- This episode of Legal Eagle was made possible by Skillshare. Learn to think like a lawyer
for free for two months by clicking on the link
in the description. As if it wasn't bad enough already that people have fallen ill
from the coronavirus, businesses are closing, quarantines, and some states are on complete lockdown, now we have senators
allegedly profiteering off of this worldwide pandemic. Four senators have now been
alleged to have engaged in insider trading by
liquidating or trading stocks just weeks before a massive
sell-off in the market due to coronavirus panic. Senators Richard Burr, Kelly
Loeffler, Dianne Feinstein, and Jim Inhofe have all been
accused of selling stocks after getting inside information. Two of the four, Burr and Loeffler, took part in a classified
and non-public hearing regarding the coronavirus
and its looming impact. Those two senators, Richard Burr, a senator from North Carolina and chairman of the Senate Intelligence Committee, and Kelly Loeffler, a newly
appointed senator from Georgia, sold significant amounts
of stock at the same time they were receiving non-public
classified information about the severity of the coronavirus and its potential
devastating impact worldwide, at the same time that they
may have been downplaying the effects of the
coronavirus to the public. If these allegations are
true, is this a crime? Well, we're about to find out. (dramatic music) Hey legal eagles, it's time
to think like a lawyer, and maybe get out the
pitchforks and guillotines, because it might be time for
some senatorial heads to roll. Today, we're going to discuss what happens when senators abuse their position and profit off of a massive tragedy, or is this all just a
big misunderstanding? Now, to better understand what
Senators Burr and Loeffler are being accused of,
it'll be helpful to have a little background as to
what insider trading is, and how it developed
into its current form. The Securities and Exchange
Act of 1934 was enacted with a desire to promote fairness and clarity in the federal securities laws for all participants in
the financial market. Section 10b of the Exchange
Act was intended to be the Exchange Act's broad
anti-fraud provision designed to cover the full range
of fraudulent conduct that, quote, "human ingenuity can devise." Of course, humans are very ingenuitive when it comes to defrauding other people. The Supreme Court has
recognized that 10b was designed as a catch-all clause to
prevent fraudulent practices. Now, it's from this
statute that the concept of insider trading was born. Although the concept of insider
trading emerged in the '60s, it really wasn't until the 1980s
that the U.S. Supreme Court affirmed that insider trading was in fact a violation of section 10b. After insider trading was deemed legal, what developed were sort
of two types and reasons for insider trading, the classical theory, and the more expansive
misappropriation theory. Now, the classical
theory of insider trading specifically holds that
corporate insiders are liable when they use material
non-public information obtained from their unique
position within a corporation for their own personal advantage
in the securities market. As the SEC has noted there
is an inherent unfairness in allowing a corporate insider to use non-public information to the detriment of other innocent investors
in securities markets. The Supreme Court has
reasoned that an individual must refrain from trading securities on the basis of non-public information because of their fiduciary relationship with shareholders as a corporate insider. Now, that really only applies
to corporate insiders, and you can imagine that there's all kinds of insider trading that
doesn't actually involve someone inside the company itself, which is why the Supreme
Court later adopted what's now known as the
misappropriation theory of insider trading,
which extended liability to certain corporate outsiders that traded on confidential information
in breach of some duty owed to the source of information, not necessarily the
shareholders themselves. The Supreme Court has held that under a misappropriation
theory an individual breaches a duty to the owner of
confidential information by using that information
to his or her advantage in the stock market. It's called misappropriation theory because it's kind of like stealing. You are taking information
that doesn't belong to you and using it for your own advantage. This often comes up in what are called tipper or tippee cases,
essentially one who receives an inside tip and trades
that non-public information received from a tipper, they're
liable under Section 10b of the Exchange Act,
regardless of whether or not there was any benefit to the person that provided the tip itself. Now, that's all in the corporate context, but what about members of Congress? Congresspeople are privy to a whole host of classified and non-public information that most of us are completely unaware of. They're not corporate insiders
in the classical sense, but they still have
information at their fingertips that can easily be used for
their own personal gain. So what happens when
someone in Congress makes an investment decision in the stock market based on this potentially classified or top secret information? Would they be liable under
some form of insider trading? Well, the answer for a long
time was effectively no. Congress basically had this
absurd loophole that made insider trading legal and even above board with congressional ethics rules. This is what happens when
the rule makers make rules about themselves, and the statistics show just how advantageous this was for them. While traders were beating
