be publicly disclosed, and plans can be modified or canceled at any time.
Trading by corporate insiders often is tracked closely by investors. Preset trading plans have become an important part of that equation:
When executives and directors disclosed stock sales in recent years, about 60% of them said those trades were carried out under preset trading plans, according to a separate Journal analysis of SEC documents.
Investors generally lack access to a key piece of information when analyzing trades made under preset plans: the date the plan was adopted.
Trades made quickly after a plan’s adoption could indicate to investors that an executive is eager to cash out for some reason, while trades carried out many months later could be less revealing.
Although some insiders voluntarily disclose the date their plans were adopted, the only place the dates are required to be disclosed is on an obscure filing called Form 144 that typically is mailed to the SEC in Washington and historically stored in a small basement room open to the public.
Some filers have emailed forms to the SEC during the pandemic, when the room has been closed. Unlike almost all other securities filings, the mailed forms aren’t viewable online.
The SEC this month said it would start to require Form 144 to be filed electronically, starting in about six months.
The Journal’s analysis of prearranged stock sales is based on a database of Form 144 filings compiled by research firm The Washington Service, a provider of data about trades by company insiders.
Companies whose executives traded not long after adopting trading plans and shortly before news that caused price downturns ranged from small ones such as Silicon Valley green-energy firm Aemetis Inc. to large medical-products maker Becton Dickinson & Co.
The Journal also found scores of examples where company insiders adopted a plan when a quarter was nearly complete and sold stock under the plan before that quarter’s results were announced.
The stock of biotech firm Nektar Therapeutics has gone on a roller-coaster ride in recent years, based largely on investor sentiment about a drug aimed at treating melanoma and other cancers.
The drug eventually failed a big melanoma trial, and shares of the San Francisco-based company this week were trading at around $4, down 96% from their high point.
Insiders profited greatly along the ride, particularly in early 2018, when Nektar’s stock soared to its closing peak of around $108—having risen 600% over 12 months—shortly after the company struck a multibillion-dollar partnership deal with oncology-drug giant Bristol-Myers Squibb Co.
In March 2018, a few weeks after the Bristol-Myers deal was announced, 10 officers or directors including CEO Howard Robin filed preset plans to sell Nektar stock. By early May they collectively had sold $48 million of shares at prices ranging from $83 to $106 apiece.
An executive and a director sold an additional $26 million in stock in total outside of preset trading plans in March 2018, filings show.
The large stock sales prompted a question from a research analyst during Nektar’s first-quarter earnings call on May 10 that year:
“Can you also just clear the air and talk about the recent management stock sales? I completely realize that share appreciation has been meaningful, but the optics aren’t great.”
Mr. Robin replied: “All the management stock sales have been done under plans that were put in place some time ago.”
The Journal’s analysis of the mailed-in Form 144 filings shows that nearly all the sales were made under recently adopted plans, averaging 36 days after adoption, or completely outside any pre-existing trading plan.
Mr. Robin in his response to the analyst on the call also said managers retained the bulk of their shares, and the sales generally were from options that were expiring or soon to expire.
“I don’t have a problem with people taking a little bit of money off the table when shares are in the neighborhood of expiring,” Mr. Robin said.
The filings show the earliest expiration date on the options was nine months away, and some had nearly two years to run.
Shortly after the stock sales by members of the company’s management ended, negative news began rolling in.
In mid-May 2018, the stock fell 8% after the release of an abstract report on early trials of the Nektar drug, in combination with a Bristol-Myers drug.
The abstract, prepared for the big annual American Society of Clinical Oncology conference, had been submitted by a group that included Nektar researchers in February—before the Nektar executives formulated their latest preset plans or sold stock under them.
Based on the abstract, investment research analysts at Evercore ISI wrote in a report that they were “increasingly skeptical” about NKTR-214 and compared it to another company’s drug that had failed.
Nektar’s stock rebounded a bit, but two weeks later, when the company presented additional results at the oncology conference, the market reaction was brutal: Shares plunged 42%, to $52.57, in one day.
The updated drug results were “underwhelming,” the Evercore ISI analysts wrote. Forbes called Nektar the conference’s “clear loser.”
Nektar said in a statement that there was “great enthusiasm and optimism” about the prospects for its drug after the Bristol-Myers deal but that later that spring the unexpected failure of a competing agent affected outside evaluation of its own drug.
On the stock trades, the company said: “Our executives regularly participate in public company compliance training regarding federal trading regulations and are educated in compliant trading practices.”
The statement didn’t address questions the Journal asked about Mr. Robin’s comments on the May 10 analyst call.
Ahead of earnings report
At Aemetis, a Cupertino, Calif., biofuels producer, three executives including the chief financial officer adopted trading plans on March 17, 2021, with two weeks left in the first quarter and amid a huge run-up in the company’s stock.
They collectively sold about $7.4 million of stock a month later.
Three weeks after that, Aemetis announced quarterly results below market expectations. The stock fell 28% over two days.
“I encouraged our management team to take advantage of the fact that our stock had gone up” from 50 cents to about $20 in a year, said Eric McAfee, the company’s CEO, in an interview.
Mr. McAfee, who didn’t sell any stock at that time, said the company has a rigorous compliance program that requires executives to establish preset plans during short trading windows and then wait at least 30 days to trade, which they followed in this case.
“Price increases are why people sell shares. It’s why any investor sells shares,” Mr. McAfee said. The stock sales were perfectly legal, he said, adding that any time people sell a stock it could fall shortly afterward.
Overall, Aemetis executives sold stock ahead of a price decline more often when they made the transaction soon after adopting a plan, compared with when they waited longer to trade, the Journal found.
In 2020 and 2021, Aemetis insiders executed 55 trades under prearranged trading plans. For the 22 of those done within two months of plan adoption, 19 preceded sharp drops in Aemetis stock, meaning insiders received a higher price by selling early.
The remaining 33 trades took place an average of 133 days after plan adoption. Almost 80% of those trades came ahead of rises in the stock price.
Aemetis shares rose in late 2021 but fell again earlier this year.
Companies are allowed to set their own guidelines on how soon executives are able to sell. Many companies require executives to wait at least 30 days after plan adoption to trade, securities lawyers say.
Some require as long as 90 days. The Journal’s analysis shows a huge spike in trades executed at and just after the 30-day threshold.
About 5% of the total trades the Journal examined took place less than 30 days from plan adoption, with just under 2%, or 1,285 trades, in less than 14 days. Some executives traded the same day they adopted a plan.
Trading on the day the plans were adopted “totally defeats the idea behind [preset] plans,” said Ben Silverman, director of research at VerityData, a service that among other things analyzes trades by company insiders.
“I’m not saying these executives had material nonpublic information,” he said, “but it’s a loophole.”
Large companies with insiders who traded the same day they adopted plans included drugmakers Abbott Laboratories and AbbVie Inc., the Journal analysis found.
Abbott in 2021 changed its policies so that insiders now need to wait at least 30 days to trade after adopting or amending a plan, a spokesman said. AbbVie didn’t respond to requests for comment.
At MarineMax Inc., a Clearwater, Fla.-based company that describes itself as the world’s largest recreational boat and yacht retailer, insiders sold stock on the same day they established the plans 21 times from 2016 through 2021, the most such rapid-fire trades of any company in the Journal analysis.
In the 60 trading days following those sales, MarineMax’s stock price fell by an average of 12%, and the price dropped during that time frame for all but four of the trades. MarineMax officials didn’t respond to requests for comment.
The SEC, citing academic research showing potential abuses, is considering a sweeping overhaul of the plans, often called 10b5-1 plans after the 2000 SEC rule that spawned them.
When the rule was adopted two decades ago, there were conflicting appeals-court rulings about what constituted illegal insider trading.
The new rule was intended to clarify how and when insiders could make trades without falling afoul of the law. It was also expected to help the SEC identify and bring insider-trading cases.
A draft proposal by the agency published on its website in December would revise the rule by requiring officers and directors to wait at least 120 days before trading under a plan and would require insiders to certify in writing that they aren’t aware of any material nonpublic information at the time they adopt such a plan.
The proposal would also require insiders to publicly disclose the date a trading plan was adopted on an SEC filing due within two business days of a trade, known as Form 4.
About 44% of the trades the Journal examined, or about 33,000 stock sales, wouldn’t have been allowed under the proposed SEC rule because they occurred within 120 days of plan adoption.
Struggles With Key Product
At Becton Dickinson, then-CEO Vincent Forlenza sold $37 million of Becton stock in January 2020, with sales starting 17 days after he adopted a plan. The prior year, Mr. Forlenza had waited 73 days to start selling under a plan.
The sales came as Becton, based in Franklin Lakes, N.J., wrestled with quality and regulatory issues with a key product, an IV infusion pump called Alaris.
Becton said in November 2019 that it had put a temporary hold on shipments of Alaris amid discussions with the Food and Drug Administration about needed changes. It told investors that the issue would be resolved quickly.
While Mr. Forlenza was selling in January, executives told investors that shipments had resumed and that the company was on track to meet 2020 financial goals.
Nine days after Mr. Forlenza finished selling his shares, Becton disclosed that the Alaris problems were much deeper than it had previously said and that the FDA several days earlier had told it to stop selling the product.
Becton withdrew 2020 guidance, and its stock dropped 14% over two days. As of this month, it still hasn’t been allowed by federal regulators to resume commercial shipments of Alaris, and shares recently were below the price where Mr. Forlenza sold.
A lawsuit pending in a New Jersey federal court alleges that Becton executives lied to investors about the depth of the Alaris regulatory problems.
The defendants, who include Mr. Forlenza, were deliberately misleading the markets while the CEO and another executive “were lining their pockets through illegal insider stock sales,” according to the suit, filed in 2020.
The defendants deny wrongdoing, saying in court filings that top Becton executives were unaware of the depth of FDA concerns until after Mr. Forlenza’s stock sales.
Also, the defendants said Mr. Forlenza’s selling wasn’t suspicious because he was preparing to retire as CEO in late January 2020, and that he sold just 14% of his stock in the period. He stayed on as executive chairman for a year.
“All trades made by BD executives were compliant with SEC rules and regulations,” a Becton spokesman said. “We won’t comment further as these matters are the subject of pending litigation.” Mr. Forlenza, through the company, declined to comment.
A federal judge initially dismissed the shareholder lawsuit but allowed the plaintiffs to file an amended complaint.
Becton said the SEC is investigating the company over the Alaris issue. It hasn’t said whether that probe extends to the stock sales. The SEC declined to comment.
Plug Power, the Latham, N.Y.-based fuel-cell maker, had been struggling for more than two decades to make money from its technology, which converts hydrogen into electricity.
After Plug Power’s stock soared during the early 2000s, it had fallen to penny-stock territory, 12 cents per share, in 2013. It has never posted a quarterly operating profit.
Mr. Marsh, who took the CEO slot in 2008, didn’t sell any shares until 2020, when the company’s stock began to rise amid optimism about its technology and its sales of fuel cells for use in forklifts.
In the first two weeks of 2021, Plug Power’s stock more than doubled to $69, after the company announced two major deals.
The first was a $1.5 billion investment from South Korea’s SK Group, announced Jan. 6, 2021; the second, a joint venture with France’s Groupe Renault announced on Jan. 12, 2021.
Mr. Marsh’s big sale, near the stock’s peak at around $66 per share, came a week after the Renault deal was announced, and before the news—including the financial restatement—that sent the stock tumbling to the $25 range in mid-April.
Mr. Marsh sold those shares under a preset plan he set up in early December 2020, his Form 144 filing shows. Mr. Marsh and other Plug Power officials didn’t respond to questions about whether, at the time the CEO set up his trading plan, he knew of the coming news that would send the stock soaring and then crashing.
During a call with investors soon after the Renault deal was announced, Mr. Marsh said that talks with the auto maker had been “ongoing for almost a year.”
A person close to Renault’s side of the deal said that discussions had started “some months” before the deal was announced.
In its legal briefs defending against the shareholder litigation, filed in 2021 in a New York federal court, Plug Power said Mr. Marsh had sold three times the number of shares under a preset plan in mid-2020, when the stock was much lower.
Under that earlier plan, Mr. Marsh waited nearly three months to sell shares, compared with the 48 days for his big 2021 sale, the Journal analysis shows.
Former Apple Lawyer Pleads Guilty To Insider Trading
Gene Levoff was charged in 2019 with sifting trading tips from undisclosed earnings releases he oversaw.
WASHINGTON—A former top corporate lawyer for Apple Inc. pleaded guilty Thursday to insider trading, admitting that he used access to the company’s undisclosed earnings results to reap hundreds of thousands of dollars in illicit gains, according to prosecutors.
Gene Daniel Levoff worked as Apple’s corporate secretary, a role that involved managing the company’s compliance efforts to avoid employee insider trading.
Mr. Levoff also served as co-chairman of Apple’s disclosure committee, which reviewed and discussed quarterly and annual earnings reports that hadn’t been issued yet, according to the U.S. attorney’s office for New Jersey, which prosecuted the case.
As an Apple executive, Mr. Levoff had a duty to not trade on its material nonpublic information.
But he made both bullish and bearish trades over five years, generating profits of $277,000 and avoiding losses of $377,000 on other transactions, according to prosecutors.
A lawyer for Mr. Levoff declined to comment.
Mr. Levoff pleaded guilty to six counts of securities fraud and will be sentenced in November, the New Jersey U.S. attorney’s office said. He faces up to 20 years in prison for each count of securities fraud.
The Securities and Exchange Commission also sued Mr. Levoff in February 2019 in civil court. The SEC’s lawsuit, which was suspended to allow the criminal case to proceed, asked a court to bar Mr. Levoff from working as an officer or director of a public company.
Apple Ex-Corporate Law Chief Admits Years of Insider Trading
* Gene Levoff Pleaded Guilty To Six Counts Of Securities Fraud
* Levoff Was Responsible For Policing Insider Trading At Apple
The Apple Inc. lawyer who was once responsible for enforcing the company’s insider trading policy admitted he used his access to draft SEC filings to personally profit.
Gene Levoff, Apple’s former director of corporate law, pleaded guilty on Thursday to six counts of securities fraud between 2011 and 2016.
Levoff, 48, was co-chairman of the company’s disclosure committee, which allowed him to see Apple’s revenue and earnings statements before they were filed with the Securities and Exchange Commission.
Levoff on several occasions made trades within quarterly blackout periods, even after telling other employees that they were prohibited from trading in Apple stock, according to federal prosecutors in New Jersey.
He used the information to make $227,000 in profit and and to avoid losses of $377,000, according to the government.
“Gene Levoff betrayed the trust of one of the world’s largest tech companies for his own financial gain,” New Jersey US Attorney Vikas Khanna said in a statement. “Despite being responsible for enforcing Apple’s own ban on insider trading, Levoff used his position of trust to commit insider trading in order to line his own pockets.”
Levoff’s lawyer, Kevin Marino, didn’t immediately respond to a request for comment.
Stanford Law Grad
US District Judge William J. Martini in Newark, New Jersey set Levoff’s sentencing for Nov. 10. The charges each carry a maximum sentence of 20 years in prison, though he is unlikely to get that much time.
The Stanford Law School graduate, who joined Apple in 2008, was first charged in 2019. Apple fired him in September 2018 after placing him on leave two months earlier, according to a filing in a related lawsuit by the SEC.
Over his decade-long career at Apple, he was one of the company’s most senior legal executives, reporting directly to the general counsel.
Levoff last year tried to have the case thrown out as unconstitutional, arguing that no statute specifically bars insider trading. Prosecutors called his argument a bogus “Hail Mary,” and it was rejected by the judge.
The case is US v. Levoff, 19-cr-00780, U.S. District Court, District of New Jersey (Newark).
Federal Reserve Inspector General Finds Powell, Clarida Didn’t Trade Improperly
The investigating agency also cited some oversights in the central bankers’ market activities.
The Federal Reserve’s inspector general said central bank leader Jerome Powell and former second-in-command Richard Clarida didn’t make improper financial trades while serving in their leadership roles, but it did flag some ways their market activities inadvertently conflicted with central bank rules.
“We did not find evidence to substantiate the allegations that former Vice Chair Clarida or [Chairman Jerome Powell] violated laws, rules, regulations, or policies related to trading activities as investigated by our office,” the agency said in its report, released Thursday.
But the report added that Mr. Clarida hadn’t fully accounted for some of his trades in 2019 and 2020, and that a trust owned by Mr. Powell and managed by an adviser had traded five times inside of a period that was restricted due to its proximity to interest-rate-setting Federal Open Market Committee meetings.
The report concluded that these were unintentional oversights.
“Based on our findings, we are closing our investigation into the trading activities” of Messrs. Clarida and Powell, said the report from the inspector general, which described itself as an independent and objective oversight authority.
The central bank’s investigating agency didn’t weigh in on the trading activity of regional bank presidents, and said that inquiry was ongoing and would be the focus of a separate report.
The agency’s formal oversight of the 12 regional banks, which are quasi-private institutions that operate under Fed oversight, is limited to activities these banks undertake at the direction of the Fed in Washington, and it had been uncertain whether the agency would look at trading activity at the regional banks.
