Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio.
Speaker 1: Senator Richard Burr has called for an ethics investigation into
Speaker 1: himself and three other senators who sold off stock after
Speaker 1: receiving classified briefings on the coronavirus threat. The sales came
Speaker 1: before stocks collapsed as the virus outbreak became a global pandemic.
Speaker 1: Joining me is former federal prosecutor Robert Mints apart in
Speaker 1: McCarter and English. Is this a question of insider trading?
Speaker 1: Is it just ethics violations? What is it if it's
Speaker 1: not from a company, Well, it's really all the above, June. Really,
Speaker 1: what regulators will be looking at here is whether or
Speaker 1: not there's potential insider trading, or whether there's a potential
Speaker 1: violation of something called the Stock Act, of which is
Speaker 1: really just like insider trading, And what it really focuses
Speaker 1: on is whether or not individual soul stock while in
Speaker 1: possession of information that was not yet publicly available, and
Speaker 1: whether or not that information was material to the pricing
Speaker 1: of the stock, the same exact standard that is used
Speaker 1: in all insider trading cases. In a tweet on Friday,
Speaker 1: Senator Burr denied any wrongdoing, saying that he relied solely
Speaker 1: on public news reports to inform his decisions. How will
Speaker 1: investigators decide whether that's true. Well, it's really very much
Speaker 1: the challenge that is faced in all insider trading cases,
Speaker 1: and that is trying to get inside the head of
Speaker 1: the trader to determine what caused the individual to make
Speaker 1: the trading decisions that were made. And of course, again
Speaker 1: it has to be information that is non public and
Speaker 1: it has to be material, which means it would have
Speaker 1: had to have caused a significant change in the stock price.
Speaker 1: So here in the in the situation of Senator Burr,
Speaker 1: we really have a circumstance where he was apparently pretty
Speaker 1: to quite a few briefings. Um many of those briefings
Speaker 1: were information that was publicly available. But then there was
Speaker 1: also a thing that occurred, apparently on February twelve, which
Speaker 1: focused on the United States being ready for this potential epidemic,
Speaker 1: but also touched on the possible economic fallout. And it
Speaker 1: was the very next day, February thirteenth, that apparently Center
Speaker 1: Burst sold off some thirty three different stock holdings worth
Speaker 1: a collective UH six twenty eight thousand to one point
Speaker 1: seven million dollars, which represented a significant share of his portfolio.
Speaker 1: Another Senator under scrutiny is Georgia Republican Kelly Loffler. She's
Speaker 1: sold off millions of dollars worth of stock beginning on
Speaker 1: January That's the day the Health Committee she sits on
Speaker 1: was briefed by US Public health officials. Um she would
Speaker 1: have lost up to one and a half million dollars
Speaker 1: if she held onto those stocks. I heard her say
Speaker 1: that these are trades that she didn't know about, that
Speaker 1: they're done automatically without her knowing about them until afterwards. Yeah. Well,
Speaker 1: as when any insider stock deal, you have to show
Speaker 1: that the person was the one who directed the trading.
Speaker 1: That doesn't mean that they would have had to have
Speaker 1: done it themselves. They certainly could have instructed their broker.
Speaker 1: But if you have a circumstance, as some of the
Speaker 1: Senators and some of the House members who did trade
Speaker 1: have now stated publicly that these decisions were made without
Speaker 1: their involved involvement, that they were either held in a
Speaker 1: blind trust, or that they were investment advisors who were
Speaker 1: making these decisions without their input, then that would be
Speaker 1: a defense to any insider trading charges or a potential
Speaker 1: violation of the Stock Act of what about not attending
Speaker 1: that meeting. Senators Diane fine Stein, a Democrat from California,
Speaker 1: and James Inhoff, a Republican from Oklahoma, also sold assets
Speaker 1: after that January briefing, but they both denied even attending
Speaker 1: the meeting, and fine Stein said her assets were held
Speaker 1: in a blind trust. So if they didn't attend the
Speaker 1: meeting but they still sold, does that have bearing. Absolutely,
Speaker 1: It really doesn't so much depend on whether you tended
Speaker 1: the meeting. It depends on whether you had the information. So,
Speaker 1: for example, if you didn't attend the meeting, but one
Speaker 1: of the other senators you did pass along the information
Speaker 1: to you, and then you use that to trade on it,
Speaker 1: it could potentially be a violation of either of those
Speaker 1: two statutes and insider trading laws or the Stock Act
Speaker 1: of twenty twelve. There's also the possibility that the SEC
Speaker 1: could take a look at this from a civil enforcement standard,
Speaker 1: and that would be a case where the genitive proof
Speaker 1: would be lower than there would be in a criminal case. Basically,
Speaker 1: regulators would have to convince a judge or a jury
Speaker 1: that the accused public official recklessly and consciously uh indifferent
Speaker 1: to their produciary duties took these steps, and they would
Speaker 1: only have to prove that by a preponderance of evidence.