the market by approximately 5% and hedge funds by seven to 8%, in one study published by
the Journal of Financial and Quantitative Analysis it
showed that congresspeople were beating the market
by an astounding 12%, and what's even more
astounding than their returns is Congress' brazenness with
which they were cashing in. Former Senator John
Kerry is a prime example of cashing in on non-public information. For instance, on May 15,
2007 the government ended reimbursements of an obscure
anemia drug manufactured by Amgen which caused the
company's stock to tank, but you know who sold
all of their Amgen stock just days before? Yup, that's right, former
presidential candidate Senator John Kerry. He avoided almost any loss by selling all of his stock on May 4th and May 5th, just days before the reimbursements ended. Impeccable timing, of course. Kerry had similar good fortune when it came to the rollout of Obamacare. Kerry was a member of the
Senate Finance Committee Subcommittee on Health and
played a key role in developing President Obama's healthcare
reform legislation. - It isn't about eating broccoli, folks. - And just prior to the
enactment of the ACA Kerry bought stock in big
time winners that resulted from Obamacare, such as
pharmaceutical companies Teva and ResMed, a medical device manufacturer, and at the same time, Kerry dumped stock in the health insurance
industry, which suffered greatly as a result of the passage of Obamacare. However, no example is
worse or more appalling than that a former
Representative Spencer Bachus. During the financial crisis of 2008, Bachus was a ranking member on the Financial Services Committee, and on September 18, 2008 Bachus
received a private briefing on the collapsing economy
and financial system from none other than the
chairman of the Federal Reserve at the time Ben Bernanke, and the Treasury Secretary Hank Paulson. Armed with information that
practically no one else knew about, what else could
Bachus possibly do with it? Well, he invested heavily
in the market failing. Bachus effectively shorted
the market by buying options that would only rise if the market tanked, and a few days later the market
went down as anticipated, and Bachus nearly doubled his money. So in an attempt to clear
up Congress' responsibility under the Exchange Act
and a natural extension of the misappropriation theory, Congress passed what is
known as the STOCK Act. The STOCK Act is short
for the Stop Trading On Congressional Knowledge Act, and was passed in April of 2012 during the presidency of Barack Obama, and it made it illegal
for members of Congress to make investment decisions
based on non-public information they obtained in their
unique political positions. That is, you can't make
trades in the stock market based on classified information
received in meetings and briefings that were
meant to aid politicians in making decisions for
the good of the public. Now, prior to this act the
SEC held that government information had no connection
with insider trading. Of course you might say that as well if the people using this
information were also the same people that
controlled your funding, but this hugely bipartisan
bill was supported by a vote of 96 to three. Only three senators voted against this act that would prohibit Congress
from financially benefiting off of classified information. Of course, one of those
three senators, ironically, was Senator Richard
Burr, who, as we noted, is currently being accused
of insider trading himself. You really can't make this up. So let's talk about
the illustrious senator from the great state of North Carolina. Senator Richard Burr was recently privy to classified information
about how potentially dangerous and devastating the
coronavirus outbreak could be, way before it was on
the radar of any of us everyday folks in the United States. In addition to being a senator with access to significant amount of
classified information on the coronavirus, Burr himself
had a unique understanding of what was going on because
of his role as the chairman of the Senate Intelligence Committee and the daily briefings on the
coronavirus that he received. In fact, Burr might be
considered something of an expert in biohazard threats and
actually helped to write the Pandemic and All-Hazards
Preparedness Act, which forms the framework
for the federal response to the very situation that
we're dealing with right now in terms of the coronavirus. So what did Burr do with
this vital information, and his unique expertise? Did he warn the public
and ensure them that despite the administration's
downplaying of the threat that the American public was
aware of what was going on, so that they could be
prepared as best as possible? No, it doesn't seem so. It seems that around
the time that Burr was first made aware of this information on potential future
impact of the coronavirus he sold off nearly $1.6 million
of his stocks portfolio. In fact, on one day alone, February 13th, Burr sold personal stocks
worth between 628,000 and $1.72 million in 33
separate transactions. To give you a frame of
reference, that is the most stock he's sold in a single day in 14 months. His timing was of course impeccable, as a week after Burr's sales the stock market began a sharp decline and has lost at least 30%
of its value ever since. And what makes this even more
interesting is that not only did he sell a bunch of
personal stocks at this time, large quantities of those
sales were in industries that have been hit significantly
hard by the pandemic, like $150,000 in the Wyndham
Hotel and Resorts stock, which has lost nearly 2/3 of its value. In fact, Burr shared some
of this inside information of dire economic and societal