The central bank’s Office of the Inspector General said it provides independent oversight of the Fed. Its leader is selected by the Fed chairman and reports to central bank leadership, as well as Congress.
If it finds legal violations, they are referred to the Department of Justice, which can make its own determination on how to proceed.
The Federal Reserve didn’t respond to a request for comment. Mr. Clarida said, “In the end, the [inspector general] determined conclusively that I did not violate any statutes, rules, regulations, or standards.
I have always been committed to conducting myself with integrity and respect for the obligations of public service, and this report reaffirms that lifelong commitment to exceeding ethical standards.”
Last September, the then leaders of the Dallas and Boston Federal Reserve Banks stepped down after their financial disclosure statements showed that they traded stocks and other investments while also helping set monetary policy.
Early this year, Mr. Clarida also left the bank as he faced questions about the timing of trades made in 2020 as the central bank launched its aggressive effort to support the economy at the onset of the coronavirus pandemic.
Tony Fratto, a spokesperson for Mr. Clarida, said his early exit was tied to a return to teaching at Columbia University, and that the timing of his move was well known at the Fed before it happened.
Mr. Powell has also faced questions about what securities he has held, in part due to his investments in local government debt securities at a time when the central bank intervened to shore up finances at the municipal level.
The Fed said that the trading done by officials was consistent with rules in place then that banned holding bank stocks, limited trading around monetary policy meetings and cautioned policy makers to avoid taking actions that would create the appearance of a conflict of interest.
Dennis Kelleher, who leads Better Markets, a group that pushes for tighter financial-sector regulation, said the report’s findings were a whitewash and “a very, very narrow crimped investigation” that appeared to avoid a deeper look at the actual trades made by the officials.
Derek Tang, an economist at forecasting firm LHMeyer, said the report was “a relief, both for the Fed and also for the public, that the [inspector general] found no wrongdoing on the part of Powell and Clarida.” He said, “There’s no reason to believe that there was wrongdoing.”
The Fed this year adopted a new ethics code that sharply limited the range of investments Fed officials, senior staff and their families could hold, and limited how and when officials could change their investment profiles.
The new rules also sought to improve officials’ financial disclosures.
Some in Congress, however, believe the Fed’s new rules have fallen short of what was needed. On Wednesday, several Senate Democrats, led by Sherrod Brown, (D., Ohio), called on the central bank to ensure that the new rules have the force of law and to implement penalties for violations.
The inspector general report said that it is taking a look at the central bank’s new trading rules and will make its findings public.
Get Rich Like House Speaker Nancy Pelosi’s Husband Through Insider Stock Trading
- Speaker Nancy Pelosi’s husband is making massive stock trades as Congress mulls whether to ban lawmakers and their spouses from trading.
- An Insider analysis estimated the Pelosis’ cumulative wealth at at least $46.1 million.
- Insider compiled each of Paul Pelosi’s trades that the speaker has reported since 2021.
As members of Congress debate whether lawmakers and their spouses should play the stock market, House Speaker Nancy Pelosi’s husband, Paul Pelosi, a venture capitalist, continues to regularly buy and sell stocks and stock options.
Pelosi has access to confidential intelligence and the power to affect — with words or actions — the fortunes of companies in which her husband invests and trades.
When asked in December 2021 whether members of Congress should even be allowed to trade stocks, Pelosi answered in the affirmative.
“We are a free-market economy. They should be able to participate in that,” she said.
This led some of her colleagues, on both the left and the right, to sharply criticize her — and draft legislation to restrict members of Congress and their spouses from trading stocks.
“Year after year, politicians somehow manage to outperform the market, buying and selling millions in stocks of companies they’re supposed to be regulating,” Republican Sen. Josh Hawley said. “Wall Street and Big Tech work hand-in-hand with elected officials to enrich each other at the expense of the country. Here’s something we can do: ban all members of Congress from trading stocks and force those who do to pay their proceeds back to the American people. It’s time to stop turning a blind eye to Washington profiteering.”
Sen. Jon Ossoff, a Democrat, introduced a similar bill alongside Sen. Mark Kelly with the intent to ban members of Congress and their families from trading stocks.
“Members of Congress should not be playing the stock market while we make federal policy and have extraordinary access to confidential information,” Ossoff said.
Pelosi has since softened her stance, but the fate of a congressional stock-trade ban remains unclear.
A previous analysis from Insider estimated that the Pelosis are worth at least $46,123,051, making Nancy Pelosi one of the 25 richest members of Congress. The vast majority of the couple’s wealth is derived from stocks, options, and investments made by Paul Pelosi.
Here Are All Of The Trades Reported By Speaker Nancy Pelosi In 2021 And 2022:
AllianceBernstein Holding L.P. (AB)
- Purchased 20,000 shares worth between $500,000 and $1 million on December 22, 2020
- Purchased 15,000 shares worth between $500,000 and $1 million on February 18, 2021
- Purchased 25,000 shares worth between $500,000 and $1 million on February 23, 2021
- Purchased 10,000 shares worth between $250,000 and $500,000 on January 27, 2022
Alphabet Inc. – Class A (GOOGL)
- Exercised 40 call options (4,000 shares) on June 18, 2021, at a strike price of $1,200 and cumulatively worth between $1 million and $5 million
Alphabet Inc. – Class C Capital Stock (GOOG)
- Purchased 10 call options on December 17, 2021, at a strike price of $2,000, and together valued between $500,000 and $1 million
Amazon.com, Inc. (AMZN)
- Purchased 20 call options on May 21, 2021, at a strike price of $3,000, and together valued between $500,000 and $1 million
American Express Company (AXP)
- Exercised 50 call options (5,000 shares) on January 21, 2022, at a strike price of $80 and together worth between $250,000 and $500,000
Apple Inc. (AAPL)
- Purchased 100 call options with a strike price of $100 on December 22, 2020, together worth between $250,000 and $500,000
- Purchased 50 call options with a strike price of $100 on May 21, 2021, together worth between $100,000 and $250,000
- Contribution of 3,000 shares to Georgetown University’s Paul F. Pelosi Endowed Fund on December 30, 2021, worth between $500,000 and $1 million
- Contribution of 3,000 shares to Trinity College on December 30, 2021, worth between $500,000 and $1 million
- Exercised 100 call options (10,000 shares) on January 21, 2022, at a strike price of $100, together valued between $1 million and $5 million
- Purchased 100 call options on May 13, 2022, with a strike price of $80 and together valued between $500,000 and $1 million
- Purchased 50 call options on May 24, 2022, with a strike price of $80 and together valued between $250,000 and $500,000
- Sold 50 call options at a strike price of $100 on June 17, 2022, and valued between $100,000 and $250,000
Micron Technology, Inc. (MU)
- Purchased 100 call options on December 21, 2021, at a strike price of $50 and together valued between $250,001 and $500,000
Microsoft Corporation (MSFT)
- Exercised 150 call options (15,000 shares) on March 19, 2021, at a strike price of $130 and together valued between $1 million and $5 million
- Exercised 100 call options (10,000 shares) on March 19, 2021, at a strike price of $140, and together valued between $1 million and $5 million
- Bought 10 call options on May 24, 2022, at a strike price of $180 and together valued between $50,000 and $100,000
- Purchased 40 call options on May 24, 2022, with a strike price of $180 and together valued between $250,001 and $500,000
NVIDIA Corporation (NVDA)
- Purchased 50 call options on June 3, 2021, at a strike price of $400, together valued between $1 million and $5 million
- Purchased 5,000 shares on July 23, 2021, together valued between $500,000 and $1 million
- Bought 50 call options on July 23, 2021, at a strike price of $100, together valued between $250,000 and $500,000
- Exercised 200 call options (20,000 shares) at a strike price of $100 on June 17, 2022, together valued between $1 million and $5 million
Paypal Holdings, Inc. (PYPL)
- Exercised 50 call options (5,000 shares) on January 21, 2022, at a strike price of $100 and together valued between $500,000 and $1 million
REOF XX, LLC
- Invested between $50,000 and $100,000 in the asset-backed security on December 22, 2021
REOF XXII, LLC
- Invested between $250,000 and $500,000 in the asset-backed security on July 13, 2021
Roblox Corporation Class A (RBLX)
- Purchased 10,000 shares worth between $500,000 and $1 million on March 10, 2021
- Purchased 100 call options at a strike price of $100 on December 20, 2021, together valued between $250,000 and $500,000.
Salesforce.com Inc (CRM)
- Purchased 100 call options on December 20, 2021, at a strike price of $210, together valued between $500,000 and $1 million
- Purchased 30 call options on December 20, 2021, at a strike price of $210, together valued between $100,000 and $250,000
Slack Technologies, Inc Class A (WORK)
- Exchanged 10,000 shares of Slack Technologies Inc. on July 22, 2021, for 776 shares of Salesforce.com Inc. as the result of a merger, with a cash payout of $267,900
Tesla, Inc. (TSLA)
- Purchased 25 call options on December 22, 2020, with a strike price of $500, together valued between $500,000 and $1 million
- Exercised 25 call options (2,500 shares) on March 17, 2022, at a strike price of $500, together valued between $1 million and $5 million
Visa Inc. (V)
- Sold 10,000 shares on June 21, 2022, valued between $1 million and $5 million
Walt Disney Company (DIS)
- Purchased 100 call options on December 22, 2020, at a strike price of $100, together valued between $500,000 and $1 million
- Purchased 50 call options on December 17, 2021, at a strike price of $130, together valued between $100,000 and $250,000
- Exercised 100 call options (10,000 shares) on January 21, 2022, at a strike price of $100, together valued between $1 million and $5 million
Warner Bros. Discovery, Inc. – Series A (WBD)
Received 2,419 shares on April 11, 2022, resulting from a spinoff of previously held AT&T (T) shares, together valued between $50,000 and $100,000
Ex-Goldman Banker Tipped Squash Buddy On Deals, US Alleges
* US Claims Banker Texted Accomplice Using Game Talk As Cover
* Goldman Condemns Insider Trading And Says It Is Cooperating
A former Goldman Sachs Group Inc. banker was accused of passing stock tips to a squash buddy, as federal prosecutors unveiled insider-trading charges against nine people, including a onetime member of Congress and an FBI trainee.
The indictment of Brijesh Goel, 37, who worked at the bank from 2013 until about 2021, was one of four unrelated cases announced Monday in New York.
A former vice president at Goldman, Goel passed along information he received about potential mergers to his friend and then split the trading profits, according to prosecutors.
The charges “should send a strong message to anyone who is even thinking about committing insider trading: Cut it out,” Damian Williams, US Attorney for the Southern District of New York, said at a press conference. “Because we’re watching.”
Goldman said it condemns such behavior and is cooperating with the Justice Department and the Securities and Exchange Commission. “The 2017 and 2018 insider trading alleged by the government is egregious conduct,” the bank said in a statement.
Hit To Reputation
The firm has seen several former employees charged with insider trading.
In 2019, after a trio of charges against people who had worked at Goldman over just 18 months, the firm’s investment-banking co-heads put out a note to staff reminding them of the reputation hit suffered by the bank because of such actions.
After leaving Goldman, Goel went to work at Apollo Global Management Inc. The company said in a statement that “upon learning of the allegations for the first time this morning, Mr. Goel was immediately placed on indefinite leave.”
Prosecutors allege Goel passed along information from the bank’s Firmwide Capital Committee.
The confidential committee emails contained details and analysis of mergers the bank was considering financing or deals in which it was acting as a financial adviser.
‘Let’s Play Squash’
In one instance, the US said, when Goel received an email about a potential takeover target for EQT Partners Inc., he texted his friend, “Let’s play Squash after work,” and that evening suggested that his friend buy call options in the target company.
The next day, he asked by text, “Did you book the court?” Prosecutors claim this was his “coded way of asking” whether his alleged co-conspirator had purchased call options.
The SEC said Goel passed tips to a foreign exchange trader and longtime friend named Akshay Niranjan, 33, with whom he often played squash and who is a defendant in the civil case.
According to the SEC complaint, Goel and Niranjan met as graduate business students in California and moved to New York together in 2013.
In addition to their squash games, they frequently took overseas trips together and, at times, lived in the same apartment building, the regulator said.
Goel is also charged with obstruction of justice for allegedly destroying evidence and directing his friends to do the same.
The recipient of Goel’s tips recorded meetings last month in which they discussed coordinating their story to law enforcement and deleting messages related to the alleged scheme, according to court documents.
Reed Brodsky, a lawyer for Goel, didn’t immediately respond to a phone call seeking comment on the charges. Robert Anello, a lawyer for Niranjan, declined to comment on the allegations against his client.
Past Cases Against Goldman Employees:
* Former Goldman director Rajat Gupta was the highest-profile executive convicted in the US crackdown on insider trading at hedge funds; he was found guilty in 2012 and served about 19 months in federal prison for passing tips to Raj Rajaratnam.
* Former compliance analyst Jose Luis Casero Sanchez, whose job was to help Goldman prevent insider trading, was sued by the SEC in September for allegedly engaging in the practice himself.
* Ex-Goldman investment banker Bryan Cohen was sentenced in 2020 to a year of home confinement after pleading guilty to engaging in a scheme to pass tips about deals involving Buffalo Wild Wings Inc. and Syngenta AG to a Swiss trader.
* Ex-Goldman vice president Woojae “Steve” Jung pleaded guilty to helping a friend trade by pointing him to stocks he had illicit tips on; he was sentenced to three months in prison in 2019.
* Ex-Goldman analyst Damilare Sonoiki pleaded guilty in 2018 to leaking nonpublic information about pending mergers to a National Football League linebacker in return for cash and tickets to Philadelphia Eagles games.
For all the elaborate maneuvering the government alleges, the two don’t appear to have scored big sums. The SEC alleges that they made $291,735 from the scheme, including one trade that netted them no profits and another that earned them just $600.
The vast majority of their profits, $250,235, came from a single trade on Calgon Carbon before it was acquired by Kuraray in 2017, according to the regulator.
Gurbir Grewal, head of the SEC’s enforcement division, said at the news conference that the regulator will “use all of our expertise and all of our data analytic tools” to “find you and to hold you accountable.”
“Because we have zero tolerance — zero tolerance — for cheating in our markets,” Grewal said.
According to his LinkedIn, Niranjan worked at Barclays PLC from April 2013 to July 2018 and again starting in June 2021, and, in between, worked at Deutsche Bank AG.
Barclays and Deutsche Bank declined to comment.
Among the others charged in the four separate cases is former Republican Congressman Stephen Buyer, who represented Indiana from 1993 to 2011.
Buyer, 63, is accused of taking confidential information from two of his consulting business’s clients and trading on it.
Prosecutors allege he traded on it first in 2018 while working for T-Mobile US, when he learned that it planned to acquire Sprint, and then the next year when he learned that his client Guidehouse LLP was going to purchase Navigant Consulting. The government said he earned profits of at least $349,000.
The US said one of the accounts that Buyer used to trade was shared with a relative who lost hundreds of thousands of dollars on an investment Buyer had led the relative to make.
He is also accused of sending himself reports on the companies and notes to himself to make it look like he was researching the stocks, and of lying to investigators probing the trades.
“Congressman Buyer is innocent,” Andrew Goldstein, a partner at Cooley LLP who is representing Buyer, said in a statement. “His stock trades were lawful. He looks forward to being quickly vindicated.”
Prosecutors also named Seth Markin, who they say was a Federal Bureau of Investigation agent trainee when he made more than $1.4 million in 2021 after he “stole” inside information from his then girlfriend, at the time an associate “at a major law firm in Washington DC.”
Markin is accused of looking through his girlfriend’s confidential work documents without her permission and finding out that Merck & Co. was going to acquire Pandion Therapeutics, a biotech company, for about three times the value of Pandion’s share price.
Prosecutors said Markin passed on the tip to his close friend, Brandon Wong, who bought hundreds of thousands of dollars of shares of Pandion based on the information and told others, including friends and family.
‘Integrity’ of Markets
Markin and Wong pleaded not guilty during an appearance in magistrate court in Manhattan on Monday and will be released on bail pending an Aug. 24 court appearance. Their lawyers declined to comment on the charges after the hearing.
Michael Brodack, who heads the FBI’s criminal division in New York, said at the news conference that although the specifics vary, the four cases have one thing in common: They all involve people “whose greed led them to make trades” based on material, nonpublic information.
“The crimes we allege here today are serious ones that threaten both the integrity of our financial markets and investors faith on them,” Brodack said.
The criminal cases are: US v. Goel, 22-cr-396; US v. Buyer, 22-cr-397; US v. Bhardwaj, 22-cr-398; and US v. Markin, 22-cr-395; US District Court, Southern District of New York (Manhattan).
Former Goldman Sachs Banker Charged In Insider-Trading Scheme
Brijesh Goel is one of nine defendants charged by Manhattan federal prosecutors in four insider-trading cases.
A former Goldman Sachs Group Inc. vice president was charged in an insider-trading scheme in which he allegedly profited by tipping off a close friend to confidential information about coming mergers and acquisitions connected to the bank.
Federal prosecutors accused Brijesh Goel of relaying information from internal Goldman communications about potential takeovers the firm was considering financing.
