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Ken Turchi
IU Maurer School of Law

Last modified: Monday, November 14, 2011

IU legal expert: Insider trading by Congress is illegal, contrary to '60 Minutes' report

Professor Donna M. Nagy says existing laws are adequate

Nov. 14, 2011

BLOOMINGTON, Ind. -- A CBS 60 Minutes segment that aired Sunday night heralded the view that members of Congress can legally buy stock based on nonpublic information, and highlighted proposed legislation -- the Stop Trading on Congressional Knowledge (STOCK) Act -- as the best way to close a purported legal loophole.

But according to an Indiana University Maurer School of Law expert on insider trading, existing laws already prohibit members of Congress from using material nonpublic congressional knowledge to enhance the profit in their personal securities portfolios.

"The conventional wisdom that members of Congress are somehow immune from the federal securities laws is simply wrong," says Donna M. Nagy, C. Ben Dutton Professor of Law. As she recently told the Capitol Hill newspaper Roll Call, "Any member of Congress or legislative staffer who trades securities on the basis of material nonpublic information obtained through congressional service is already doing so in violation of existing law."

What's more, in Nagy's view, the proposed STOCK Act constitutes a serious step backward because it would ban securities trading only when the nonpublic information pertains to a legislative action that relates to a particular securities issuer. Thus, the STOCK Act is not only unnecessary, but it would also create serious gaps that do not exist under the current law.

"Members of Congress are public fiduciaries who owe duties of trust and loyalty to the federal government and its citizens," Nagy says. These duties of entrustment bring senators and representatives within the scope of Rule 10b-5 of the Securities Exchange Act of 1934, a broad anti-fraud prohibition in U.S. securities law. If a member of Congress were to purchase stock in a company based on nonpublic congressional knowledge -- for example, the award of a highly lucrative, but not yet publicly announced, defense contract -- the SEC could prosecute that official under Rule 10b-5 for fraud "in connection with the purchase or sale" of a security.

As Nagy sees it, congressional information constitutes government property that, like federal funds and tangible property, rightfully belongs to the citizenry. Thus, "a lawmaker's secret self-serving use of material nonpublic congressional knowledge for securities trading purposes deceives and defrauds the American public."

Nagy urges Congress not to take additional legislative action when current laws and enforcement mechanisms are already adequate. "Existing insider trading laws can function just as well for congressional officials as they do for all other investors trading in the capital markets," she told Roll Call.

Nagy is available to comment on the STOCK Act and insider trading laws in general. She can be reached at or at 812-856-2826. She has written an extensive article, "Insider Trading, Congressional Officials, and Duties of Entrustment," which can be accessed via the Social Science Research Network.