effects to only a select few in late February, while
President Trump was actively downplaying any
fears about COVID-19. - This is a list of the
different countries. The United States is rated
number one most prepared. - On February 27th, Burr addressed a group at the Tar Heel Circle
about the potential impact of the coronavirus. In addressing companies and organizations from North Carolina that
donated more than $100,000 to his election campaign Burr said-- - [Richard] There's one
thing that I can tell you about this, it is much more
aggressive in its transmission than anything that we have
seen in recent history. It's probably more akin
to the 1918 pandemic. Every company should be
cognizant of the fact that you may have to alter your travel. You may have to look at your employees and judge whether the trip
they're making to Europe is essential, or whether it can
be done on video conference. Why risk it? - Burr went on to say,
"there will be, I'm sure, "times that communities,
probably some in North Carolina, "have a transmission rate where they say "'let's close schools for two weeks, "'everybody stay home.'" These statements were made 13 days before the U.S. State
Department warned Americans against international travel
and more than two weeks before North Carolina
decided to close its schools. In an apparent attempt to
diffuse these allegations, a spokesman for Senator Burr stated, "Senator Burr filed a
financial disclosure form "for personal transactions
made several weeks "before the U.S. and
financial markets showed signs "of volatility due to the
growing coronavirus outbreak." The thing is that's sort of
what he's being accused of. It looks like he knew
what was going to happen before a lot of other people did, and then sold off the stocks. Whether he disclosed the sale later on isn't material to whether he traded on inside congressional information. By the way, I asked for recommendations for targeted and effective
charities regarding the coronavirus on Twitter, and you legal eagles did not disappoint. I wanted to highlight one of them here, the Gates Foundation COVID-19 Fund. They focus on vaccines,
diagnostics, and therapeutics, which are going to be necessary
for ending this pandemic. In fact, there are
several funds that you can choose from to get even more targeted, and the Gates Foundation has
had a jump start on most of us since they started focusing
on the coronavirus in January, and they have general
expertise in global health and biomedical research. I'll drop a link in the description. I just gave $500. If you're in a position to give, I would really appreciate it if you could. But onto the next
criminal, I mean, senator. Now, Senator Burr wasn't the only one potentially getting in on the action of trading on inside information. Another interesting case is that of newly appointed senator
Kelly Loeffler from Georgia, who is potentially the richest
member in Congress right now. Loeffler, whose husband, Jeffrey Sprecher, is the chairman of the
New York Stock Exchange, she began aggressively selling
equities on January 24th, the same day that she was present
for an all Senate briefing conducted with the CDC director and officials from the
National Institute of Allergy and Infectious Diseases. Over the next few weeks, she and Sprecher sold stock to the tune of
potentially $3,000,000, and it's important to
note that from January 6th when she was selected to take
the place of Senator Isakson until the day of this coronavirus briefing Loeffler had not made a
single stock transaction. From that day through the
middle of February, however, her household dumped seven
figures worth of stocks in almost 30 separate transactions. Additional SEC filings
showed that Sprecher sold an additional 3.5 million in
shares of his own company, Intercontinental Exchange, on February 26, which is also Loeffler's former employer. The power couple then
went on to sell another 15.3 million shares in the
same company on March 11th, and since the initial sale of their stock in Intercontinental Exchange
the company's stock prices almost dropped 25%. They then conveniently
bought shares in Citrix, a company which makes
teleworking software. At the same time, there
have also been allegations against Senator Feinstein and Inhofe who have been accused of dubiously selling large amounts of stocks in the weeks prior to the markets reaction
to the coronavirus. Those Senators Feinstein and
Inhofe were not in attendance of the all Senate briefing
on the coronavirus that Loeffler and Burr were present for. In addition, Senator
Feinstein indicated that her investments are actually
held in a blind trust that she has no control
over or even any oversight. That being said, the
timing of these trades still raises questions that
should probably be investigated. We lose sight of this sometimes, but the mere appearance of impropriety shakes people's faith in our institution. But those are the allegations
against the four senators, though really we're only
hearing one side of this story, sourced largely from a Daily
Beast article on this topic. But what are the potential
defenses that these senators might have to raise against
allegations of insider trading? Well, of course you have
the standard insider trading defenses, such as the fact
that there was a disclosure prior to the use of the
material information, or a lack of knowledge that
the material information was actually confidential. Other straightforward
defenses can be used as well, like the argument that the
person never actually had possession of material
non-public information, or the classic my lawyer
said it was okay defense, and courts have found
insider trading did not occur when the transaction