Mr. Goel’s friend traded on the tips, typically using a relative’s brokerage account to buy call options that would become profitable if the stock price of a company targeted for acquisition rose, according to an indictment.
Mr. Goel was one of nine defendants charged in four unrelated insider-trading cases announced Monday by federal prosecutors in Manhattan. All of the cases involved the alleged use of nonpublic information about mergers and acquisitions.
The other defendants included a former congressman, a former FBI trainee and technology-company executives.
“We are keenly interested in sending a message that insider trading is still around, we are still around, and we are going to enforce it when we find it,” Damian Williams, the U.S. attorney for the Southern District of New York, said at a news conference Monday.
The four schemes collectively resulted in millions of dollars in illegal profits, prosecutors said. The Securities and Exchange Commission, which filed parallel civil charges, said three of the cases originated from an enforcement unit that uses electronic databases to detect suspicious trading patterns.
Prosecutors charged Mr. Goel with securities fraud. They also alleged that Mr. Goel, who left Goldman in 2021, sought to obstruct a grand jury investigation into the scheme by deleting electronic communications between him and the friend.
A lawyer for Mr. Goel didn’t respond to a request for comment.
A Goldman spokeswoman said the bank is cooperating with the Justice Department and the SEC.
“The 2017 and 2018 insider trading alleged by the government is egregious and illegal conduct,” the spokeswoman said. “The firm condemns such behavior, which violates our standards of conduct and business principles.”
Mr. Goel most recently worked at Apollo Global Management Inc. An Apollo spokeswoman said the firm learned of the allegations against Mr. Goel on Monday and immediately placed him on indefinite leave.
Mr. Goel and the friend often discussed confidential information over games of squash, and made about $280,000 illegally, according to the indictment.
Prosecutors said the information was used to make trades tied to at least seven deals involving companies including Thermo Fisher Scientific Inc., T-Mobile US Inc. and Walgreens Boots Alliance Inc.
In a separate case, prosecutors charged former Rep. Stephen Buyer, a Republican who represented districts in Indiana from 1993 through 2011, with four counts of securities fraud.
While doing consulting work after he left Congress, Mr. Buyer engaged in insider trading in connection with two different mergers, prosecutors said.
In one, Mr. Buyer provided consulting services to T-Mobile, which in 2018 publicly announced it would merge with Sprint Corp. Mr. Buyer learned of confidential information about the merger from a T-Mobile government-affairs executive, according to the indictment.
The indictment also said that the unnamed executive and Mr. Buyer spoke on the phone and played golf immediately before the former congressman purchased Sprint stock.
Andrew Goldstein, a lawyer for Mr. Buyer, said his client was innocent. “His stock trades were lawful,” Mr. Goldstein said. “He looks forward to being quickly vindicated.”
A T-Mobile spokeswoman said the company cooperated with the government’s investigation.
Former GOP Congressman Pleads Not Guilty In Insider-Trading Case
* Indiana’s Stephen Buyer Faces Four Counts Of Securities Fraud
* Lawyer Says Buyer Did His Own Research, Didn’t Get Deal Tips
Former Republican Congressman Stephen Buyer pleaded not guilty to insider trading charges tied to his work as a consultant after leaving office.
Buyer, who represented Indiana in the House from 1993 to 2011, entered his plea Wednesday in federal court in Manhattan, after which he was released on a $250,000 bond.
He was arrested and charged Monday with four counts of securities fraud tied to his alleged trading on nonpublic information about two mergers.
Prosecutors said Buyer, 63, learned of T-Mobile’s plans to acquire Sprint Corp. while providing consulting services to the former in 2018.
In a parallel case, the Securities and Exchange Commission alleges Buyer received the confidential information from a T-Mobile government-affairs executive with whom he spoke on the phone and played golf just before purchasing Sprint stock, notching $126,000 in profits after the merger was announced in 2018.
In 2019, prosecutors said Buyer traded in shares of Navigant Consulting Inc. ahead of its acquisition by Guidehouse Inc., for which he acted as a consultant. He made more than $223,000 in illegal profits on that deal, according to the indictment.
Buyer’s lawyer, William Schwartz, told US District Judge Richard Berman on Wednesday that his client would present evidence he conducted his own research and didn’t rely on inside information for his trades.
“This case will be hotly contested,” said Schwartz.
But prosecutor Jordan Estes said the government would show that Buyer tried to conceal his crimes. According to Estes, after Buyer learned that he was being investigated by the Financial Industry Regulatory Authority, he sent an encrypted message to the person who tipped him about the Navigant deal. “I want to see you right away,” Buyer allegedly wrote.
“This shows the efforts he’s willing to take not to get caught,” said Estes, who added that the US had executed 15 search warrants for various phones and devices linked to the trading.
Berman ordered Buyer to return to court Aug. 31 and restricted his travel to the continental US.
The case is US v Buyer 22-cr-0397, US District Court, Southern District of New York (Manhattan).
US Ethics Advisory On Federal Employee’s Crypto Has Basis In Legislation
The Office of Government Ethics reminded federal agency ethics officers of current law and extended its interpretation of the law to mutual funds.
When the United States Office of Government Ethics (OGE) released its Legal Advisory 22-04 on July 5, most attention was given to its conclusion that federal employees who own any amount of cryptocurrency or stablecoins whatsoever may not participate in regulation and policymaking that concerns crypto.
The legal advisory (LA) raised some eyebrows, as de minimis exemptions, threshold amounts below which assets holdings are permissible, are common in the government. The LA is more comprehensible when seen in a larger context.
What They Were Thinking
The OGE does not grant interviews, so it was fortunate that a video of OGE Senior Associate Counsel Christopher Swartz discussing the LA appeared on the office’s YouTube channel the day after Cointelegraph made an inquiry.
Swartz discussed several points in detail and emphasized that the LA is an interpretation of current law to aid in its application to federal employees and “understand the law as it exists.” The OGE has no position on digital assets in general.
The OGE issued an advisory in 2018 on federal employees’ disclosure of crypto assets. In light of the growing adoption of cryptocurrency by the public and federal employees, Swartz explained:
“We realized it was now ripe for us to revisit this area, make sure we have established ground rules particularly as it relates to the conflicts of interest law, which is a criminal law.”
The law Swartz was referring to dates to 1962 and “prevents federal employees from participating in any particular matter in which they have a financial interest,” according to Swartz. It is intentionally broad and “agnostic” in regard to the details.
There is no substantiality element in the law, that is, a de minimis exemption, to allow federal employees to hold small amounts of anything.
Under the law, the OGE has the authority to waive the conflict of interest laws for all employees or classes of employees when the financial interest is too remote to affect the expected services of the employees.
Agencies can provide exemptions on a case-by-case basis in consultation with the OGE.
The OGE created some exemptions in 1996. Publicly traded equity in a company that engages in crypto services is already covered by an exemption, for example.
The LA specifies that a registered mutual fund with exposure to crypto derivatives, such as futures, might have one of two exemptions: a per se exemption for diversified mutual funds or a de minimis exemption of $50,000 for sectoral funds.
No OGE exemption covers crypto, the LA states, because crypto does not qualify as a publicly traded security.
“This is true even if individual cryptocurrencies or stablecoins constitute securities for purposes of the Federal or state securities laws,” the LA states.
Cryptocurrency Is Not A Publicly Traded Security
The definition of “publicly traded security” is narrower than that of “security,” the LA notes. The LA does not relate to the larger question of which cryptocurrencies or stablecoins are securities, nor does it address reasons for the lack of an exemption.
Nonetheless, Aitan Goelman, partner at Zuckerman Spaeder and former director of the Commodity Futures Trading Commission enforcement division, told Cointelegraph:
“If I were a lawyer representing Ripple, I think I would bring the OGE’s opinion up, even though the OGE take pains to distinguish its definition of publicly traded securities from the definition of securities under [the] Howey [test].”
“The OGE’s opinions are very influential at the agencies,” Goelman continued.
All the experts consulted by Cointelegraph agreed on the agency’s high moral authority and absence of political agenda.
Philip Moustakis, counsel in Seward & Kissel’s blockchain and cryptocurrency practice groups and a former member of the SEC asset management unit, told Cointelegraph in an email, “I don’t think there is any subtext to be read at all.”
The experts also agreed that the LA would be observed throughout the government, even though the OGE has no enforcement powers to go with its regulatory authority. As a matter of fact, it seems that ethical standards are already widely observed.
The LA’s interpretation and detailed commentary on how disclosure requirements apply to mutual funds may be new, but ethics requirements are not.
“Employees of the Securities and Exchange Commission are already required to report their securities holdings,” Moustakis said.
Elizabeth Boison, partner at Hogan Lovells and former Department of Justice (DOJ) prosecutor and member of the department’s National Cryptocurrency Enforcement Team, told Cointelegraph:
“Before the regulators provided clarity on these rules, this is what the regulators were doing anyway. […] Even absent guidance, we would talk about this issue [at the DOJ] and we were generally not holding it.”
Goelman observed that the perception of corruption has been a political issue recently and the LA contributes to a reduction in the perception of financial impropriety in government.
The Downside of The OGE LA
When asked what it would take for the OGE to publish a regulation to create an exemption to allow de minimis cryptocurrency holding, Goelman replied simply “motivation.”
Swartz dismissed the argument that the prohibition on owning crypto would discourage people from pursuing government careers, saying the OGE had developed ways to help “remove the financial entanglement” of new federal employees.
Nonetheless, there are arguments in favor of policymakers holding crypto.
“One of the things a regulator has to understand is how these things work,” Boison said. She named Know Your Customer procedures and setting up wallets as examples of activities where real-life experience is valuable to regulators. She suggested the creation of a “sterile, sanitized lab” setting where regulators could go through the motions of the procedures.
LA 22-04 was followed 10 days later by another crypto-related advisory, this time on disclosure of nonfungible token holdings.
Fractionalized and collectible NFTs worth $1,000 or more must be reported if “held for investment or production of income,” as well as NFT investments that produce over $200 in profits during a reporting period.
Warren Renews Push For SEC To Crack Down On Insider Stock Sales
* Group Of Democratic Senators Want Regulator To Toughen Rules
* They Sent Gary Gensler A Letter About The Issue On Friday
A group of Democratic senators led by Elizabeth Warren is redoubling efforts to get Wall Street’s main regulator to clamp down on executives’ ability to use inside information to make well-timed stock trades.
The US Securities and Exchange Commission should quickly move to toughen its rules, the lawmakers said in a letter Friday to SEC Chair Gary Gensler. “Corporate insiders cannot be allowed to continue to trade based on insiders’ knowledge with impunity,” they wrote.
In December, the SEC proposed new restrictions for pre-arranged plans that senior executives often use to sell stock and avoid being accused of insider trading later.
Among other things, the agency proposed forcing insiders to wait roughly four months from when they schedule a trade before they sell.
The scheduled stock sales, so-called 10b5-1 plans, are common across Corporate America.
Under the proposal, which could be finalized in the coming months, companies would be required to disclose in regulatory filings whether executives have adopted or made any changes to when they plan to sell stock.
Employees would also be prevented from having multiple plans for trading the same security.
While Warren and the other lawmakers lauded the plan as a solid first step, they’re asking the regulator to go even further.
The SEC declined to comment on the letter.
“We urge you to consider additional, strong rules that would prevent these abusive practices and protect the integrity of our capital markets, and that you implement them without delay,” read the letter, which was also signed by Democrats Chris Van Hollen, Tammy Baldwin, as well as Bernie Sanders, an Independent. A copy was reviewed by Bloomberg News.
The senators asked the SEC to extend the “cooling-off period” between a trading plan’s adoption and its execution to 180 days and said that the required delay should apply to more employees.
The lawmakers also called for more limits on single-trade plans.
The issue has also garnered the attention of local governments.
New York City Comptroller Brad Lander urged the agency to crack down on the issue and asked a medical device company’s shareholders to revise its policies this April, after a Bloomberg News article highlighted certain trades by its former executive.
Wall Street Friendship Ends In Betrayal, Insider-Trading Charges
* Brijesh Goel And Akshay Niranjan Rose On Wall Street Together
* Then Niranjan Turned On His Buddy And Wore A Wire To Meetings
They were business school buddies who landed at top Wall Street firms — Goldman Sachs Group Inc. and Barclays Plc — lived for a time in the same Manhattan high-rise, played squash regularly and partied overseas together.
And then one of them wore a wire and recorded his friend allegedly asking him to delete incriminating text messages.
Former Goldman banker Brijesh Goel was arrested last month for insider trading. His friend, ex-Barclays trader Akshay Niranjan, is “co-conspirator 1” in the criminal complaint against Goel, and the man who turned on his buddy, according to people familiar with the matter.
“F—… This we need to delete,” Goel, 37, allegedly said in a conversation Niranjan, 33, recorded. “Did we put on any trade?… It has to be deleted. I don’t even have this chat.”
While betrayals are far from uncommon in the world of high finance or crime, details about the two men show how even the closest ties can rip under FBI scrutiny.
Court documents paint a portrait of two young men establishing themselves on Wall Street, sharing good times and allegedly trading on details about pending mergers, until one of them turned on his pal.
Goel has pleaded not guilty to securities fraud, conspiracy and obstruction of justice, and his lawyer has taken square aim at Niranjan’s credibility.
“Sadly, the government rushed to charge Brijesh on the apparent say-so of one person,” defense lawyer Reed Brodsky said in a statement shortly after the charges were announced on July 25, adding that “the judge and jury will not make that mistake.”
Niranjan’s lawyer, Robert Anello, declined to comment.
The two men had a great deal in common from the start. Both are from India, where they earned degrees from different campuses of the prestigious Indian Institute of Technology.
They met in 2012 at University of California, Berkeley’s Haas School of Business, where they both pursued quant-oriented financial engineering master’s degrees.
Two Haas classmates who said they were friends with the two men recalled that they all belonged to the same social circle of about a dozen MFE students from India.
But Goel and Niranjan also cultivated relationships outside that group, particularly among other students pursuing careers on Wall Street, said the classmates, who asked not to be identified.
Both men were very bright, but Goel, who was older than many of the other students, managed to stand out, one of the classmates said.
On the very first day of classes, when a professor asked if someone could name the assumptions behind the Black-Scholes model for pricing options, it was Goel who raised his hand and correctly answered the question.
Goel and Niranjan were also avid poker players, though that was hardly unusual among MFE students, the classmates said.
Instructors at Haas encouraged poker games because they forced students to measure risk and evaluate outcomes quickly, with money on the line.
The stakes were low, with antes ranging from $5 to $20, because the students were on tight budgets.
According to federal prosecutors in Manhattan, Goel and Niranjan would start taking much bigger risks with money on the line less than four years after their 2013 graduation from Haas.
‘Let’s Play Squash’
Goel won one of the most coveted placements out of the MFE program, joining Goldman as a risk associate and then moving to investment banking within two years, eventually becoming a vice president. Niranjan went to work at Barclays in interest-rates structuring and foreign-exchange trading.
In the years that followed, the two became close and were neighbors in a luxury building in Hell’s Kitchen for a time.
They also liked to play squash, typically booking courts at the New York Health & Racquet Club. They would often meet either at a now-shuttered Midtown branch, near Barclays, or one in Lower Manhattan, close to Goldman.
“Let’s play squash after work,” Goel allegedly texted Niranjan in February 2017. But prosecutors say this time was different from other times the two met for a match.
That evening, they claim, Goel told his friend about Goldman’s plans to provide financing to EQT AB’s potential acquisition of Lumos Networks Corp.
According to the government, Goel had received a confidential memo on the proposed deal because he was on distribution list for the bank’s firmwide capital committee.
“Did you book the court?” Goel allegedly texted his friend the next morning. Prosecutors claim this was a coded message inquiring whether Niranjan had followed up on a plan to purchase call options in Lumos. Niranjan allegedly had, using his brother’s brokerage account.
It was the first of several trades over the next year or so which prosecutors say made the pair a total of around $280,000 in illegal profits.
During that time, they also had some fun, including meeting up at the Tomorrowland electronic dance music festival in Belgium, according to a July 2017 picture that had been posted on Goel’s Facebook page, which has since been deleted.
Another photo Goel posted to the now-deleted Facebook page suggests he was a groomsman at Niranjan’s 2018 wedding on a beach in Goa, India.
Prosecutors say the pair’s insider-trading activity cooled some time in late 2018, when Niranjan left Barclays and took a job with a proprietary trading firm in London.
A Twitter account that appears to be from Niranjan includes several re-tweets of motivational messages in 2020 and 2021, and a statement that “There exists no absolute truth.” The account hasn’t tweeted or re-tweeted anything since August 2021.
The two men’s friendship continued during this time. In September 2021, Niranjan, by then back in New York, allegedly loaned Goel $85,000. According to the government, that loan shows Goel benefited from passing tips to Niranjan, an important element of an insider-trading prosecution.
Not long after that though, both men knew trouble was brewing, court documents show.
Goel met Niranjan, who was work at Barclays again, on May 23 and told him that he’d been approached by Federal Bureau of Investigation agents about possible insider trading, prosecutors say.
Goel allegedly told Niranjan he’d deleted certain text messages and advised his friend to do the same, prosecutors say.
