If a Member of Congress or legislative staffer were to purchase stock in a company based on Congressional knowledge (e.g., the award of a highly lucrative, but not-yet-publicly-announced, defense contract), the Securities and Exchange Commission could prosecute that official under Rule 10b-5 for defrauding the federal government and its citizens.
Congressional information constitutes government property that, like federal funds and tangible property, rightfully belongs to the citizenry. The entrusted information on which trades were based need only be material and nonpublic. It needn’t be explicitly confidential pursuant to a statute, internal rule or other specific mandate.
While constitutional protections such as the Speech or Debate Clause may hamper the collection of evidence supporting liability, they are not insurmountable obstacles.
If Congressional officials find the vicissitudes of a fiduciary-focused anti-fraud prohibition too vague and unsettling, Congress could expressly define and prohibit “insider trading” and unmoor the offense from Rule 10b-5. New legislation along that line would be a welcome development.
But unless and until Congress acts to clarify insider trading law for everyone, the classical and misappropriation theories — with their emphasis on duties of entrustment — can function just as well for Congressional officials as they do for all other investors who trade securities in the capital markets.
Donna M. Nagy, the C. Ben Dutton professor of law at the Indiana University Maurer School of Law, is the author of “Insider Trading, Congressional Officials, and Duties of Entrustment,” an article published in the Boston University Law Review, which can be accessed via the Social Science Research Network.