was part of a scheduled or predetermined trading plan, and we don't necessarily know what any of these particular senators had in terms of financial planning. There's actually a constitutional
defense that may be made by members of Congress
too under what's known as the Speech and Debate Clause. The text in the Constitution says that "for any speech or debate in either House" members of Congress
"shall not be questioned "in any other place." That clause has been
interpreted to provide a certain criminal and civil immunity for lawmakers when they're engaging in
official legislative acts. That rule has been used
by members of Congress to refuse to answer subpoenas, and it would be pretty
likely that they would do so if the SEC attempts to investigate
any of these allegations, particularly if it has to
do with information that they received in briefings
on the coronavirus. Now, the factual defenses that
Burr and Loeffler have raised come from a couple of different angles. Loeffler simply contends that she simply didn't make the trades
and that they were done by a third party financial advisor. Loeffler defended herself
on Twitter by saying, "this is a ridiculous and baseless attack. "I do not make investment
decisions for my portfolio. "Investment decisions are made by multiple "third party advisors without my, "or my husband's,
knowledge or involvement. "As confirmed in the
periodic transaction report "to Senate Ethics, I was
informed of these purchases "and sales on February 16, 2020, "three weeks after they were made." - If you actually look at the
personal transaction reports that were filed, it
notices at the bottom that I'm only informed of my transactions after they occur, several weeks. - Also stated that the trades were part of a larger purchase that included a lot of stock that has
subsequently gone down. - There's a range of different decisions made every day with regard to
my savings and 401k portfolios that I'm not involved in, and certainly, like any other trades, you can't see into the future. - Burr, however, doesn't
deny making the trades, but says he did so on public information, and his general concern for
the impact of the coronavirus. The specific statement he released stated, "I relied solely on public
news reports to guide "my decision regarding the sale
of stocks on February 13th. "Specifically, I closely
followed CNBC's daily health "and science reporting out of
its Asia bureaus at the time. "Understanding the assumption
many could make in hindsight, "however, I spoke this
morning with the chairman "of the Senate Ethics
Committee and asked him "to open a complete review of the matter "with full transparency." Now, it's possible both of these things could be a complete defense. If Loeffler can show
that she never contacted the third parties who made
the trades on her behalf, then it seems unlikely that they colluded in some fashion to trade
on inside information, and if Burr can somehow
show that he never used confidential information
in making those trades, that might be a defense as well. But everyone has to sort
of admit that the timing on these trades is highly suspicious. Now, if the allegations are true, and the implications
turn out to be correct, Burr and Loeffler put their
portfolio above the safety and well-being of their fellow Americans that they were voted in to represent, and they would deserve more
significant consequences than simply not being reelected. They would need to be held
accountable for their actions. But beyond that, I think
Congress needs to further rethink the restrictions on how they're
allowed to invest in office. The situation also goes to show the benefit of having a blind trust. A valid argument could
be made that congressmen and women should never
be active investors, but really should only be
allowed to be passively invested in ways in which they
cannot gain from the use of their classified or
non-public information. In a blind trust the owner
or trustor of the assets in theory has no knowledge of the specific stock holdings in the trust. The only control the
trustor has over the trustee is to initiate the trust
and to terminate it. But having that blind trust
would inoculate the senators from these kind of
allegations that they profited over classified information
that they received. This would obviously be a
burden to congresspeople and senators, but you
know, if you're elected to the highest deliberative
body in the country, you probably need to make some sacrifices in order to hold that office. But in an interesting
coda to this whole thing, the report to the SEC will in fact investigate these transactions. So we actually may learn more about these suspicious trades after all. You would think that these
congresspeople would be better at business and wouldn't need
to use classified information to make a buck at the public's expense. Instead of using their
positions for personal gain, they should really take Michael
Chernow's Skillshare class Entrepreneurship Hustle, From
Business Plan to Real Success. Michael would teach these
senators how to find market opportunity, nail
their business plan, pitch investors, align brand and culture, and measure success, you know, in a way that isn't dollars
made shorting the market before the coronavirus shuts it down. And if they're committing insider trading because they're bad with money, they could always take Emily
Simcox's Skillshare class Bookkeeping for Freelancers,
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Real Law Reviews over here where I cover all of the
coronavirus news of the day. So click on this playlist,
and I'll see you in court.
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