They met again on June 3, but this time Niranjan was wearing a wire, according to court filings. He allegedly recorded Goel saying that they should make sure their stories were consistent.
Prosecutors say Niranjan wore a wire to another meeting a week later, recording Goel asking to see his friend’s text messages from 2017 so that he could “have an explanation for every single conversation.”
After he reviewed several, he urged Niranjan to delete a number of them. The obstruction of justice charge relates to Goel’s alleged destruction of evidence.
Niranjan’s reasons for turning on his friend aren’t addressed in court filings, but prosecutors typically offer leniency, or even immunity, to those who cooperate.
Several major insider-trading cases have involved betrayed friendships, including former McKinsey & Co. partner Anil Kumar’s testimony against his mentor Rajat Gupta and Raj Rajaratnam.
Another cooperating witness in that case, Thomas Hardin, wore a wire to collect evidence against people connected to Rajaratnam. Both Kumar and Hardin received no jail time.
There is no indication that Niranjan faces or will face criminal charges, but the Securities and Exchange Commission is suing him along with Goel for insider trading, raising the prospect of a fine and ban from the financial industry.
And Niranjan has apparently already faced career consequences — Barclays said shortly after the case was announced that he no longer worked there.
Goldman said in a July 25 statement that it condemned Goel’s alleged actions and was cooperating with prosecutors and the SEC. “The 2017 and 2018 insider trading alleged by the government is egregious conduct,” the bank said in a statement.
Goel was put on indefinite leave by Apollo Global Management, which he joined from Goldman last year as a principal.
The asset management firm issued a statement shortly after Goel was charged noting that the indictment focused on his alleged conduct prior to joining Apollo.
He’s now out on a $1 million bond, with his travel restricted to New York and northern California. His bail agreement also requires that he have “no contact” with his old squash buddy.
The case is US v. Goel, 22-cr-00396, US District Court, Southern District of New York (Manhattan).
Framework To Ban Members Of Congress And SCOTUS From Trading Stocks Includes Crypto Provision
A bill based on the proposed framework banning crypto investments could help to “restore the public’s faith and trust in their public officials,” according to Zoe Lofgren.
Members of the United States House of Representatives and Senate as well as Supreme Court justices currently trading cryptocurrencies may have to stop hodling while in office should a bill get enough votes.
According to a framework released on Thursday, chair of the Committee on House Administration Zoe Lofgren — responsible for the day-to-day operations of the House — said she had a “meaningful and effective plan to combat financial conflicts of interest” in the U.S. Congress by restricting the financial activities of lawmakers and SCOTUS justices, as well as those of their spouses and children.
The bill, if passed according to the framework, would suggest a change in policy following the 2012 passage of the Stop Trading on Congressional Knowledge Act, or STOCK Act, allowing members of Congress to buy, sell and trade stocks and other investments while in office, but also requiring them to disclose such transactions.
“Congress can act to restore the public’s faith and trust in their public officials and ensure that these officials act in the public interest, not their private financial interest, by restricting senior government officials — including Members of Congress and the Supreme Court — and their spouses and dependent children from trading stock or holding investments in securities, commodities, futures, cryptocurrency, and other similar investments and from shorting stocks,” said Lofgren:
“I will soon introduce legislative text for a bill built on this framework for reform. Many Members have already concluded that reforms are necessary.”
The framework suggested that lawmakers and SCOTUS justices could still hold and disclose a portfolio with diversified mutual funds, exchange-traded funds (ETFs), treasury bills and other investments that did “not present the same potential for conflicts of interest.”
The bill’s framework also proposed disclosure amounts be more precise rather than the “extremely broad” range currently used — for example, from $5 million to $25 million — and be available to the public.
Under the STOCK Act, lawmakers are required to report the purchase, sale or exchange of any investment over $1,000 within 30 to 45 days but the law provides minimal financial and legal consequences for not filing in time — sometimes as little as a $200 late fee.
The proposed framework suggested enforcing fines of $1,000 for every 30-day period an individual was in violation of disclosure rules, increasing the late fee to $500 and authorizing the Department of Justice to bring civil actions if necessary.
The House Press Gallery’s Twitter account reported on Thursday that the House could consider the proposed legislation as early as next week.
Senators Jon Ossoff and Mark Kelly proposed similar reforms for the STOCK Act in the Senate in January, but there has been no movement on the bill in more than eight months.
According to Lofgren, House Speaker Nancy Pelosi tasked the committee to review potential financial conflicts of interest in Congress.
However, the speaker previously pushed back against efforts to prohibit lawmakers from owning or trading stocks, saying “they should be able to participate in that.”
A number of House members and senators have disclosed their exposure to crypto investments, including Illinois Representative Marie Newman, Florida Representative Michael Waltz, Wyoming Senator Cynthia Lummis, Texas Representative Michael McCaul, Pennsylvania Representative Pat Toomey, Alabama Representative Barry Moore, and New Jersey Representative Jefferson Van Drew.
In December 2021, New York Representative Alexandria Ocasio-Cortez said it inappropriate for her to hold Bitcoin (or other digital assets because U.S. lawmakers have access to “sensitive information and upcoming policy.”
Stock Trade Ban For Congress Is Being Readied For Release In US House
* Proposal From Democrats Would Cover Congress, Immediate Family
* Restrictions On Stocks Would Extend To Supreme Court
Senior House Democrats are poised to introduce long-promised legislation to restrict stock ownership and trading by members of Congress, senior government officials and Supreme Court justices.
The bill would apply to the spouses and dependent children of those officials, according to an outline sent to lawmaker offices last week by House Administration Chair Zoe Lofgren. The restrictions also cover “commodities, futures, cryptocurrency, and other similar investments,” according to the outline.
The legislation would require public officials to either divest current holdings or put them in a blind trust. Investments in mutual funds or other widely held investment funds and government bonds would be allowed.
The bill may be released as soon as Monday, according to a person familiar with the matter. It hasn’t been scheduled for a vote, though House Majority Leader Steny Hoyer has said it’s possible it could come to the floor this week in the middle of an already jam-packed schedule before lawmakers go on break ahead of the November midterm election.
While conservative Republicans and progressive Democrats alike have been clamoring for restrictions on stock trades by members of Congress to avoid conflicts of interest, legislation has been hung up by questions about how broad to make the ban and whether to include family members.
A group of senators is working on their own version of the legislation and there’s little chance of Congress taking any final action before the midterms.
“I believe that a meaningful and effective plan to combat financial conflicts of interest could help restore the public’s faith and trust that our public servants act in the public interest,” Lofgren, a California Democrat, wrote in the notice to lawmakers, which was obtained by Bloomberg.
The current law doesn’t prohibit lawmakers from owning or trading individual securities, but it bans members of Congress from using nonpublic information available to them for personal benefit. It requires any transaction be disclosed within 45 days.
A New York Times analysis of disclosure forms published earlier this month found that from 2019 to 2021 almost 100 senators or representatives reported that they or an immediate family member traded a stock or other financial assets that had some overlap with issues before congressional committees on which they served.
Lofgren’s framework also would tighten disclosure requirements and increase penalties for violations.
One of the key points of debate has been whether to include family members in any ban on trading. House Speaker Nancy Pelosi’s husband, Paul Pelosi, made his fortune in real estate and venture capital and frequently draws attention for his stock trades.
Pelosi in February gave her support to banning lawmakers from trading equities, a reversal of her earlier stance on the subject.
Another potential point of contention is applying the requirements to the Supreme Court. The Congressional Research Service in an April report said that Congress imposing a code of conduct on the judiciary would “raise an array of legal questions,” including whether it would violate the constitutional separation of powers.
Justices and lower court judges already file annual financial disclosures and are barred from participating in cases where there’s a direct conflict of interest.
Despite that, the CRS report says that the Supreme Court has never directly addressed “whether Congress may subject Supreme Court Justices to financial reporting requirements or limitations upon the receipt of gifts.”
Democrats Release Text Of Bill Banning Stock Trading For Congress, Judges
Lawmakers hope for a vote this week, but its passage is uncertain.
WASHINGTON—House Democrats released their bill to ban stock trading by members of Congress, judges and senior government officials as they work to gather enough votes to pass legislation through the House before the midterm elections.
The bill text was released late Tuesday and lawmakers hoped to vote on it this week.
Proponents say new rules are needed to eliminate potential conflicts of interest, but they have struggled to iron out the details on the specific language and who should be subject to the restrictions.
Critics say that insider trading is already against the law and that new rules would impose unnecessary burdens on lawmakers.
One Big Hurdle: House Majority Leader Steny Hoyer (D., Md.) has repeatedly stated in private meetings that he will be voting against the bill, according to two people who have been in meetings with him recently.
Mr. Hoyer and his staff set the floor schedule for votes, so his opposition makes passing the bill difficult and could also open the door for other members to follow him in dissent.
A spokeswoman for Mr. Hoyer said he would like to see increased penalties for lawmakers who violate insider trading laws. She said that Mr. Hoyer “has also not seen final legislation, and will reserve his official decision until that time.”
Illinois Rep. Rodney Davis, the top Republican on the House Administration Committee, has criticized the Democratic effort as lacking GOP input and “more focused on scoring cheap political points rather than passing sound policy.”
House Minority Leader Kevin McCarthy (R., Calif.) has indicated he would support limiting lawmakers’ stock ownership but hasn’t delved into details.
Democrats have a narrow majority in the House, and can only afford to lose a few votes if all Republicans are opposed.
Democrats expect this week to consider the legislation that would ban senior government officials—including members of Congress, executive branch officials and Supreme Court justices and their spouses and dependent children—from trading stocks or directly holding investments in securities, commodities, futures, cryptocurrency and other similar investments, as well as from shorting stocks. The legislation would also apply to senior congressional staff but not their spouses.
There is an exemption for spouses and children of lawmakers who receive stock from their employer, as opposed to purchasing individual stocks.
The legislation would force lawmakers and government officials to divest themselves of these holdings or place them in a qualified blind trust.
Because a forced divestment could have tax implications, the bill would allow those affected to defer payment of capital-gains taxes, as is allowed for cabinet members who have to divest ownership.
Members would be allowed to hold diversified mutual funds, exchange-traded funds and U.S. Treasurys as well as state and local government bonds.
Some lawmakers, including Rep. Dean Phillips (D., Minn.), have placed their holdings in a blind trust. Mr. Phillips, who set up a blind trust before signing onto bipartisan investment-restrictions legislation by Reps. Abigail Spanberger (D., Va.) and Chip Roy (R., Texas), said the process took months and was complicated.
Backers say current rules requiring regular disclosure of holdings don’t do enough to address potential conflicts of interest or potential trading on access to nonpublic information.
Lawmakers can be aware of planned legislation or hearings before the information is released to the public, and markets can move depending on how Congress acts.
“Members of Congress should be leaping at the chance to demonstrate that they care more about the people they serve than their own stock portfolios,” Ms. Spanberger said.
While initially being resistant to the idea, House Speaker Nancy Pelosi (D., Calif.) has backed legislation banning lawmakers and spouses from owning stocks.
Her husband, Paul Pelosi, frequently discloses trades, some of which have come under scrutiny.
Mrs. Pelosi has long maintained that she doesn’t discuss trades with her husband.
Currently, lawmakers must publicly file and disclose any financial transaction involving stocks, bonds, commodities, futures and other securities within 45 days.
Last year, activists and many lawmakers, including Ms. Spanberger and Mr. Roy, began pushing for tighter rules, with some liberal and conservative groups finding common cause on the issue.
Mrs. Pelosi assigned House Administration Committee Chairwoman Zoe Lofgren (D., Calif.) to steer the legislation.
In a letter to Democrats last week, Ms. Lofgren said the legislation would increase transparency around large securities transactions and increase the penalties for violating the imposed rules, from a $200 fee now for late disclosures to a $1,000 fee for every 30-day period in which a person is in violation of the new restrictions.
Lawmakers have been divided on how expansive to be on the legislation, whether it should include spouses and children and senior staff. The negotiations around the bill have also alienated Republicans, who have called the process partisan.
Late last year, the Federal Reserve imposed new restrictions on senior officials in a bid to address a stock-trading controversy that prompted the resignation of two reserve bank presidents.
Meanwhile, lawmakers have proposed legislation requiring federal judges to report stock trades over $1,000 within 45 days and post their financial-disclosure forms online, following a Wall Street Journal investigative series that found 131 federal judges violated federal law by hearing lawsuits involving companies in which they reported owning stock.
Mrs. Pelosi had planned to vote on the bill by the end of September, before House lawmakers leave Washington for a month to campaign for the midterm elections. Still, it was unclear on Tuesday whether the bill had enough backing to pass this week.
“It’s a lame food fight to be having if we don’t, in fact, have the votes,” said a senior Democratic aide.
The legislation is unlikely to move forward in the Senate. While some senators, including Sen. Jeff Merkley (D., Ore.) and Sen. Mark Kelly (D., Ariz.), have backed legislation that would prevent lawmakers from owning stock, they have failed to gain consensus on one bill.
Federal Officials Trade Stock In Companies Their Agencies Oversee
Hidden records show thousands of senior executive branch employees owned shares of companies whose fates were directly affected by their employers’ actions, a Wall Street Journal investigation found.
Thousands of officials across the government’s executive branch reported owning or trading stocks that stood to rise or fall with decisions their agencies made, a Wall Street Journal investigation has found.
More than 2,600 officials at agencies from the Commerce Department to the Treasury Department, during both Republican and Democratic administrations, disclosed stock investments in companies while those same companies were lobbying their agencies for favorable policies.
That amounts to more than one in five senior federal employees across 50 federal agencies reviewed by the Journal.
A top official at the Environmental Protection Agency reported purchases of oil and gas stocks. The Food and Drug Administration improperly let an official own dozens of food and drug stocks on its no-buy list.
A Defense Department official bought stock in a defense company five times before it won new business from the Pentagon.
The Journal obtained and analyzed more than 31,000 financial-disclosure forms for about 12,000 senior career employees, political staff and presidential appointees.
The review spans 2016 through 2021 and includes data on about 850,000 financial assets and more than 315,000 trades reported in stocks, bonds and funds by the officials, their spouses or dependent children.
The vast majority of the disclosure forms aren’t available online or readily accessible. The review amounts to the most comprehensive analysis of investments held by executive-branch officials, who have wide but largely unseen influence over public policy.
Among The Journal’s Findings:
• While the government was ramping up scrutiny of big technology companies, more than 1,800 federal officials reported owning or trading at least one of four major tech stocks: Meta Platforms Inc.’s Facebook, Alphabet Inc.’s Google, Apple Inc. and Amazon.com Inc.
• More than five dozen officials at five agencies, including the Federal Trade Commission and the Justice Department, reported trading stock in companies shortly before their departments announced enforcement actions, such as charges and settlements, against those companies.
• More than 200 senior EPA officials, nearly one in three, reported investments in companies that were lobbying the agency. EPA employees and their family members collectively owned between $400,000 and nearly $2 million in shares of oil and gas companies on average each year between 2016 and 2021.
• At the Defense Department, officials in the office of the secretary reported collectively owning between $1.2 million and $3.4 million of stock in aerospace and defense companies on average each year examined by the Journal. Some held stock in Chinese companies while the U.S. was considering blacklisting the companies.
• About 70 federal officials reported using riskier financial techniques such as short selling and options trading, with some individual trades valued at between $5 million and $25 million. In all, the forms revealed more than 90,000 trades of stocks during the six-year period reviewed.
• When financial holdings caused a conflict, the agencies sometimes simply waived the rules. In most instances identified by the Journal, ethics officials certified that the employees had complied with the rules, which have several exemptions that allow officials to hold stock that conflicts with their agency’s work.
Federal agency officials, many of them unknown to the public, wield “immense power and influence over things that impact the day-to-day lives of everyday Americans, such as public health and food safety, diplomatic relations and regulating trade,” said Don Fox, an ethics lawyer and former general counsel at the U.S. agency that oversees conflict-of-interest rules.
He said many of the examples in the Journal analysis “clearly violate the spirit behind the law, which is to maintain the public’s confidence in the integrity of the government.”
Some federal officials use investment advisers who direct their stock trading, but such trades still can create conflicts under the law. “The buck stops with the official,” said Kathleen Clark, a law professor and former ethics lawyer for the Washington, D.C., government. “It’s the official who could benefit or be harmed…. That can occur regardless of who made the trade.”
Investing by federal agency officials has drawn far less public attention than that of lawmakers. Congress has long faced criticism for not prohibiting lawmakers from working on matters in which they have a financial interest.
The rules were tightened in 2012 by the Stop Trading on Congressional Knowledge (STOCK) Act, passed following a series of Journal articles on congressional trading abuses.
Journal reporting last year on federal judges, revealing that more than 130 jurists heard cases in which they had a financial interest, led to a law passed this May requiring judges to promptly post online any stock trades they make.
This article launches a Journal series on the financial holdings of senior executive-branch employees and, in some instances, conflicts of interest hidden in their disclosure forms.
U.S. law prohibits federal officials from working on any matters that could affect their personal finances. Additional regulations adopted in 1992 direct federal employees to avoid even an appearance of a conflict of interest.
