Members of Congress certainly like to talk the talk, but when it comes to insider trading there seems to be little interest in walking the walk by cooperating with an investigation into a possible leak of confidential information that allowed for lucrative trading.
In 2011, Congress was embarrassed by a “60 Minutes” report that highlighted well-timed trades by representatives and senators that appeared to be based on government information and questioned whether they were subject to the prohibition on insider trading. In response to President Obama’s State of the Union address calling for action, Congress adopted the Stop Trading on Congressional Knowledge Act, commonly known as the STOCK Act, in April 2012.
The law provides that members of Congress and their staff “are not exempt from the insider trading prohibitions arising under the securities laws.” Before its passage, the chairman of the House Judiciary Committee, Representative Lamar Smith, Republican of Texas, praised the legislation because “the American people deserve to know that no one in any branch of government can profit from their office.”
For all the talk about making Congress subject to the insider trading laws, the hard question was whether it would cooperate with the Securities and Exchange Commission in an investigation into questionable trading on information emanating from Capitol Hill. The answer appears to be “no.” The S.E.C. has sued a House committee and its staff director in Federal District Court in Manhattan to enforce subpoenas for documents and testimony about possible tipping of confidential government information.
The investigation concerns trading in insurance companies in April 2013 after a change in the Medicare reimbursement rates by the Centers for Medicare and Medicaid Services leaked out before its official announcement. The S.E.C. traced a potential source of the information to Brian Sutter, the staff director of the House Ways and Means Committee.
The S.E.C. issued subpoenas to Mr. Sutter and the committee in May for documents and his testimony about contacts with lobbyists at the law firm Greenberg Traurig. Federal prosecutors in Manhattan also served a grand jury subpoena for Mr. Sutter to testify, and it is not clear whether he has responded.
According to the S.E.C.’s filing to enforce its subpoenas, Mr. Sutter spoke with a Greenberg Traurig lobbyist just a few minutes before the lobbyist emailed a brokerage firm that “very credible sources” had confirmed the Medicare change. The brokerage firm then issued an alert to clients about the reimbursement policy that resulted in a jump in the share price of insurance companies that would benefit.
When the investigation first started, Mr. Sutter told an F.B.I. agent and an investigator from the Department of Health and Human Services’ inspector general’s office that he did not recall speaking with the lobbyist on his cellphone about the reimbursement policy.
A few days later, a lawyer for the House of Representatives sent a letter stating that “with the benefit of some time for reflection” Mr. Sutter may recall speaking with the lobbyist and that other statements he made “might merit clarification.” That type of admission is a red flag for investigators that they may have caught someone in a lie, making it a potentially fruitful avenue for further investigation.
Typically, the next step in an investigation is to subpoena records about any contacts the person might have had with sources of the information and potential tippees, which usually includes having them testify under oath. Whether the person will actually testify is an open question because a lawyer most likely would advise a client to assert the Fifth Amendment right against self-incrimination to keep from making any further damaging statements.
The S.E.C. tried to obtain information about Mr. Sutter by asking the Ways and Means Committee to voluntarily turn over records related to his government issued cellphone and records of any contacts he had with Greenberg Traurig lobbyists. The committee, however, refused to provide the requested information.
On May 6, the S.E.C. took a more confrontational approach by issuing subpoenas requiring production of the documents and Mr. Sutter’s testimony. In response, the general counsel’s office for the House sent a letter giving a number of reasons for not complying that sound like typical legal boilerplate.
Among those cited in the letter were that the subpoenas were “vague, confusing, overbroad, unduly burdensome, unlikely to lead to the discovery of admissible evidence, and otherwise improper.” The letter even contended that the subpoenas were “repugnant to public policy,” an odd position to assert in light of the STOCK Act’s proclamation that Congress is subject to insider trading laws.
The most important basis for resisting the subpoenas concerns the protection afforded members of Congress and their staff under the Constitution’s so-called speech or debate clause. That provision, which can be traced to the English Bill of Rights adopted in 1689 to protect Parliament from harassment by the monarchy, states that “for any speech or debate in either House, [members] shall not be questioned in any other place.”
The clause protects against any outside inquiry into “legislative acts” in Congress, although the scope of that term is unclear. In United States v. Brewster, the Supreme Court said that it had “consistently been defined as an act generally done in Congress in relation to the business before it.” On the other hand, political acts are not protected from investigation, which the court said includes “a wide range of legitimate ‘errands’ performed for constituents, the making of appointments with government agencies, assistance in securing government contracts, preparing so-called ‘news letters’ to constituents, news releases, and speeches delivered outside the Congress.”
Mr. Sutter’s contacts with the Greenberg Traurig lobbyist could fall into either category. The lobbyist contacted him to complain about a client being dropped from a Medicare insurance program, which sounds more political than legislative as a type of constituent service. But the information about the Medicare reimbursement policy involved Congress’s acting to prevent a reduction in the physician payment rates, something that is clearly a legislative act.
The larger question is whether Congress has any interest in allowing an investigation to move forward that involves a member of its staff. In a letter to the S.E.C. last week, the House offered to consider a proposal to release a limited number of records as long as there was a “firm commitment that the committee’s making available to your agency of certain documents would end the committee’s and Mr. Sutter’s involvement in this matter.”
That sounds like the price for getting the documents is dropping any further investigation of Mr. Sutter, thus insulating him from potential liability for insider trading. I doubt the S.E.C. is willing to set a precedent that effectively prevents pursuing an insider trading case involving a member of Congress or its staff.
So the S.E.C.’s hand was forced if it wanted the investigation to move forward by turning to the federal court for an order requiring compliance. A hearing is scheduled for July 1 on whether to enforce the subpoenas, and the losing side can be expected to appeal the case to the United States Court of Appeals for the Second Circuit, and perhaps even to the Supreme Court.
Regardless of the outcome of the battle over the subpoenas, Congress has shown that the STOCK Act was more about responding to negative publicity than a step toward greater accountability for misuse of confidential information. In November 2011, soon after the “60 Minutes” report, I wrote on DealBook that the law “would do little good if the S.E.C. and the Justice Department would be stymied in trying to conduct an investigation by an assertion of the speech or debate clause to stop the case dead in its tracks.” It certainly looks as if that’s what the House wants.