Speaker 1: So not only are they potentially looking at criminal charges here,
Speaker 1: that's a possibility, there's also SEC taking civil enforcement actions.
Speaker 1: And then there's also the possibility of ethics investigations by
Speaker 1: the Senate or by the House into some of these trades.
Speaker 1: But again, they would have to look at the timing
Speaker 1: of it, what information was available to the individual directing
Speaker 1: the trade, and then they have to surmount that difficult
Speaker 1: hurdle of proving that the material the information was material
Speaker 1: and that the decision was made based upon non public information.
Speaker 1: And in the case of sender Burn, for example, we
Speaker 1: could see that he was privy to both public and
Speaker 1: non public information, and proving that it was the non
Speaker 1: public information that precipitated the trading decision is a difficult one.
Speaker 1: But that's the same um high hurdle that's faced by
Speaker 1: prosecutors in all insider trading cases. The same high hurdle
Speaker 1: was faced by the SEC and all civil enforcement actions
Speaker 1: in the ethics investigations. Is it a different standard, is
Speaker 1: it a different kind of inquiry? But yeah, that that's
Speaker 1: a completely different kind of investigation. It's done by Senate
Speaker 1: or House members themselves, and uh history tells us that
Speaker 1: rarely are sanctions imposed by those investigations, but that can
Speaker 1: ultimately result in the Senate or the House voting to
Speaker 1: remove a member if they believe there has been a violation.
Speaker 1: So that is another option, And in fact, Senator Burr
Speaker 1: has publicly called for an investigation by the Senate Ethics
Speaker 1: Committee into these trades, an attempt to clear his name. Yeah,
Speaker 1: there's no question that the investigations by House or Senate
Speaker 1: committees is going to be a standard that is less
Speaker 1: than what prosecutors would have to meet in order to
Speaker 1: bring either civil or criminal charges. But you're really a
Speaker 1: good point here, because what we're seeing in many ways
Speaker 1: is a pattern that is similar to the financial crisis
Speaker 1: of two thousand and eight, where we saw individuals in
Speaker 1: corporate America being prosecuted by the SEC. Mainly where he
Speaker 1: had instances of politically connected corporate insiders a top financial
Speaker 1: institutions who had advanced knowledge of bailouts in the wake
Speaker 1: of the two thousand and eight financial crisis, and who
Speaker 1: used that information for stock trades anticipating the market reaction.
Speaker 1: So I think where we're gonna see here is a
Speaker 1: delay in enforcement. We're certainly not gonna see regulators moving
Speaker 1: quickly on any of this, given the fact that they're
Speaker 1: all working from home and there's quite a bit of
Speaker 1: other things going on in the market that SEC officials
Speaker 1: are gonna have to be looking at. But there are
Speaker 1: going to be looking down the road at trades by
Speaker 1: various people. This could be months, could be even years later,
Speaker 1: because whenever you see this kind of market volatility, it
Speaker 1: presents a heightened opportunity for insider trading, and we're going
Speaker 1: to see regulators looking at the trading patterns of certain
Speaker 1: individuals to see whether or not there's a possibility that
Speaker 1: we're using inside information order to make those trading decisions.
Speaker 1: So Bob, explain basically what insider trading is. Sure, the
Speaker 1: body of insider trading law points to some key guidance
Speaker 1: when you're looking at what is legal and what is illegal.
Speaker 1: Basically it comes down to don't trade on non public
Speaker 1: information about listed companies, don't tell someone else to trade
Speaker 1: on it, and don't lie if authorities have questions for
Speaker 1: you about your trades or investments. The problem and the
Speaker 1: challenge for prosecutors always for insider trading cases is demonstrating
Speaker 1: the cause and effect, which you can get kind of murky.
Speaker 1: Insider trading cases are not easy to make, which is
Speaker 1: why you don't see them frequently prosecuted, and they're often complicated.
Speaker 1: Insider trading, remember, is only illegal when the information is material,
Speaker 1: meaning that it would have caused a significant change in
Speaker 1: the stock price. And it's also only illegal when the
Speaker 1: information is known by the trader and not the public.