The 1978 Ethics in Government Act requires senior federal employees above a certain pay level to file annual financial disclosures listing their income, assets and loans. The financial figures are reported in broad dollar ranges.
Most officials’ financial disclosures are public only upon request. The Journal obtained disclosure forms by filing written requests with each federal agency.
Some made it difficult to obtain the forms, and several agencies haven’t turned over all of them. The Department of Homeland Security hasn’t provided any financial records. (See an accompanying article on methodology.)
Under federal regulations, investments of $15,000 or less in individual stocks aren’t considered potential conflicts, nor are holdings of $50,000 or less in mutual funds that focus on a specific industry. The law doesn’t restrict investing in diversified funds.
Some federal officials, especially those at the most senior levels, sell all their individual stocks when they enter the government to avoid the appearance of a conflict.
The Office of Government Ethics, which oversees the conflict-of-interest rules across the executive branch, is “committed to transparency and citizen oversight of government,” said a spokeswoman.
She said the agency publishes financial disclosures of the most senior officials on its website, along with instructions for getting disclosures from other agencies.
At the EPA, an official named Michael Molina and his husband owned oil and gas stocks while Mr. Molina was serving as senior adviser to the deputy EPA administrator, according to agency records.
Such companies stood to benefit from former President Donald Trump’s pledge to promote energy production by rolling back environmental regulations and speeding up projects.
Mr. Molina’s job gave him a front-row seat to deliberations about environmental regulations relating to energy. He “reviews and coordinates sensitive reports, documents and other materials,” said his job description, provided by the EPA in response to a public-records request.
He served as a “personal and confidential representative” of the EPA deputy administrator in communications with the White House and Congress, according to the job description.
In the month he started the job, May 2018, Mr. Molina reported purchases totaling between $16,002 and $65,000 of stock in Cheniere Energy Inc., a leading producer and exporter of liquefied natural gas.
He reported adding Cheniere stock five additional times over the next year. At the time, senior EPA officials were encouraging the production of natural gas in the U.S.
The trades were made through a financial adviser in his husband’s account, according to emails and disclosure forms reviewed by the Journal.
Mr. Molina was required to enter the trades into the EPA’s electronic-disclosure system within 30 days of receiving notice of the transactions, under the 2012 STOCK Act.
Officials are responsible for ensuring that their holdings don’t conflict with their work, regardless of whether they use a financial adviser.
The Journal’s review of disclosures shows that many federal officials tell their financial advisers to avoid investing in certain industries or to shed specific stocks.
In an interview on Sept. 28, Mr. Molina indicated that he didn’t know much about the energy trades. “I can say this on the record: I didn’t even know what Cheniere was until 36 hours ago,” he said.
In February 2019, Mr. Molina was promoted to EPA deputy chief of staff. He attended scores of meetings on environmental issues, reviewed matters for the then-head of the agency, Andrew Wheeler, and was sometimes asked his opinions in meetings, according to records reviewed by the Journal and people familiar with the matter.
In about 2½ years at the EPA, Mr. Molina reported more than 100 trades in energy and mining companies including Duke Energy Corp., NextEra Energy Inc. and BP PLC.
About 20 of the transactions were for between $15,001 and $50,000 each, according to Mr. Molina’s disclosures. Those trades also were made for his husband by his financial adviser.
In the month he was promoted, February 2019, his husband made several stock purchases through the adviser in Cheniere and Williams Cos., which builds and operates natural-gas pipelines.
Two months later, Mr. Trump said the EPA would propose new rules to help the gas industry.
After publication of this article, Mr. Molina said in a written statement: “Neither I nor my husband knew about or directed any of these trades. Our financial advisor had complete discretion to trade in the account, and these same trades were made on behalf of a ‘pool’ of several dozen clients—not for us individually.”
Mr. Molina left the EPA in January 2021. An EPA spokeswoman said the agency’s ethics office “counseled Mr. Molina on his ethics and financial disclosure obligations.”
EPA officials signed Mr. Molina’s financial-disclosure statement in each year he worked at the agency, an indication they believed he was in compliance with the conflict-of-interest rules.
U.S. law leaves it to individual agencies to decide whether they need rules to beef up the federal conflict-of-interest law.
The Federal Energy Regulatory Commission explicitly bars its officials from investing in natural gas, interstate oil pipeline, utility and other energy firms.
The EPA doesn’t have additional agencywide rules. A spokeswoman for the EPA said its officials may invest in energy companies so long as they aren’t working on policies that could affect their investments.
Mr. Molina’s boss told ethics officials that he had no influence over public policy matters.
Greg Zacharias was the chief scientist for the Defense Department’s director of operational test and evaluation until last fall.
He repeatedly bought stock in a defense contractor in the weeks before the Pentagon announced it would pay the company $1 billion to deliver more F-35 combat jets, while his division was overseeing testing of those planes.
Mr. Zacharias made five purchases of Lockheed Martin Corp. stock, collectively worth $20,700, in August and September 2021, according to figures he provided.
On Sept. 24, 2021, the Defense Department said it was buying 16 F-35 jets from Lockheed for the Air Force and Marine Corps. Lockheed shares closed up 1.1% the next trading day. The stock made up a small part of Mr. Zacharias’s portfolio.
Mr. Zacharias’s office had been involved for years in overseeing testing of combat jets, and testing officials regularly met with the Pentagon’s F-35 Joint Program Office and with Lockheed directly, according to former defense officials.
Mr. Zacharias, who provided scientific and technical expertise on how to assess the effectiveness of weapons systems, didn’t attend those meetings.
In an interview, Mr. Zacharias said he wasn’t involved in decisions on contracting and had no inside knowledge ahead of the contract, beyond the public information that the Pentagon remained committed to the F-35 program.
He acknowledged that his role could have allowed him to access information about specific weapons systems.
“I could always walk downstairs and ask them how it’s going. But that really wasn’t an interest of mine,” he said, adding that his focus was emerging technologies.
Mr. Zacharias said he wanted to buy stock in defense contractors, including Lockheed, because of their dominance of the defense market. He said he didn’t pay much attention to the timing of trades, adding: “I’m just the pipe-smoking science guy.”
The Lockheed investments were among more than 50 trades Mr. Zacharias reported in about a half-dozen defense contractors in 2020 and 2021, according to the Journal’s analysis.
“I apologize that things don’t look good on the buy side,” Mr. Zacharias added. Of the trades in defense contractors, he said: “I just decided that would be a good investment at the time.”
He said ethics officials didn’t raise concerns about his trades in Lockheed or any of the other defense contractors he reported investments in, beyond periodically sending a letter reminding him not to take part in contract negotiations involving the companies. He said ethics rules could be “a little tighter.”
A Pentagon spokeswoman said Mr. Zacharias “worked with his supervisor and ethics officials to implement appropriate disqualifications.”
She said the department requires supervisors to screen their employees’ disclosures for conflicts in addition to the review conducted by ethics officials. Ethics officials certified that he complied with the law.
Some conflicts of interest stemmed from agencies’ misunderstanding of their own rules.
The FDA prohibits employees, their spouses and their minor children from investing in companies that are “significantly regulated” by the agency.
The FDA maintains an online list of the prohibited companies for officials to check.
An FDA official named Malcolm Bertoni disclosed that he and his wife owned stock in about 70 pharmaceutical, diagnostics, medical device and food companies regulated by the agency in 2018 and 2019, including drug giants Pfizer Inc. and Takeda Pharmaceutical Company Ltd. All were on the prohibited list.
Mr. Bertoni, a career executive, ran the FDA’s planning office from 2008 to 2019, researching and analyzing agency programs.
Most of the investments he reported were in the range of $1,001 to $15,000, but his 2019 disclosure showed he and his wife owned between $15,001 and $50,000 in each of Allergan PLC, Sanofi SA, Takeda and Zoetis Inc.
Mr. Bertoni’s lawyer, Charles Borden, said Mr. Bertoni and his wife held these stocks despite the bans because they got bad advice from the FDA ethics office.
The stocks were in accounts managed by professionals who had discretion to trade without the knowledge of Mr. Bertoni or his wife, the attorney said.
He said that years ago, Mr. Bertoni asked the ethics office how he should treat the accounts and was told they fell into an exception to the rules for mutual funds.
They did not. The ethics office discovered its error in a routine review of Mr. Bertoni’s forms in early 2019, Mr. Borden said.
“The FDA’s Office of Ethics and Integrity took full responsibility for the inaccurate guidance given to Mr. Bertoni,” the attorney said in an email.
After considering the tax and retirement-planning consequences of having to sell the stocks, and other personal factors, Mr. Bertoni chose to retire instead, his lawyer said.
An FDA spokesman said Mr. Bertoni was recused from matters involving the companies once he reported his family’s holdings in them. The spokesman declined to comment on the events leading up to his departure.
“The FDA takes seriously its obligation to help ensure that decisions made, and actions taken, by the agency and its employees, are not, nor appear to be, tainted by any question of conflict of interest,” said the spokesman.
When federal officials are found to have violated conflicts rules and are referred to criminal authorities, they often receive light punishment if any, according to records reviewed by the Journal.
Valerie Hardy-Mahoney, a lawyer who runs the National Labor Relations Board’s Oakland, Calif.-based regional office, held Tesla Inc. shares as her office pursued complaints against the auto maker and Chief Executive Elon Musk and considered whether to file more.
Members of the labor relations board, appointed by the president, review decisions made by agency administrative courts. Ms. Hardy-Mahoney acts as a prosecutor in those courts. She is a career employee who joined the NLRB in the 1980s.
Ms. Hardy-Mahoney’s office filed complaints against Tesla in 2017 and 2018. She reported holding Tesla shares worth $1,001 to $15,000 in 2019 while those cases were ongoing.
The next year, her disclosure form shows, she owned Tesla shares valued at between $30,002 and $100,000 in E*Trade accounts. She purchased two chunks of Tesla stock in August 2020, each valued at between $1,001 and $15,000, according to her disclosure form.
The NLRB ruled in March 2021 that Tesla had illegally fired an employee involved in union organizing and that Mr. Musk, in a tweet, had coerced employees by threatening them with the loss of stock options if they unionized.
It ordered Tesla to reinstate the employee and Mr. Musk to delete the tweet. Tesla has disputed the findings and has appealed the decision to a federal appeals court.
Ms. Hardy-Mahoney’s office has in other cases rejected charges against Tesla filed by employees, including allegations her office received in 2020, after she bought more Tesla stock, according to an NLRB case docket.
An employee who worked at the Tesla Gigafactory alleged that the company interfered with workers’ rights. Ms. Hardy-Mahoney’s office dismissed the charge in January 2021.
Last November, an NLRB ethics official declined to certify that Ms. Hardy-Mahoney was in compliance with ethics laws and regulations, according to her disclosure form.
The NLRB’s inspector general said in a report that his office had substantiated an allegation of violating federal law by participating in a matter in which an employee had a financial interest. An agency spokeswoman confirmed that the report involved Ms. Hardy-Mahoney.
The report said that the matter was referred to the local U.S. attorney’s office, but that federal prosecutors declined to take it.
The report said the subject of the report—Ms. Hardy-Mahoney—received additional training regarding financial conflicts of interest and the case was closed.
Ms. Hardy-Mahoney declined to comment. She recused herself from Tesla cases last year and now is in compliance with conflict-of-interest rules, the NLRB spokeswoman said.
At the Federal Reserve, an economist named Min Wei reported trades in stock of a marijuana company after the Fed sought clarity about whether banks could serve cannabis businesses.
A Fed spokeswoman said the trades were made by Ms. Wei’s husband.
In June 2018, Fed Chairman Jerome Powell said publicly that the issue put the central bank “in a very, very difficult position.” Even though its mandate has nothing to do with marijuana, Mr. Powell said, he “just would love to see” a clear policy on the matter.
Because Mr. Powell didn’t dismiss the idea, investors saw the comment as bullish for cannabis companies such as Tilray Brands Inc., a leading producer. Tilray went public the following month, and its stock skyrocketed.
In early September 2018, Ms. Wei’s husband bought between $480,005 and $1.1 million of Tilray shares, according to her disclosure form and the Fed. The stock continued to surge.
It then became clear that neither the Fed nor the Treasury would take action; it would be up to Congress, with no quick fix in sight. In October, shares of cannabis companies began to fall.
Ms. Wei’s husband sold his Tilray stake in five sales in early October. By then, the shares had nearly doubled, worth between $800,005 and $1.75 million, according to Ms. Wei’s disclosure.
The Fed imposed new restrictions this year on investing by bank presidents, Fed board governors and senior staff after the Journal reported questionable trading by presidents of two Fed banks, who subsequently resigned.
The new rules prohibit trading individual stocks and bonds and require that trades, even in mutual funds, be preapproved and prescheduled.
The new Fed rules for top people don’t apply to Ms. Wei because she isn’t senior enough. The trades were “permissible then and are permissible now,” said the Fed spokeswoman.
Ms. Wei referred questions to the Fed. The spokeswoman said Ms. Wei had “no responsibility or involvement with policy decisions related to bank supervision or the provision of banking services.”
She said the Fed “did not assert any interest at the time in the Federal Reserve resolving the conflict between federal and state law in the area of cannabis companies and their access to banking services, but rather pointed out that the appropriate resolution of those issues should come from the Congress.”
Ethics lawyers said trading such large amounts of an individual stock while the Fed is publicly addressing an issue creates an appearance problem, even if Ms. Wei’s trades didn’t violate conflicts rules.
Roughly seven dozen federal officials reported more than 500 financial transactions apiece over the six-year period analyzed by the Journal.
Some traded a single stock frequently, while others reported hundreds or even thousands of trades across a broad array of stocks, bonds and funds.
In one instance, the Commodity Futures Trading Commission permitted short sales contrary to one of the CFTC’s own rules.
The financial disclosure of Lihong McPhail, an economist at the CFTC, showed the most trading reported by any federal official in the Journal’s review.
Her husband made more than 9,500 trades in 2020—an average of about 38 each trading day, according to her disclosure form and the CFTC.
About one-third of those reported 2020 trades—2,994—involved shorting stocks, or betting on a fall in their price. They ranged from Amazon to Ford Motor Co. to Zoom Video Communications Inc. The CFTC said all the short sales were made by her husband.
Over the years, to safeguard the CFTC’s integrity, Congress imposed tighter restrictions than at other agencies on employees’ investing.
In amending the Commodity Exchange Act, Congress also declared that any breach by a CFTC employee of an investment rule set by the commission could be punishable by up to a $500,000 fine and five years in prison.
The CFTC’s role doesn’t include regulating stocks, but in 2002, the agency adopted a rule banning short selling by its employees and their families.
Nonetheless, a CFTC ethics official approved short selling by Ms. McPhail’s husband, Joseph McPhail, a CFTC spokesman said, fearing that the commission “could possibly be sued by the employee if we said no.”
The spokesman said the ethics office believed the regulatory provision exceeded the commission’s statutory authority.
Mr. McPhail referred questions to the CFTC. The CFTC spokesman said he didn’t speak for the McPhails. Ms. McPhail didn’t respond to requests for comment.
At the CFTC, “employees are required by statute and by regulations to adhere to strict ethical standards and to disclose personal investments to ensure that the work of the CFTC to oversee markets is free from any conflict of interest,” said the agency spokesman. “In this instance, several years ago the employee sought advice regarding their spouse’s investments and received approval from career ethics counsel.”
Mr. McPhail was a senior policy analyst at the Federal Deposit Insurance Corp. until September 2021. In a written statement, that agency said: “The FDIC expects our employees, as public servants, to devote their time and efforts to our mission to maintain stability and public confidence in the nation’s banking system.”
The Defense Department was among the federal agencies with the most officials who invested in Chinese stocks, even as the Pentagon in recent years has shifted its focus to countering China.
Across the federal government, more than 400 officials owned or traded Chinese company stocks, including officials at the State Department and White House, the Journal found. Their investments amounted to between $1.9 million and $6.6 million on average a year.
Reed Werner, while serving as deputy assistant secretary of defense for south and southeast Asia, in December 2020 reported a purchase of between $15,001 and $50,000 of stock in Alibaba Group Holding Ltd.
At the time, discussions were under way at the Pentagon over whether to add the Chinese e-commerce giant to a list of companies in which Americans were barred from investing because of their alleged ties to the Chinese government.
Defense and State officials pushed to add the company to the blacklist, while the Treasury feared this would have wide capital-markets ramifications.
Mr. Werner had been involved over a period of months in some discussions about what companies to add to the blacklist, former defense officials said.
Nearly two weeks after the Alibaba purchase, the Treasury updated its list and didn’t include Alibaba. The company’s stock rose 4% that day.
Three days later, Mr. Werner’s financial-disclosure form shows a sale of between $15,001 and $50,000 of Alibaba stock.
The sale came a day before a meeting where defense officials planned to press their case for adding Alibaba and two other companies to the blacklist. Then-Treasury Secretary Steven Mnuchin ultimately blocked the effort.
In an interview, Mr. Werner acknowledged he was involved in discussions about adding Alibaba to the list, saying he attended a meeting in late 2020 and was on an email chain about the matter.
