Tuesday, May 31, 2011

Political Perks: Evidence of Insider Trading in Washington

When it comes to insider trading cases, probably none have been as big as the recent conviction of the billionaire Raj Rajaratnam, former hedge fund manager and founder of Galleon Group. (See our prior posts on Rajaratnam here.)

Rajaratnam had a huge web of contacts that fed him with insider information which he then traded on to make billions and to obtain abnormal returns for investors in his hedge funds. His case has been hailed as a huge victory for the US Justice Department in an effort to crack down on what is believed by some to be a widespread problem in our capital markets.

There is now evidence suggesting that the Justice Department may not need to look so far from Capital Hill to find rampant insider trading. A new study...
described in The Washington Times, found that "members of the House of Representatives made 6.8 percent more on their stock purchases and sales than the average investor." According to the article, the authors of this study published a previous paper that shows members of the Senate were also able to beat the market.

Typical returns over the long run in the stock market are generally purported to be around 8%. So, our political representatives are almost doubling their returns and receiving an average of near 15%! That is incredible and almost irrefutable evidence suggesting that our political representatives are not following the laws that they have made for the rest of us to follow. Few investment gurus or funds are able to match that type of performance.

Unfortunately, The Wash Times article explains that prosecuting members of Congress who trade on inside information may be difficult. The article states:
 To the frustration of open-government advocates, lawmakers and their staff members largely have immunity from laws barring trading on insider knowledge that have sent many a private corporate chieftain to prison.
This is definitely frustrating in my view. Why should members of Congress be able to circumvent the market by trading on information that is not available to other citizens? This definitely has some implications for the "tone at the top" in our country. I, for one, agree with Randall W. Forsyth who is calling for "the same reporting requirements" that are "imposed on corporate insiders be placed on members of Congress."

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