Speaker 1: So it really requires prosecutors to get inside the head
Speaker 1: of the trader, which they have to do circumstantially by
Speaker 1: showing the pattern of trading prior to the incident, which
Speaker 1: they believe is based on insider information, and showing that
Speaker 1: based on the circumstantial evidence, the timing, the amount of trades,
Speaker 1: all of that put together, it shows that the individuals
Speaker 1: making the decision not based on public information and not
Speaker 1: based on their past trading patterns, but arguably based on
Speaker 1: infra nation that was not available to the public and
Speaker 1: was ultimately the trayal on the stock price. So is
Speaker 1: the fear here that corporate insiders could trade based on
Speaker 1: advanced knowledge of let's say, government relief for airlines or
Speaker 1: other companies before the measures are made public. Oh. Absolutely,
Speaker 1: there's going to be unfortunately, lots of opportunities here due
Speaker 1: to the enormous market volativity volatility that we're seeing and
Speaker 1: the possibility of government bailouts and corporate insiders who may
Speaker 1: have information about those bailouts before it's publicly known. Obviously,
Speaker 1: we'll have the opportunity to potentially trade on that information
Speaker 1: before the market reacts. That's the kind of thing that
Speaker 1: regulators will be looking at, but it's probably information that
Speaker 1: they'll be looking at in a delayed way down the road.
Speaker 1: They're just not going to have the ability to look
Speaker 1: at this kind of trading activity in real time. We're
Speaker 1: going to see some delay months, maybe even years before
Speaker 1: regulators can catch up on some of the trading that
Speaker 1: may occur during this period of market volatility connected to
Speaker 1: the coronavirus. Daniel Taylor, who is a professor at the
Speaker 1: University of Pennsylvania's Business School, said that the pattern we
Speaker 1: saw what the financial crisis appears to be repeating itself.
Speaker 1: Can you explain a little bit about what happened then
Speaker 1: compared to what's happening now, Sure, what we're talking about
Speaker 1: here is the same potential government bailout system where we
Speaker 1: saw in the financial crisis of two thousand and eight.
Speaker 1: There are instances in which politically connected corporated ciders at
Speaker 1: financial institutions who may have had advanced knowledge about these
Speaker 1: bailouts and the wake of that two thousand and eight
Speaker 1: financial crisis, use that information for stock trades anticipating the
Speaker 1: market reaction. So, in other words, if they were prevy
Speaker 1: new information that a bailout was coming, and they knew
Speaker 1: that was going to cause a jump in the stock price,
Speaker 1: which is at that point had been enormously depressed, they
Speaker 1: could trade on that information. And given the fact that
Speaker 1: we can expect to see a similar amount of government
Speaker 1: allowed to different industries, which as the airline industry and others,
Speaker 1: that information presents opportunities for those to trade on the information.
Speaker 1: This heightened opportunity for insider trading is something that regulators
Speaker 1: will no doubt be looking at, and those trading records
Speaker 1: will be available to them after the fact to try
Speaker 1: to figure out the timing of when those trades were
Speaker 1: made versus the information that they have been available to
Speaker 1: these corporate insiders, to try to piece together a case
Speaker 1: for insider trading. But these cases, again are always difficult
Speaker 1: to prove, so it remains to be seen whether we're
Speaker 1: going to see a real spike in insider trading prosecutions
Speaker 1: in the wake of some of these anticipated government bailouts. Bob,
Speaker 1: if you remember, were any executives given jail time for
Speaker 1: insider trading during the financial crisis or was it mainly
Speaker 1: penalties that they had to pay. No, that's a great
Speaker 1: example because even during the bailouts of two thousand eight,
Speaker 1: we saw very few insider trading cases actually being brought
Speaker 1: where people were criminally responsible. For example, Angelo Mozilo, who
Speaker 1: was the co founder and CEO of Countrywide Financial. There
Speaker 1: is a very high profile case in which this Morgage
Speaker 1: company faced financial clap collapsed in two thousand and eight
Speaker 1: before being purchased by Bank of America, and in that case,
Speaker 1: Mr Brazilla paid a multimillion dollar penalty to the sec
Speaker 1: but never admitted or denied any wrongdoing and there were
Speaker 1: no criminal charges brought. As an example of how difficult
Speaker 1: it is to bring these types of cases. Do you
Speaker 1: think years before we'll see any of these cases. Yeah,
Speaker 1: I think we're gonna have to wait to see how
Speaker 1: this whole crisis plays out on the economy. There's going
Speaker 1: to be instances where uh, there are drug approvals, there's
Speaker 1: going to be Medicare coverage issues, there's going to be
Speaker 1: government bailout issues. There's all kinds of information that is
Speaker 1: going to have an impact on the market, uh and
Speaker 1: will result in markets either moving up or down, and
Speaker 1: that information present opportunities always for people to trade on
Speaker 1: the information, but it will take the government years probably
Speaker 1: rather than months, to unravel whether or not there was
Speaker 1: anything done illegally in any of these trades. That's former
Speaker 1: federal prosecutor Robert Ment's a partner mcarter and English. Thanks
Speaker 1: for listening to the Bloomberg Law Podcast. You can subscribe
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Speaker 1: on Bloomberg dot com slash podcast. I'm June Rosso. This
Speaker 1: is Bloomberg. Yeah.