Does Congress Have a Clue on Insider Trading?
In a 75-word note to clients on April 1, Simon predicted the government would increase certain pay rates for health insurers that had been scheduled for cuts. He didn’t say where he got this idea, only that he believed it would happen. And it seemed to be more than a guess. The headline on his report said: “FLASH -- Medicare Advantage Rates.”
Simon was proven right when the government released its decision later that day after stock markets had closed. By then, the shares of some insurers had soared, including those of Humana Inc. (HUM) and Health Net Inc. (HNT), which Simon had cited favorably in his report.
When financial journalists break news like this for their paying customers, they get praised as market movers. Simon and his firm instead have gotten lots of headaches.
Senator Charles Grassley of Iowa this week sent Height Securities a letter asking for lots of documents and demanding to know how Simon got his information -- as if the senator would try bullying a major newspaper or television network this way. News organizations that should be kicking themselves for getting scooped have spotlighted Height as an example of what’s wrong with the so-called political-intelligence industry. The insinuation is there must be something untoward about a person with a broker’s license doing what beat reporters do routinely.
There has been no sign that Simon or his firm violated any confidentiality obligations, engaged in insider trading, paid bribes, or otherwise did anything improper. Maybe someone told Simon something without permission, but that wouldn’t be the analyst’s problem. Journalists get stories all the time by sweet-talking people into blabbing things they shouldn’t. There’s nothing wrong with that.
(Grassley, the ranking Republican on the Senate Judiciary Committee, also has requested documents from the Centers for Medicare and Medicaid Services, including a list of people who had advance notice of the agency’s rate decision.)
As for “political intelligence,” this is a fancy term for information that is obtained by reading things or talking to people. Likewise, a “political intelligence professional” is someone with a phone, a notepad and access to federal employees. Grassley says these outside snoops should have to register with the government, and he wants new laws requiring it. An exception might be made for someone who is a “representative of the media,” whatever that’s supposed to mean. District of Columbia maitre d’s, bartenders, barbers and taxi-cab drivers had better watch out the next time they trade gossip for bigger gratuities.
“When a political intelligence professional is paid to gather inside information from congressional or agency sources that can be used to make investment decisions, that professional should have to register and disclose his or her activities to the public,” Grassley said April 4 in a joint statement with U.S. Representative Louise Slaughter, a New York Democrat.
The word “activities” looks especially creepy. If someone gets valuable information in a legal way, isn’t barred from trading on it, and isn’t obligated to keep it confidential, it’s none of the government’s business what that person does with it. Sell it, whisper it, buy stocks, do nothing, whatever. Grassley touts his plan as a step toward transparency, akin to lobbyist registrations. It’s more like a government invasion of privacy. This is about controlling citizens, not protecting them. You have to wonder if it would survive a constitutional challenge.
Besides, Simon and Height Securities are already registered with the Securities and Exchange Commission and the Financial Industry Regulatory Authority. Anyone can go to the regulators’ websites and find detailed reports about Simon and the firm.
“Height Securities is an SEC-registered broker-dealer and not a lobbying or political-consulting firm,” Andrew Parmentier, one of Height’s managing partners and founders, said in an e-mail to Bloomberg News. “We issue research reports in accordance with a comprehensive regulatory regime. We are highly confident our April 1 report was based on good research, conducted in accordance with this regulatory regime. We look forward to demonstrating this to Senator Grassley.”
The people most affected by new rules would be everyone else deemed to be in the political-intelligence trade -- a large universe that includes everyone from law firms and consultants, to researchers for public-pension plans and hedge funds, or even Washington socialites trying to make a few bucks on the side.
This isn’t Grassley’s first attempt at such a requirement. Last year, Congress passed something called the Stop Trading on Congressional Knowledge Act, which promised to crack down on insider trading among the legislative set, although there’s little reason to believe it will change much of anything. Grassley wanted to mandate disclosure of political-intelligence activities, but his proposal was stripped from the bill at the last minute. And thank goodness. The government has enough information about what all of us do on our own time.
As for Justin Simon, he should have a bright future as an enterprising journalist if things don’t work out for him as a stock analyst.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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