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March 29, 2006

Did You Know Your Congressmen Can Trade on Non-Public Information?

posted by MR WAVETHEORY at 3/29/2006 06:32:00 PM
Neil Cavuto from Fox News reported earlier today that that members of Congress are allowed to trade on non-public information. Cavuto said that Congressmen and Congresswomen can trade on information from the non-public information they are privy to, as a result of their work on legislation pertaining to appropriation bills, government contracts, and Federal grants. One blogger commented that Senator Tom Delay and Frisk had day traders working out of their offices. The members of Congress would pass on information to these traders. Hill News reports there is a cottage industry around this type of information.

What is insider trading?

According to SEC staffers,

Insider trading is "the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of "inside" information."

When an investor acts on material, non-public information that a rational investor would want to know before making an investment decision, that is considered insider trading.

Why is it such a big deal that Congressmen can get away with insider trading?

It is a big deal because Congressmen have access to material, non-public information on a daily basis. Members of the House Finance Committee, Appropriations Committee, or Senate Banking Committee know ahead of time what types of companies may be receiving government assistance or government sanctions. Such access means they have access to material, non-public information that a rational investor would want to know before making an investment decision.

What is ironic is that, in 1984, Congress enacted the Insider Trading Sanctions Act of 1984, to remedy the "inadequate deterrent provided by enforcement remedies for insider trading." Apparently, according to Cavuto, this does not apply to members of Congress or their aides.

Future hedge fund managers and insider traders of America, time for you to get a job in Congress!

Mr Wave Theory

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