He said that he wasn’t involved in blacklist discussions during the period the Alibaba trades were made, and that the trades resulted in a $1,556.51 gain. He declined to answer further questions.
The Pentagon spokeswoman said that the officials who formally compiled and approved the blacklist didn’t own stock in affected companies, and that supervisors and ethics officials review reports for holdings that could conflict with an employee’s duties. Ethics officials certified that Mr. Werner complied with the law.
At least 15 other defense officials in the office of the secretary reported that they or family members owned or traded Alibaba between 2016 and 2021, including Jack Wilmer, who served as senior cybersecurity adviser at the White House and then as the Pentagon’s top cybersecurity official.
Between 2018 and 2020, Mr. Wilmer reported at least six trades, which he said totaled around $10,000, in the Chinese companies Alibaba, search-engine giant Baidu Inc. and China Petroleum & Chemical Corp.
Mr. Wilmer said that a money manager handles his trades and that he didn’t direct any of those transactions. He said he wasn’t involved in policy-making decisions that would have affected those stocks and said he didn’t see a conflict between his job and investments.
He left the government in July 2020, before Mr. Trump signed the executive order barring Americans from investing in certain Chinese companies.
Within federal agencies, ethics officials generally don’t consider it their job to investigate whether employees are making stock trades based on information they glean from their government jobs.
Ethics officials’ ability to spot potential conflicts is limited because they usually don’t know what employees are working on.
When ethics officials do see a potential violation, they can refer it to their agencies’ inspectors general, who refer cases on to the Justice Department if they find evidence of wrongdoing.
A Journal review of inspector general reports showed that the offices rarely investigated financial conflicts. As more federal officials invest in the stock market, ethics officials say they have less time to look into possible wrongdoing.
When findings have been referred to the Justice Department, prosecutors in most cases have declined to open an investigation.
One matter at the Securities and Exchange Commission involved an official who failed to report or clear his and his spouse’s financial holdings and trades for at least seven years.
The trades included stocks that SEC employees and their families weren’t allowed to own, some of which the SEC inspector general determined posed a conflict with the official’s work, according to a report the inspector general provided to Congress.
When a U.S. attorney declined to prosecute, the SEC’s inspector general reported the findings to SEC management. The unnamed official ultimately was suspended for seven days and gave up 16 hours of leave time.
The SEC declined to comment. A Justice Department spokeswoman declined to comment on individual investigations but said: “We take all inspector general referrals seriously and bring charges when the facts and law support them, consistent with the principles of federal prosecution.”
Most federal agencies don’t have protocols to verify that officials’ financial disclosures are complete. One Agriculture Department official disclosed wheat, corn and soybean futures and options trades.
The Journal discovered that he had made additional large trades in corn and soybean futures in 2018 and 2019 and omitted them from his reports.
The official, Clare Carlson, who is no longer at the USDA, said that he tried to be scrupulous in his disclosures, and that the omissions were honest mistakes. The Agriculture Department declined to comment.
At the EPA, Mr. Molina’s financial-disclosure reporting caught the attention of ethics officials.
The conflict-of-interest rules say executive-branch employees may not “participate personally and substantially” in matters that have a “direct and predictable effect” on their investments and those of family members.
When the ethics officials contacted Mr. Molina about energy stocks he reported on his forms, they were told he didn’t have any influence over environmental policy.
His “duties are administrative in nature,” his boss, the EPA’s chief of staff at the time, told the ethics officials. “He provides logistical support to the principal but does not participate personally and substantially in making any decisions, recommendations or advice that will have any direct or substantial effect” on his financial interests, the chief of staff said, according to Mr. Molina’s financial disclosure.
In his time at the EPA, Mr. Molina clashed with ethics officials. Many of his financial disclosure reports were inaccurate and tardy, according to EPA emails reviewed by the Journal.
At one point, he didn’t file accurate monthly trading disclosures for 12 months, according to the EPA emails. Mr. Molina reported the stock trades on his annual financial reports, as required.
Ethics officials said they contacted Mr. Molina “scores” of times to press him to file timely reports, according to the emails reviewed by the Journal.
In one email, a senior ethics official said his office had “provided you with at least 3-5 times more personal assistance than for any other agency employee, yet the required ethics reports were still late.”
Mr. Molina told EPA officials that he initially didn’t know he was supposed to complete regular stock-trading reports. He later struggled to keep up with the EPA’s electronic-disclosure system, according to the emails reviewed by the Journal.
In September 2020, the EPA fined Mr. Molina $3,200 for numerous failures to disclose stock trades to the agency on time. Mr. Molina refused to pay.
“We have never before had an employee refuse to pay the late fee,” wrote one ethics officer in an email to Mr. Molina on Oct. 21, 2020, “so I will have to inquire about how to commence garnishment proceedings.”
The next month, Mr. Molina accused ethics officials of discriminating against him. “I feel that I am being targeted and have been asked to report more than anyone else,” he wrote in a Nov. 3, 2020, email.
“If the intent of these filings is to curb any corruption or misbehavior,” Mr. Molina wrote, the EPA should open an investigation. “I believe that paying such an outrageous fine would be an admission that I have done something wrong in this regard.”
Ethics officials didn’t investigate Mr. Molina’s trades or refer the matter to internal investigators.
On the evening of Jan. 19, 2021, Mr. Molina’s final day working for the government, EPA ethics officials offered to end the matter if he paid a discounted fine of $1,067.
Mr. Molina wrote out a personal check to “U.S. Treasury” and sent it to officials in the EPA’s ethics office, including to Justina Fugh, an official with whom he had clashed.
In the memo line of his check, Mr. Molina wrote: “Justina tax.”
How WSJ Analyzed 12,000 Federal Officials’ Financial Disclosures For Its ‘Capital Assets’ Investigation
The federal government doesn’t maintain a comprehensive public database of the mandatory financial disclosures of all senior executive-branch officials. So The Wall Street Journal built its own.
To do that, the Journal collected and analyzed data on about 850,000 financial assets and more than 315,000 transactions for about 12,000 officials at 50 federal agencies between 2016 and 2021.
The Journal compared this data to lobbying reports filed by companies to identify officials who invested in firms seeking favorable treatment from those agencies, or whose immediate family members did.
Journal reporters also cross-referenced reported stock trades with announcements of contracts and of regulatory, enforcement and legal actions.
That database underpins the Journal’s Capital Assets investigation, the most comprehensive review to date of the investments of senior federal officials and their families.
Journal reporters spent 10 months gathering more than 31,000 financial disclosure forms, and analyzed them using a combination of automated computer systems and manual review.
The investigation underscores how a process meant to enable the public to scrutinize the finances of government officials—and potential conflicts of interest—is anything but easy to navigate.
The review covers executive-branch officials required to file annual public financial disclosures. It includes Senate-confirmed appointees, the senior executive service—political and career roles that aren’t subject to confirmation but still have broad oversight responsibilities—and other officials who report to presidential appointees.
The review doesn’t cover all federal workers, some of whom file confidential financial disclosures with ethics officials.
The vast majority of the financial filings for career and political staff aren’t available online and can be obtained only by requesting them from each agency.
The Journal filed requests for annual and termination reports with more than 50 agencies beginning in January.
Some agencies agreed to fulfill the bulk request in response to a written query. Others, including some of the largest departments, also required the Journal to submit a list of names of the officials—but declined to provide the names of their employees.
To obtain employee names, the Journal filed Freedom of Information Act requests with those agencies, several of which took months to comply. Some agencies initially declined to provide such a list, until contacted by a Journal lawyer.
Some large agencies, including Defense and Justice, required the Journal to submit FOIAs and written requests to each of their separate divisions.
For the Justice Department, the Journal’s analysis includes Main Justice—which refers to the offices of the attorney general, deputy attorney general, associate attorney general and solicitor general, among others—as well as the antitrust division and the Executive Office for U.S. Attorneys.
For the Pentagon, the analysis includes filers in the office of the defense secretary, which includes the offices of top civilian decision makers.
Once the Journal received names of employees, it submitted written requests for the financial disclosures. For a narrower group of agencies, the Journal also requested disclosures filed in 2022.
Of the 50 federal agencies in the analysis, eight have yet to provide all of the requested reports: the Agriculture Department, the Commerce Department, the Energy Department, the Federal Communications Commission, the Justice Department’s Executive Office for U.S. Attorneys, the National Labor Relations Board, the State Department and the Transportation Department.
Officials aren’t required to use a standardized name for companies and investments or to provide stock symbols in their disclosures.
The forms include acronyms and shorthand (sometimes handwritten), and many contain misspellings or incorrect stock symbols. Officials also incorrectly labeled some investments or left off key information such as dates.
To decipher the forms, the Journal employed several automated computer systems to extract data, while hand-reviewing nearly all of them.
That data was then fed into a database detailing each individual transaction and asset listed for each senior executive-branch employee.
The Journal used a suite of algorithms to match each of nearly 1.2 million descriptions of assets and transactions against an internal database of publicly traded companies.
To ensure accuracy, the work of the algorithms was manually spot-checked by reporters.
Even so, the analysis was limited in several ways by the form and nature of the financial disclosures. Many forms were incomplete, contained ambiguous entries or had clearly erroneous data, such as future dates.
The Journal excluded any such entries from its analysis.
The Journal also took steps to ensure its analysis included only stock transactions reported by officials while in government service and not any that were part of a divestiture process, which can require officials to sell assets that pose a conflict.
Reports filed by new entrants to the government weren’t included in the analysis because they detail assets held in the private sector.
The Journal also chose to exclude any assets within the lowest valuation range of $0 to $1,000 on an employee’s first annual report and that didn’t appear in later year forms. Sales where no corresponding assets were disclosed also were dropped from the analysis.
In the lobbying analysis, the Journal included only publicly traded companies and didn’t include trade associations. Journal reporters reviewed the 250 companies most commonly listed on disclosure forms for common alternate spellings or changes to names, but some smaller companies that had been mislabeled were excluded.
In the agency action analysis, the Journal reflected trades of a company’s stock made within 90 days of an agency’s enforcement action, such as charges and settlements, against that company.
The federal disclosure forms require officials only to use ranges, rather than actual dollar amounts, to report the value of assets and trades.
Six Takeaways From WSJ’s Investigation Into The Stock Trades of Government Officials
Wall Street Journal investigation revealed that thousands of officials across the U.S. government’s executive branch disclosed owning or trading stocks that stood to rise or fall with decisions their agencies made.
Across 50 federal agencies ranging from the Commerce Department to the Treasury Department, more than 2,600 officials reported stock investments in companies while those companies were lobbying their agencies for favorable policies, during both Republican and Democratic administrations.
When the financial holdings caused a conflict, the agencies sometimes simply waived the rules.
The Office of Government Ethics, which oversees the conflict-of-interest rules across the executive branch, is “committed to transparency and citizen oversight of government,” said a spokeswoman.
Among the findings of the investigation, which is the most comprehensive analysis of stock trading by officials in the executive branch of the government:
Numerous Federal Officials Owned Shares Of Companies Lobbying Their Agencies:
More than 200 senior officials at the Environmental Protection Agency, or nearly one in three, reported that they or their family members held investments in companies that were lobbying the agency.
EPA employees and their family members collectively owned between $400,000 and nearly $2 million in shares of oil and gas companies on average each year between 2016 and 2021.
Issues Emerged At A Wide Array Of Agencies:
At the Defense Department, officials in the office of the secretary or their family members collectively owned between $1.2 million and $3.4 million of stock in aerospace and defense companies, on average, during years the Journal examined.
Some owned stock in Chinese companies while the U.S. considered blacklisting the companies.
An EPA official reported purchases of oil and gas stocks. The Food and Drug Administration improperly let an official own dozens of food and drug stocks on its no-buy list.
A Defense Department official bought stock in a defense company five times before it won new business from the Pentagon.
Some Officials Traded Ahead Of Regulatory Actions:
More than five dozen officials at five agencies reported trading stocks of companies shortly before their departments announced enforcement actions against those companies, such as charges or settlements.
Federal Officials Are Big Technology Investors:
While the government was ramping up scrutiny of large technology companies, more than 1,800 federal officials reported owning or trading at least one of four major tech stocks: Meta Platforms Inc.’s Facebook, Alphabet Inc.’s Google, Apple Inc. and Amazon.com Inc.
Some Officials Made Large And Risky Trades:
About 70 federal officials or their family members reported using sophisticated techniques such as options trading and short selling, with some individual trades of between $5 million and $25 million.
In all, the disclosure forms revealed more than 90,000 stock trades during the six-year period reviewed.
The husband of a Commodity Futures Trading Commission economist in a single year shorted nearly 3,000 stocks, betting on a drop in their price. Such trading is contrary to CFTC rules, but the agency waived them, fearing it could be sued.
The Scope Of The Investigation Was Extensive:
The Journal obtained and analyzed more than 31,000 financial-disclosure forms for about 12,000 senior career employees, political staff and presidential appointees.
The review spans 2016 through 2021 and includes data on about 850,000 financial assets and more than 315,000 trades reported in stocks, bonds and funds by the officials, their spouses or dependent children.
The federal government doesn’t maintain a comprehensive public database of the mandatory financial disclosures of all senior executive-branch officials. The Journal built its own.
The Regulators Of Facebook, Google And Amazon Also Invest In The Companies’ Stocks
The Federal Trade Commission’s officials traded stocks and funds more than those at any other major agency, including going heavily into tech shares, The Wall Street Journal found.
The top watchdog of American business is also home to Washington’s most active Wall Street investors.
The Federal Trade Commission in recent years has opened investigations into nearly every major industry. It has launched antitrust probes into technology companies, examined credit card firms and moved to restrict drug, energy and defense-company mergers.
At the same time, senior officials at the FTC disclosed more trades of stocks, bonds and funds, on average, than officials at any other major agency in a Wall Street Journal review of financial disclosures at 50 federal agencies from 2016 to 2021.
Many of the investments overlapped with the FTC’s work.
A third of its 90 senior officials owned or traded stock in companies that were undergoing an FTC merger review or investigation, based on actions the agency has made public.
FTC officials owned stock in 22 of the roughly 60 large companies the FTC brought cases against in the period reviewed.
The officials were most heavily invested in technology, an industry that has come under increasing scrutiny by the agency.
Nearly one in four top FTC officials owned or traded individual stocks of tech companies such as Amazon.com Inc., Meta Platforms Inc.’s Facebook, Alphabet Inc.’s Google, Microsoft Corp. and Oracle Corp.
An FTC chairman owned Microsoft, Oracle and AT&T Inc. while the agency was conducting sensitive reviews affecting the tech and telecom sectors.
The head of the FTC’s international division bought and sold Facebook stock through a financial adviser as his office coordinated with overseas enforcement officials on an investigation involving Facebook.
And an FTC consumer-protection official owned stock in more than 10 companies as the agency scrutinized mergers or acquisitions involving the firms.
The FTC’s mandate gives it broad oversight over American business. Nearly every large U.S. company has interests that run through the hallways of the agency.
U.S. law prohibits federal employees from participating in policy matters in which they have a significant financial stake. Additional regulations direct federal employees to avoid even the appearance of a conflict.
The Journal obtained and analyzed financial disclosures for about 12,000 senior career employees, political staff and presidential appointees at 50 agencies who ranked high enough that they were required to file public reports.
The stock holdings the Journal identified among FTC officials were legal because the rules contain exemptions that often permit officials to own stocks that overlap with their agencies’ work.
An investment of $15,000 or less in an individual stock, or of $50,000 or less in an industry-specific mutual fund, isn’t deemed a conflict of interest under federal regulations.
An FTC spokesman said the agency officials had followed the law.
The spokesman said the agency has a “robust ethics program” and follows the rules set by Congress and the Office of Government Ethics. He said its ethics office reviews senior employees’ disclosures and counsels them on how to comply with the rules.
Before ethics officials will certify compliance, they require filers to confirm they have reviewed guidance on potential conflicts and aren’t aware of any actual conflicts.
“Ultimately, it is the filer’s obligation to comply with the rules,” the FTC spokesman said. Ethics officials certified that the employees in the Journal’s review were in compliance with the law.
The spokesman said the ethics office reports any conflicts it identifies to the agency’s inspector general. Its inspector general referred four such matters to the Justice Department between 2016 and 2020. Prosecutors declined to investigate any of them.
The law doesn’t require ethics officials to examine qualitative issues, such as the timing of trades, the number of transactions and how stock prices change over the course of the reporting period.
Nor do they examine broad patterns of stock ownership by officials throughout the agencies they help oversee.
Longtime ethics officials said the investing by FTC employees undermines the agency’s mission, even though in legal compliance.
It “hurts the reputation of the agency and the government in general,” said Kent Cooper, a former government official and expert on ethics issues.
“Are these decisions being made for the benefit of the public or the officials who have a personal benefit in the outcome?”
Ethics lawyers said the investments suggest the FTC might need to adopt tighter rules on what stocks officials are allowed to own and trade.
The Securities and Exchange Commission, for example, imposes additional restrictions, including barring officials from trading companies under SEC investigation regardless of whether they have personal knowledge of the probe. The FTC has no such rules beyond the federal conflict-of-interest law.
For years, the FTC has faced bipartisan criticism for not more aggressively enforcing competitive practices in corporate America. Now it is poised to take a far higher profile.
