Dems Take Aim at Lawmakers' Potential for Insider Trading

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May 18, 2007 4:24 PM

Democratic lawmakers are pushing a new bill that would bar members of Congress from using their inside knowledge of congressional action to profit from investments. But experts doubt the move.

The bill, reintroduced Wednesday by Reps. Louise Slaughter, D-N.Y., and Brian Baird, D-Wash., would ban lawmakers from using nonpublic information to buy and sell stocks. Slaughter said that since members of Congress have access to market-moving information before the public does, "the potential for abuse is very real."

Slaughter pointed to the 2005 Securities and Exchange Commission probe into whether someone in former Senate Majority Leader Bill Frist's office shared inside information with Wall Street investors. Stock prices of some companies with asbestos-related liabilities rose just before Frist proposed a $140 billion public trust fund for asbestos liability claims.   

Frist has denied any wrongdoing. An SEC spokesman refused to comment on the probe or Slaughter's pending legislation.

Frist faced questions from the Justice Department and the SEC in 2005 about another allegation of insider trading stemming from his sale of stock in his family's hospital company, HCA Corp, one month before its price fell sharply.    

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Last month the SEC closed that probe without charging Frist. The former Senate majority leader  maintained throughout that he got no insider information and that he actually began laying the groundwork for the sale of HCA stock by making inquiries to lawyers and to the Senate Ethics Committee well before the transactions took place.

Political watchdogs say Slaughter's proposed rule would be nearly impossible to enforce.

"Is the SEC really going to do an insider trading investigation every time a lawmaker makes a trade? That's an impossible amount of investigating," said Melanie Sloan of the Washington, D.C.-based Citizens for Responsibility and Ethics in Washington.

Sloan also said the bill is unlikely to pass. 

"Members of Congress never want to crack down harder on themselves. I frankly don't think this is going anywhere," she said.

The bill also cracks down on efforts by private investors to beat the market by buying inside information on what Congress is likely to do.

Hedge funds and other investment firms have reportedly found Washington to be a gold mine of information that affects the market. Some firms are hiring lobbyists to give them the inside track on upcoming trade regulations, Medicaid reimbursement, corporate tax legislation and other information to guide their investments.

"There are a handful of law and lobbying firms that have developed a good reputation and market themselves in the investment community," said lobbyist Matthew "Mac" Bernstein of the prominent Washington, D.C. lobbying firm DLA Piper.

The new bill would require such firms to register their "political intelligence" clients the way they register their traditional lobbying clients.

"Anytime any investor uses nonpublic information to gain advantage over everyone else, it undermines the integrity of our stock markets," said Slaughter.