The STOCK Act Was Just For Show: Looking at the Inside of Insider Trading

insideA fascinating bit of litigation, one with financial, constitutional, and even psychological significance, seems to have been frozen in place in the Manhattan district court since last New Years’ Eve. Yet it has received a flurry of attention amongst bloggers in recent weeks, as interested parties have made a belated discovery of what is at stake.

The litigation in question arose because there is reason to believe that about two years ago Brian Sutter, the staff director of the Ways and Means Committee of the House of Representatives, leaked trade-sensitive information on an impending rate announcement by the U.S. Centers for Medicare and Medicaid Services, and a likely Congressional reaction to that development. The CMS was about to announce a reduction on what physicians would receive under what is known as the sustainable growth rate (SRG).

For certain Medicare-related stocks, notably Humana Inc. (BYSE: HUM) and Health Net (NYSE: HNT) the proposed reduction was bad news, and Congressional intervention would be good news.

Meanwhile, Marilyn Tavenner, the President’s choice as Administrator of the CMS, awaited confirmation.

One Possible Leaker and Two Leakees

If Sutter was in fact the leaker of Congress’ reaction to this situation, the first leakee was a lobbyist and attorney at an international law firm, Greenberg Traurig LLP. And what that leakee received included the fact that Senator Orrin Hatch, shown above, was working on a legislative intervention. Hatch wanted to turn the reimbursement cut into an increase, turning the HUM/HNT frowns upside down.

That lobbyist at GT then allegedly sent an email to an analyst at a broker-dealer, Height Securities LLC, which aside from making the obvious pun on Hatch’s name, plugged the unnamed leaker as a “credible source.” The email said: “Our intel is that a deal was already hatched by Hatch to smooth the way for Tavenner as long as they address the [Medicare Advantage] rates in the final notice. We have heard from very credible sources that the final notice will adjust the phase in on risk adjustment and take into account the likelihood/certainty of an SGR fix.”

Forty minutes before the CMS’ rate announcement, an analyst at Height Securities passed that intel along to dozens of clients, including hedge funds.

It is difficult to imagine how this would not count as the release of material non-public information to those clients, such as could well taint their trading on HUM and HNT. But what about the Congressionally employed leaker? What is his civil responsibility in this matter? Is the SEC even allowed to ask?

Not Allowed to Ask

The naïve might be forgiven if they think this question has already been ‘asked and answered.’ In April 2012, after all, the President signed the STOCK Act, a law that was explicitly created to prove that Congress doesn’t consider itself above the rest of us mere mortals, that they and their staff members would be subject to the general prohibition against insider trading and the breaches of fiduciary responsibility that are critical to making it lucrative. “STOCK” in this case is an acronym for “Stop Trading on Congressional Knowledge.”

So … case closed. The SEC is supposed to look into precisely such matters as this. Right?

Alas, wrong. In response to the investigation of its staff director, the House Ways and Means Committee has taken the position that the U.S. Constitution doesn’t allow the SEC to do much if anything about enforcing the law against those with earliest possession of that “congressional knowledge.”

Attorneys for the W&M committee, in resisting the SEC subpoena, have invoked the “speech and debate” clause of the U.S. Constitution, the clause generally understood to protect Congresscritters from slander suits for anything they say during Congressional deliberations.

In order to make this plausible, though, the lawyers have to interpret that clause so broadly as to make the STOCK Act utterly unenforceable. If Sutter’s apparent contact with lobbyists counts as “speech and debate” by his bosses, then anything that might violate that Act is “speech and debate,” and since the whole thing is unenforceable, there was no point passing it except to give said critters a brief chance to pat themselves on the back for imagined rectitude.


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