President Biden has signaled tougher antitrust scrutiny and appointed as chairwoman a vocal critic of large companies.
Randolph Tritell, the recently retired head of the FTC’s Office of International Affairs, reported more stock trades than any other FTC official in the period the Journal examined.
The office coordinates with foreign counterparts to make sure rules, merger conditions and enforcement actions are applied consistently, and coordinates the sharing of evidence and other information on overlapping investigations.
Mr. Tritell reported large holdings in technology stocks. He owned Apple Inc. stock valued at between $100,001 and $250,000, Amazon shares worth $15,001 to $50,000, and $1,001 to $15,000 of Microsoft stock, according to his most recent financial-disclosure form.
Since 2016, he has reported a total of more than three dozen trades in Facebook, Amazon, Microsoft and Oracle.
One of Mr. Tritell’s best-timed stock trades was an 80% gain in Amazon over nine months as the European Commission investigated whether the company violated antitrust rules.
Mr. Tritell said he followed the law. Ethics officials certified his disclosures each year as complying with the rules.
Mr. Tritell said a financial adviser handles his trading. He said he has the authority to provide some direction to the adviser, but rarely does. He said he had “no role whatsoever” in Amazon, Oracle, Apple and Microsoft trades.
An exception was Facebook, where Mr. Tritell said he didn’t have any role in the trades “other than for one transaction.” He declined to provide details.
Mr. Tritell disclosed six trades in Facebook amid a high-profile investigation into whether the company had abused consumers’ privacy.
His office coordinated with U.K. officials on the exchange of evidence and confidential information on an investigation involving Facebook and U.K.-based Cambridge Analytica. The FTC announced they were examining Facebook’s privacy practices in March 2018.
Two officials in Mr. Tritell’s office took the lead in the talks with U.K. counterparts, and one of his deputies acted as a supervisor, according to former officials.
Mr. Tritell had informal conversations with colleagues about the probe, but wasn’t briefed on the details of conversations with the U.K., according to the officials.
At the end of 2017, Mr. Tritell owned between $15,001 and $50,000 of Facebook shares, according to his financial disclosure. In April 2018, Mr. Tritell reported two purchases of Facebook shares.
He bought additional shares in June and December. In all, Mr. Tritell invested a total of just under $11,000 in Facebook that year, according to figures he provided the Journal.
Facebook shares rose in the early part of 2019, partly on news that a settlement of the investigation was near. On April 15, 2019, Mr. Tritell reported selling $5,327 worth of the stock, which was up 35% from the December purchase.
He sold the rest of his Facebook shares, $22,886 worth, on June 4, he said.
In July 2019, the FTC said it was imposing a $5 billion penalty on Facebook over its practices involving users’ data.
The same day it announced this penalty, the FTC sued Cambridge Analytica and said it had settled with the firm’s former chief executive. In its news release, the agency credited the cooperation with U.K. regulators overseen by Mr. Tritell’s office.
In an interview, Mr. Tritell said that his deputies largely handled fraud and deception matters such as the Facebook probe, and that for most such cases, “I was less briefed in detail because I knew they were doing a great job.”
Mr. Tritell said he didn’t discuss his office’s involvement in the case with ethics officials. He said they didn’t flag any potential conflicts to him. He also said it doesn’t make “any practical sense” for ethics lawyers to know what matters officials are working on.
Mr. Tritell said of the Facebook probe: “I wasn’t personally and substantially involved, so there’s no issue.” The law doesn’t consider stock holdings to be a conflict unless officials work “personally and substantially” on an issue that can affect their investments.
He said he meets with his financial adviser to discuss his portfolio roughly every six months.
He said he saw his trades when he reviewed his statements to file monthly transaction reports with the FTC ethics office, as required by a 2012 law known as the STOCK Act.
Mr. Tritell said he finds stock trading “horribly tedious” and “the last thing I want to spend my time on.”
Among officials with large holdings in companies affected by FTC decisions was James Kohm, associate director of the FTC Bureau of Consumer Protection’s enforcement division.
His job includes making sure companies comply with agreements reached with the agency to settle charges of unfair or deceptive practices.
Mr. Kohm disclosed owning between $15,001 and $50,000 in both Comcast Corp. and AT&T shares when the FTC’s consumer protection bureau issued orders in March 2019 to several U.S. broadband providers, including those two companies, seeking information about their privacy practices.
He also reported owning stock in more than three dozen companies, including more than 10 while they were undergoing FTC merger or acquisition reviews.
Mr. Kohm held Allstate Corp. shares worth between $100,001 and $250,000 in 2018 when the FTC cleared an Allstate takeover of a company called InfoArmor Inc.
Mr. Kohm held $50,001 to $100,000 in AstraZeneca PLC when the company announced a $39 billion plan to acquire drug firm Alexion Pharmaceuticals Inc. in late 2020. The FTC cleared the deal the following April.
In an email, Mr. Kohm said he didn’t work on any issues involving the companies he owned. He also said he hasn’t realized a profit on any of the stocks he owns because he hasn’t sold them.
Joseph Simons, the FTC chairman from 2018 until January 2021, disclosed more than 1,300 trades during his tenure. Fewer than a dozen were trades in individual stocks; the rest were in mutual funds and exchange-traded funds.
Half of the individual stocks he reported owning were technology and telecommunications companies involved in FTC reviews.
The FTC spokesman said Mr. Simons’s investments weren’t ethics violations because stock investments of $15,000 or below aren’t considered a conflict. “He sought and received counsel and took steps that were needed in order to comply,” the spokesman said.
When the FTC issued orders in March 2019 to the several broadband providers seeking information, Mr. Simons held between $1,001 and $15,000 in AT&T shares. He held onto the stock until August of that year, when he sold his stake.
The same day he sold his AT&T stock, Mr. Simons reported the sale of a stake in Charter Communications Inc., worth between $1,001 and $15,000. Less than two weeks later, the FTC broadened the examination of privacy rules to include Charter.
Mr. Simons also held some technology stocks when the FTC on Feb. 11, 2020, ordered the industry’s largest players—Alphabet, Amazon, Apple, Facebook and Microsoft—to provide more information about their previous acquisitions, as part of its examination of the tech sector’s growth.
In a news release announcing the orders, Mr. Simons said they would “help us continue to keep tech markets open and competitive, for the benefit of consumers.”
The next day, Mr. Simons sold between $2,002 and $30,000 worth of stock in Oracle, a rival tech company, according to his disclosures. He didn’t sell his Microsoft stock.
By the time he left office, the price of his Microsoft shares was up 140% from when he became chairman.
Mr. Simons declined to comment on his holdings.
A former acting director of the FTC office that enforces antitrust laws owned stock in three companies that came under scrutiny by the agency during his tenure.
Abbott Lipsky, a longtime antitrust attorney, was named acting director of the FTC’s Bureau of Competition in February 2017.
In a financial disclosure he filed later that year, Mr. Lipsky reported owning nearly 90 individual stocks, some of which were in a family trust of which he was a trustee and a beneficiary.
He reported that the trust held between $50,001 and $100,000 in stock of Emerson Electric Co., one-fifth of which was his share.
At the time, FTC competition officials were investigating Emerson’s planned $3.15 billion acquisition of a unit of Pentair PLC.
In April 2017, nearly two months after Mr. Lipsky started running the competition bureau, the FTC said it had reached an agreement with Emerson in which the company would sell Pentair’s switchbox business to settle the FTC’s charges that the acquisition would violate antitrust law.
In early May, Mr. Lipsky reported buying between $1,001 and $15,000 in JPMorgan Chase & Co. stock. He already owned shares in the company, according to his disclosure.
Seven weeks later, on June 29, the FTC cleared an acquisition involving JPMorgan.
Mr. Lipsky left the FTC on July 3, 2017. He didn’t respond to requests for comment. Ethics officials certified that he was in compliance with the law.
A pamphlet the FTC wrote for new employees in 2019 cautioned them against conflicts and urged them to stay abreast of their financial holdings. “Cheese gets better with age—financial data doesn’t,” it said.
The Pamphlet Added: “Some things are more precious than others—the public’s trust is one example.”
An FTC ethics lawyer who helped produce the pamphlet owned stocks herself in companies the agency investigated.
Lorielle Pankey and family members owned between $65,002 and $150,000 of Visa Inc. shares at the outset of an FTC inquiry into whether Visa and Mastercard Inc. had prevented retailers from using competing debit networks.
The card companies have said they comply with the law.
On July 13, an account controlled by Ms. Pankey’s family sold $5,613 of Visa stock, according to her disclosures and the FTC spokesman. On July 31, Visa disclosed in a quarterly report that the FTC had requested documents in June.
Ms. Pankey and her family kept most of their Visa shares, which were valued at between $100,002 and $200,000 at the end of 2020.
Shares of Visa more than doubled from the time Ms. Pankey started at the FTC in June 2016 to the end of 2020. The FTC investigation is continuing.
Ms. Pankey said she had fully complied with ethics requirements and said any suggestion she had violated the rules was “completely false.”
“I am not now and have never in the course of my FTC tenure personally and substantially participated in any FTC particular matter affecting the financial interests of Visa,” she said in an email. “Further, I have never used nonpublic information acquired in the course of my FTC duties for the private gain of myself or others.”
The FTC spokesman said that Ms. Pankey doesn’t work on FTC investigations of companies and that the stocks she owns are held in brokerage accounts opened by her father when she was a child.
He said Ms. Pankey didn’t direct any stock trades and that the Visa sale was made by a financial adviser who manages the account.
Another FTC official made large trades in Visa and Mastercard during the investigation.
When the probe became public in November 2019, FTC Chief Administrative Law Judge D. Michael Chappell held between $1 million and $5 million in Mastercard stock and between $100,001 and $250,000 in Visa shares, according to his disclosure form.
On Jan. 2, 2020, Mr. Chappell sold all of his Visa stock and between $250,001 and $500,000 of his Mastercard holdings. It was the first time he had sold shares in the companies in at least four years.
Since then, Mr. Chappell has sold Mastercard stock three more times, totaling between $400,003 and $850,000. At the end of last year, he reported owning between $500,001 and $1 million in Mastercard shares.
The FTC spokesman said Mr. Chappell “operates independently from the agency” and “has no knowledge of or involvement with FTC investigations or enforcement actions and in fact is strictly separated from any agency actions with respect to matters that come or could come before the Commission since he may be tasked with adjudicating these matters.”
In an interview, Mr. Chappell said that he didn’t work on the FTC’s investigation into Visa and Mastercard and that in his role, he is made aware of FTC investigations only once the agency files a lawsuit.
“I don’t know who they are investigating and I don’t care,” Mr. Chappell said.
He said he adheres to agency rules on stock ownership and attends the FTC’s annual training sessions.
He said he didn’t know the FTC was investigating Mastercard or Visa until the Journal brought it to his attention. Said Mr. Chappell: “I can assure you that I don’t know anything about that.”
Bostic Reveals Trading Missteps, Adding To Fed Ethics Scandal
* Powell Directs Fed Watchdog To Review Bostic’s Disclosures
* Atlanta Fed’s Board Expresses Its Support For Bostic
Another top Federal Reserve official revealed he violated central bank policy on financial transactions, leading Chair Jerome Powell to open a probe in the latest chapter of a broader Fed ethics scandal.
Atlanta Fed President Raphael Bostic said Friday that his asset managers made trades during restricted periods and transactions had been inadvertently omitted from his financial disclosures.
The regional bank also posted the corrected disclosures — going back to 2017, the year he became chief.
The development comes at a time when the central bank can ill afford distractions. It’s battling inflation at a 40-year high by aggressively raising interest rates while hoping to avoid a painful recession.
Bostic’s revelations reopen a damaging ethics scandal that erupted last year and led Powell to overhaul trading rules to support public confidence in the Fed, in an acknowledgment that the previous oversight lacked rigor.
Bostic said Friday he wasn’t aware of the specific trades or timing of the transactions, which were made by a third-party manager in accounts where he did not have ability to direct trades.
“I take very seriously my responsibility to be transparent about my financial transactions and to avoid any actual or perceived conflicts of interest,” Bostic, 56, said in the statement.
The Atlanta Fed’s board of directors expressed its support for Bostic. “My board colleagues and I have confidence in President Bostic’s explanation that he did not seek to profit from any FOMC-related knowledge,” board chair Elizabeth Smith said.
The ethics scandal’s earlier fallout saw two regional Fed presidents announce their early retirements following revelations about their unusual trading activity in 2020 as the central bank battled Covid-19, and placed Powell himself under scrutiny, alongside then-Vice Chair Richard Clarida.
Bostic explained in a seven-page statement Friday that he misunderstood the trading restrictions, and he sought to avoid conflicts of interest by holding his assets in managed accounts that he could not direct.
He said that he had “come to learn, however, that while I did not have the ability to direct trades in these accounts, the transactions directed by third parties, not just the assets themselves, should have been listed on my annual financial disclosure forms.”
That included what he said were a “limited number” of trades that took place during Federal Open Market Committee blackout periods or financial stress periods.
A Fed spokeswoman said Powell has asked the Board of Governors inspector general, the central bank’s internal watchdog, to review Bostic’s disclosures and “we look forward to the results of their work and will accept and take appropriate actions based on their findings.”
Comments From Fed Board Ethics Officials Included In Bostic’s Corrected 2021 Financial Disclosures Noted That:
* Bostic Omitted A Substantial Number Of Securities Transactions From The Disclosures That He Previously Filed
* He Held More Than $50,000 Of Treasury Funds In Violation Of Then-Applicable Board Policy
* Bostic Had Extensive Trading Activity During FOMC Trading Blackout Periods And During March-April 2020, Which He Explains Was Carried Out By Third-Party Financial Advisors With Investment Discretion Within Managed Account
Bostic said his assets are no longer in unified managed accounts and no “automatic” investments can occur without his approval. He also divested from assets that are no longer allowed under new trading rules that went into effect for senior Fed officials in May.
The Fed overhauled its ethics rules in 2021 after revelations about unusual trading activity during 2020 by several senior officials as the central bank slashed interest rates to nearly zero and unleashed emergency lending programs to protect the economy as the pandemic spread.
Then-Dallas Fed President Robert Kaplan and his Boston colleague Eric Rosengren both announced their early retirement following the revelations, with Rosengren citing ill health.
Clarida also came under scrutiny for his transaction on the eve of a Fed statement signaling it was getting ready to calm market panic.
He resigned Jan. 14, 2022, ahead of the expiration of his term as governor on Jan. 31.
Regional Fed presidents file annual financial disclosures, and it is now routine for those banks to make them publicly accessible.
The Fed IG has separately looked into transactions by Powell’s family trust and by Clarida, and closed the investigation in July saying it didn’t find evidence of wrongdoing.
Probes of senior reserve bank officials are ongoing, the IG said at the time.
The IG’s probe has been criticized as incomplete by Senator Elizabeth Warren, a Massachusetts Democrat,.
She said in a statement later on Friday that the revelations show “an alarming failure by President Bostic and further evidence of the depth of the ethics problem at the Fed.”
U.S. Hundreds of Energy Department Officials Hold Stocks Related To Agency’s Work Despite Warnings
Ethics lawyers caution officials not to work on matters affecting the companies but don’t tell them to sell.
U.S. ethics officials in recent years have warned one-third of the Energy Department’s senior officials that they or their families owned stocks related to the agency’s work, reminding them not to violate federal conflict-of-interest rules.
Most held on to the stocks, a Wall Street Journal analysis of officials’ financial disclosures from 2017 through 2021 shows.
The more than 300 agency officials who received such warnings include nearly six dozen who held stocks of major energy companies such as Exxon Mobil Corp.
More than 130 officials in the Energy Department collectively reported about 2,700 trades of shares, bonds and options in companies that ethics officers labeled as related to their agency’s work, according to the Journal’s analysis, which examined only disclosures by officials who filed annual reports in that period.
Behind those investments is a quirk in the Energy Department’s policies. Its ethics lawyers, as they review officials’ annual financial disclosure forms, painstakingly identify stocks that could pose conflicts with the department’s work, including companies that are regulated by the agency, contractors and loan or grant recipients.
When they find one, they mark it on the disclosure form, an internal reminder to send that official a letter.
The letter doesn’t direct the official to sell the stock. It just advises him or her not to work on matters that would “have a direct and predictable effect” on the company, and to “remain alert for any potential conflicts.” In the meantime, the official is allowed to continue owning the stock and is certified as complying with federal conflict-of-interest rules.
U.S. law prohibits federal officials from working “personally and substantially” on any matters in which they, their spouses or their dependent children have a significant financial stake. Regulations adopted in 1992 direct U.S. officials to avoid even an appearance of a conflict of interest.
In a series of articles last fall, the Journal reported that across 50 federal agencies, more than 2,600 government officials reported investments that stood to rise or fall with the decisions made by their agencies.
Like the rest of the federal ethics system, the Energy Department’s ethics policy has gaps. It doesn’t take into account whether officials have knowledge of or could come across information affecting companies they invest in.
Unless ethics lawyers believe the official wields substantial influence over policies or other matters affecting the companies, they don’t direct the official to sell the stock.
A spokeswoman for the Energy Department said the agency “works diligently to ensure staff is aware of and following the letter and spirit of ethics laws and regulations to ensure the American people have the utmost confidence their government is working for them.”
When ethics officials identify conflicts, the spokeswoman said, the agency works with the employees, their managers and the federal agency that oversees ethics rules to address the issues.
The spokeswoman added that the agency maintains “strong firewalls to reduce conflicts between employees and outside entities,” because the department’s research, development and demonstration portfolio focuses on technologies that span several industries, including energy, health care and computing.
Paul Golan, at the time an Energy Department overseer of two federal research labs in California, disclosed more than 130 trades in 18 companies the department identified as related to its work, including Chevron Corp., Schlumberger Ltd. (since renamed SLB), Boeing Co. and Caterpillar Inc.
He continued to report trades in several of them, including companies that were involved in research at the labs he oversaw.
In 2017, Chevron researchers collaborated with scientists at an Energy Department lab Mr. Golan oversaw on experiments that used X-ray technology to better predict corrosion rates from crude oil, which could help the company avoid costly safety incidents.
That year, Mr. Golan reported six trades in Chevron stock. He continued to report trades in its shares after ethics officials marked the holding as related to the Energy Department’s work and sent him a letter about it.
Mr. Golan reported buying and selling Chevron shares a total of 18 times over the next two years, mostly in chunks valued at between $15,001 and $50,000. In February 2020, ethics officials again noted Chevron was a company related to the department’s work. Mr. Golan reported six more trades in the stock made in 2020, this time in increments of $50,001 to $100,000.
Mr. Golan, who stopped overseeing that lab in July 2022, didn’t respond to requests for comment. The Energy Department spokeswoman said Mr. Golan, who was trained as a nuclear engineer, doesn’t participate in the peer review process the agency uses to determine which proposals submitted by individuals, academic institutions and corporations get to use the laboratories’ facilities.
David Meyer, a senior adviser in the Energy Department’s electricity division who worked on problems involving the modernization, expansion and reliability of transmission grids, reported frequent trading in stocks of energy, solar and electric-charging companies.
Mr. Meyer said in an email that the trades were made by his wife, a professional day-trader, who based her trading decisions on “the results of scans based on price movements in the stocks of all U.S. and some foreign companies.”
From 2016 through 2021, when he left the department, Mr. Meyer reported more than 450 trades in stocks that ethics officials said were related to the department’s work.
Among them were 12 trades in SunPower Corp., a solar technology and energy services provider that later received $6.65 million in funding from a program run by Energy Department divisions including Mr. Meyer’s.
He also disclosed 44 trades of shares and options in Blink Charging Co., a provider of electric-vehicle charging equipment that is key to the division’s aim of expanding renewable power and the use of electric vehicles.
He reported 11 trades in Pioneer Power Solutions, a maker of electrical-transmission and power-generation equipment.
Ethics officials noted SunPower’s link to the department’s work in July 2018 and sent Mr. Meyer a letter about it. He reported trading the stock twice later that year, in increments of $15,001 to $50,000.
Mr. Meyer said his wife “scrupulously refrained” from trading electric-utility stocks or stocks in other companies that were “clearly grid-related,” but said: “In some instances it was not apparent that a company dealt in electricity-related products or services.”
He said that he didn’t share information with his wife about his work at the agency relevant to any stocks and that “any inference that these trades were made on the basis of insider (non-public) information is totally incorrect.”
Mr. Meyer said that from time to time he received advisories from the Energy Department providing a list of companies relevant to the agency’s work and advising him to avoid participating in matters that could affect his investments. “I did not participate in any such matters after receiving such advisories,” he said.
Beyond those advisories, he said, agency ethics officials never raised his wife’s trading with him, and he never discussed the advisories he received from the agency with his wife.
Mr. Meyer reported more than 15,000 trades over six years at the Energy Department. Most weren’t in stocks related to the department’s work.
Philseok Kim, a director in the Energy Department division that funds research into emerging energy technologies, disclosed owning stocks and trading options in companies that stood to be affected by that research.
Ethics officials highlighted seven stocks on his disclosure form in July 2021, including some related to his division’s research efforts.
Mr. Kim reported owning several investments in Tesla Inc., the electric-car maker, at a time when his division was funding research into making longer-lasting and more-efficient batteries.
He reported that at the end of 2020 he owned between $18,004 and $95,000 in Tesla call options, which are bets on the stock’s price to rise.
Earlier this year, Mr. Kim’s division granted $42 million in funding for a dozen research projects studying ways to improve the U.S. supply chain for electric-vehicle batteries. In announcing the grants, the agency said the research seeks to “expand domestic EV adoption by developing batteries that last longer, charge faster,” among other things. Last year, the agency made a $500,000 grant to a company trying to develop a long-lasting battery that relies on abundant supplies of salt and iron. Mr. Kim helped oversee that grant.
Mr. Kim didn’t respond to requests for comment. The Energy Department spokeswoman said his battery project is focused on large, heavy, stationary batteries used for grid applications, which use materials that she said are unrelated to the lithium batteries used by Tesla. She said Tesla isn’t involved in the project.
The U.S., while prohibiting federal officials from working on any matter in which they have a significant stake, leaves it to individual agencies to decide whether they need additional rules to ensure that officials don’t use their influence for personal gain.
Some do. The Food and Drug Administration keeps a list of “significantly regulated” companies in which officials are barred from investing. The Securities and Exchange Commission prohibits officials from owning shares in any company it is investigating, regardless of whether they’re working on the probe.
The Federal Energy Regulatory Commission bars its officials from investing in certain kinds of energy-related firms.
The Energy Department has no such rule.
Ethics specialists said the Energy Department practice of pointing out when a holding has the potential to become a conflict, but often leaving it at that, shows the need for stricter rules on federal officials’ stock investing.
“How many public resources do we wish to spend on compliance in order to allow securities trading?” said Donna Nagy, executive associate dean at the Indiana University Maurer School of Law, who has testified before Congress on trading by government officials.
“At the end of the day, you’re still having the public question the decision-making of federal officials and still questioning whether the individuals are engaged in self-interested decision-making.”
Lawmakers (Crooks-In-Suits) Trade Bank Stocks While Working on U.S. Bank-Failure Fallout #GotBitcoin
Rep. Earl Blumenauer (D., Ore.) and Rep. Nicole Malliotakis (R., N.Y.) reported bank-stock trades while involved in addressing the banking crisis.
Trades could intensify calls to restrict congressional stock trading.
Two lawmakers reported trades in bank stocks last month as they worked on government efforts to address fallout from two of the largest bank failures in American history.
The disclosures, by a New York Republican and an Oregon Democrat, mark the latest instance of congressional stock trading intersecting with official business.
Rep. Nicole Malliotakis (R., N.Y.) bought stock in a regional bank before a subsidiary agreed to take over Signature Bank’s deposits following its closure. Days before she bought the stock, she said she met with financial regulators to discuss the bank’s closure.
Rep. Earl Blumenauer (D., Ore.) reported three trades in bank stocks as he co-sponsored legislation seeking to strengthen restrictions on financial firms in the wake of the bank failures.
The trades could intensify the pressure on Congress to restrict stock trading by lawmakers. That effort briefly gained momentum last fall, when House Democrats released a bill to ban stock trading by members of Congress, judges and senior executive-branch officials, but has since stalled. A bipartisan group of lawmakers earlier this year reintroduced a bill seeking to ban congressional stock trading.
Lawmakers are uniquely positioned to gain insight about particular industries in the course of their work. But beyond rules mandating regular disclosure and the laws against insider trading, they face no other restrictions on what stocks they are allowed to own or trade.
They are required to disclose any trades by them or their spouses of $1,001 or more in stocks, bonds, commodities, futures and other securities within 45 days, and must disclose their assets and liabilities every year in broad ranges.
A spokeswoman for Ms. Malliotakis said the lawmaker made the trade at the recommendation of her financial adviser and that she wasn’t aware the bank planned to bid on Signature Bank assets. A spokeswoman for Mr. Blumenauer said that the trade was made by his wife and that he wasn’t aware of it at the time.
Several lawmakers have faced criticism for stock trading over the years. Former Sen. Richard Burr, a North Carolina Republican, faced U.S. investigations over stock sales valued at as much as $1.7 million in February 2020, while sitting on committees that received detailed briefings on the then-growing pandemic. Both investigations later closed without enforcement action.
Rep. Nancy Pelosi (D., Calif.) has reported frequent trading by her husband, Paul Pelosi, that has come under scrutiny. She has said she doesn’t discuss trades with her husband.
Lawmakers aren’t required to disclose the time at which their trades were made, making it impossible to determine how much money they made or lost on stock trades.
Ms. Malliotakis bought $1,001 to $15,000 in New York Community Bancorp Inc. stock on March 17, soon after she met with financial regulators.
Days before she bought the stock, she emphasized her work on Signature Bank, which New York regulators had put into receivership on March 12.
“Both last night and this morning I have been meeting with the Federal Reserve, U.S. Department of Treasury, Governor [Kathy] Hochul and New York State Department of Financial Services Superintendent Adrienne Harris to discuss the closure of Signature Bank,” she said in a March 13 statement posted to her office’s Twitter account.
“I have been assured all depositors will be made whole through the Deposit Insurance Fund which is made up of contributions from all member banks, not taxpayer funds,” she added.
The next day, Ms. Malliotakis, a member of the House Ways and Means Committee, called for the Fed and the Biden administration to “review its monetary policy,” saying that rising interest rates had “played a role” in the failure of Silicon Valley Bank the previous week.
On March 17, she bought the New York Community Bancorp shares. On March 19, the Federal Deposit Insurance Corp. announced that NYCB’s Flagstar Bank would take on Signature’s deposits.
NYCB stock rose 32% on the news the next day.
Ms. Malliotakis’s disclosure said the stock purchase was made by her spouse. She is unmarried. A spokeswoman said that was an error and that the report will be updated.
Ms. Malliotakis’s financial adviser “recommended the purchase of NYCB as a long-term investment given the purchase price was $6.69 with a 9% dividend considering the stock was over $11.00 last March,” the spokeswoman said in an email.
The spokeswoman said there was no mention of NYCB in the briefings she participated in. She learned that the bank’s subsidiary had agreed to take on the Signature deposits in the news on March 19, the spokeswoman said.
Rep. Earl Blumenauer of Oregon reported selling between $1,001 and $15,000 in Bank of America stock on March 9, as panic was spreading and shares of the four biggest U.S. banks—including Bank of America—slid. The next day, federal regulators announced they had taken control of SVB, marking the second-biggest bank failure in U.S. history.
A week after the sale, the stock was down 5%.
Mr. Blumenauer also reported a less successful trade made March 9: a purchase of between $1,001 and $15,000 in SVB Financial Group. Shares of SVB were halted the next morning, shortly before the bank was taken over.
Less than a week later, on March 14, Mr. Blumenauer was among lawmakers who co-sponsored a bill to repeal the 2018 law that relaxed restrictions placed on financial firms.
His office sent an email to supporters heralding his work on the issue. “I am working with my friends Senator Elizabeth Warren and Congresswoman Katie Porter on a bill to repeal the Trump-era regulatory rollback and put banks with at least $50 billion in assets back under strict federal oversight and Dodd-Frank era stress tests,” said the email.
“I will keep working to keep the public, our savings, and our businesses safe, healthy, and secure,” he said.
Days later, as the banking industry continued to reel, Mr. Blumenauer reported a sale of between $1,001 and $15,000 in First Republic Bank. On that day, March 20, the bank’s stock closed down 47%, after The Wall Street Journal reported that a group of big U.S. banks were in discussions about fresh efforts to stabilize the lender.
Mr. Blumenauer’s disclosure said all three trades were part of his spouse’s retirement portfolio.
A spokeswoman said the congressman doesn’t personally own any stock and has “no knowledge of financial transactions made by his wife.” His wife uses a financial adviser who makes transactions “without her input, advice, consent, or prior knowledge,” the spokeswoman said.
Mr. Blumenauer, elected to the House in 1996, is a member of the Ways and Means Committee and a senior member of the Budget Committee.
A third lawmaker reported two trades in bank stocks last month, although he appears to have been less involved in the congressional response to the bank failures.
Rep. John Curtis (R., Utah) reported selling $1,001 to $15,000 in Bank of America stock on March 16. Four major banks, including Bank of America, announced they would deposit $30 billion at First Republic that day.
That same day, he also reported selling $1,001 to $15,000 in First Republic stock. The bank’s stock closed down 33% the next day, reflecting investors’ worries that the bank’s problems hadn’t been fully addressed. It was the bank’s worst week on record.
Mr. Curtis’s disclosure says both stocks were traded in a joint fund with his spouse. A spokesman didn’t respond to a request for comment.
Mr. Curtis, who sits on the Energy and Commerce Committee, said in a January 2022 interview with the Journal that he was critical of proposals banning lawmakers from trading stocks. “For 40 years I’ve been building up a retirement, mostly in stocks. It’s not as easy as ‘don’t do stocks,’” he said.
SEC Investigates Trades By First Republic Executives Before Sale To JPMorgan
* Wall Street Regulator Looking For Possible Insider Trading
* Sec Scrutinizing Activity Before Bank’s Collapse And Seizure
The Securities and Exchange Commission is investigating the conduct of First Republic Bank executives before the government seizure and sale of the lender to JPMorgan Chase & Co., according to two people familiar with the matter.
The SEC is looking into whether any members of the then-executive team of First Republic improperly traded on inside information, said one of the people, who asked not to be identified because the probe hasn’t been publicly disclosed.
It couldn’t immediately be determined which former executives are the focus of the inquiry. No one previously or currently at the bank has been accused of wrongdoing and the investigation could end without anyone being accused of misconduct.
Representatives for the SEC and JPMorgan declined to comment.
First Republic was seized by regulators and sold to JPMorgan on Monday in a government-led deal after a drama-filled weekend.
Separately, the SEC has been probing the trading activity of Silicon Valley Bank executives before its collapse in March, Bloomberg News has reported.
“That the SEC is looking into First Republic is no surprise,” said Richard Hong, a former SEC trial attorney who is now a partner at the firm Morrison Cohen in New York. “My expectation is that the SEC will be looking at a variety of issues regarding insider trading and disclosures.”
WSJ Wins Pulitzer Prize for ‘Capital Assets’ (Insider Stock Trading By US. Gov. Officials) Investigation
The Journal wins for investigative series examining the investments of federal officials.
The Wall Street Journal, Washington Post, Associated Press and New York Times were among news outlets awarded Pulitzer Prizes Monday, honoring journalists who uncovered financial conflicts of interest and delved into issues of racism, immigration and abortion.
The Journal was awarded a Pulitzer Prize in investigative reporting for its series examining how more than 2,600 federal officials invested in companies that stood to benefit from their agencies’ work.
“The success of this extensive, expansive project is due in large part to the cross-collaborative efforts of the investigative team and the D.C. bureau, with assistance from the data and visual departments,” Emma Tucker, the Journal’s editor in chief, said in a memo Monday to staff.
The Journal was also named a finalist for international reporting for its coverage from Ukraine by reporters Yaroslav Trofimov and James Marson.
The Pulitzers are among the most prestigious awards in the journalism business and are awarded by Columbia University annually. They have been awarded for more than 100 years.
The Associated Press won the public service award for its reporting from Mariupol, Ukraine, during Russia’s invasion of Ukraine. The AP also won for breaking news photography.
The Washington Post won for national reporting for coverage of the consequences of the Supreme Court’s overturning of Roe v. Wade. It also won for feature writing.
The New York Times won the award for international reporting for its coverage of Russia’s invasion of Ukraine. It also won for illustrated reporting and commentary. The Los Angeles Times was awarded for its breaking news coverage of a secretly recorded conversation among city officials that included racist comments. The publication also won for feature photography.
Al.com won the award for local reporting for a series showing how the police in Brookside, Ala., preyed on residents to inflate revenue. The publication also won for commentary.
The Journal’s seven-part investigative series, titled “Capital Assets,” offered a comprehensive review of the investments of senior federal officials and their families.
The series, which collected and analyzed data across 50 federal agencies, found more than 2,600 officials reported stock investments in businesses while those companies were lobbying their agencies for favorable policies, which occurred under both Democratic and Republican administrations.
The Journal series found that senior officials at the Federal Trade Commission disclosed more trades of stocks, bonds and funds, on average, than officials at any other major agency.
The series also uncovered about seven dozen senior federal-government officials who disclosed that they or their families each made more than 500 trades from 2016 through 2021.
Journal reporters Rebecca Ballhaus, Brody Mullins, John West, Coulter Jones, Joe Palazzolo, James V. Grimaldi, James Benedict, Michael Siconolfi and Chad Day worked on the “Capital Assets” series.
Neil Brown, co-chair of the Pulitzer Prize Board, said reporters often face threats for doing their jobs, including kidnapping.
“We would like to take particular note of the outrageous and unlawful detention in Russia of Wall Street Journal reporter Evan Gershkovich,” Mr. Brown said. “The Pulitzer Prize Board joins the many organizations around the world demanding Evan’s immediate release.”
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