How My Boss Got Fired and Went to Prison

Long, long ago in a land far away, my boss got fired and went to prison. Okay, maybe it was not a land far away and there were several thousand folks between his position at the top of a conglomerate and my lowly spot near the bottom. But he did go to prison . . . for trading stocks using information he had but the general public did not. 

This would not have happened if he had been a member of Congress. By the way, his stockbroker also went to prison.

Here’s a portion of a Q&A with the author of Throw Them All Out, Peter Schweizer, posted on Amazon:

Q: When did you realize that so many insider trading and sweetheart land deals were going on?

A: When I first discovered that members of Congress are exempt from insider trading laws, I didn’t believe it. Then, when I started to look at their stock trades and compare them with what they were doing in office, I was stunned.

Q: What do you mean by the "Permanent Political Class"?

A: I think politics in Washington has become a business opportunity. Republicans and Democrats work together to enrich themselves. They have designed the system to work so that they can make lots of money doing things that would get the rest of us sent to jail.

Q: Politicians are exempt from insider trading laws? You’re kidding, right?

A: No. They write the rules, and guess what: the rules that apply to us don’t apply to them. They are also exempt from whistleblower laws. If you see your boss committing a financial crime, you can report them and you will be protected. You can’t be fired. But if your boss is a congressman? You’re toast.

Many years ago, insiders could buy or sell at any time for any reason and just pocket the gains. This rigged the game in favor of those holding material, non-public information. The government now requires corporate insiders to file a Form 4 with the SEC any time they transact in their own company's shares, detailing how much they bought or sold, at what price, and when.

They have to file the form within 48 hours of the trade. Smart investors track those inside trades.

In my former life, I was a licensed securities principal.  I had all the certifications and licenses required to train and supervise registered representatives (stockbrokers). I was required to know insider trading rules as well as other regulations related to broker-dealers.

Insider trading would get a rep who worked for our company fired. Not so, apparently, for members of Congress.

The following are some of the insider trades listed in Throw Them All Out.

Melissa Bean (D) bought shares in the health care sector while Obamacare was being debated, earning as high as a 50% return.

Jared Polis (D) was a tireless advocate for Obamacare, bought a huge stake ($6 to $12 million) in BridgeHealth, a medical tourism company that specializes in providing less expensive medical procedures in countries other than America, clearly believing that the bill would increase costs here, making overseas medical procedures more attractive. He also invested heavily in biotech companies while voting on a bill that would provide a 50% tax credit for investments in such companies.

Senator John Kerry (D) bought at least $200k in shares of Resmed, a beneficiary of Obamacare, earning a quick 71%, and then worked to reduce taxes on Resmed and companies like it. 

He earned 40% on Thermo Fisher Scientific, also a beneficiary of Obamacare provisions. He dumped health insurance company United Health, which stood to lose from the health care bill, then introduced an amendment that would tax generous health care plans. He saved about $100k by dumping Amgen because Obamacare would reduce their Medicare reimbursements.

Johnny Isakson (R) and Sheldon Whitehouse (D) dumped shares on the same day Kerry did.

James Oberstar (D) (served eighteen terms) sold major holdings in two pharmaceutical companies just before the shares plummeted with the passage of the bill that established Medicare part D because the companies he sold stood to lose from the legislation.

Jeb Bradley (R), new to his job in 2003, invested just before the above bill was passed, reaping an instant 10% return.

           

But everybody pales in comparison to Kerry. He made 111 transactions in pharmaceutical and health insurance companies in one year, earning at least a half million from one company.

Max Baucus (D) and John Boener (R) actively traded health care stocks even as one pushed for Obamacare and the other against.

Jim McDermott (D) also bet big on big pharma when the Medicare part D bill was working its way through Congress, earning a tidy return of 180% in one year.

           

Spencer Bachus (R) made as much from option trading during the crash of 2008 as he did from his congressional salary. He was included in private meetings with the Fed chairman and Treasury Secretary and knew in advance what actions were going to take place.

           

Jim Moran (D) dumped shares in 90 companies after being in one of these private meetings.

           

Kerry, along with Whitehouse (D) and Dick Durbin (D) (about $115K) actively traded financial stocks the day after the meetings. Same for Shelley Capito (R) (about $200K).

Kerry once again dwarfed them all, dumping or shorting financial stocks before the clueless Treasury Secretary Hank Paulson and the equally inept fed chairman announced that the sky was falling. Kerry bought back just before the bailouts passed.

           

Rahm Emanuel, the president’s foul-mouthed chief of staff and now Mayor of Chicago, was appointed by Clinton to serve on the Freddie Mac board in 2003. He sold about a quarter million of stock just before the accounting fraud there was partially revealed (we may never know the total extent of the fraud since the major culprits now serve as White House economic advisers).

           

Nancy Pelosi (D) purchased between $1 and $5 million in Visa stock weeks before the rest of us got a shot at buying shares in the IPO (initial public offering)earning 50%. When a bill unfavorable to Visa passed out of committee with bi-partisan support, Pelosi made sure it never made it to the floor.

She and her husband received similar favorable treatment on at least ten IPO’s. She touted natural gas as an alternative to fossil fuels (apparently thinking the rest of us don’t know that natural gas is a fossil fuel) and earned a nifty 67% on a natural gas IPO.

           

The Pelosis are joined in the IPO Treasure Kingdom by Senators Torricelli (D) ($70K), Bingaman (D) ($378K) on one IPO in one day. Barbara Boxer (D) also earned returns from 184% to 200%. 

Maybe you didn't vote for any of these folks, but there are many more trades. And John Kerry did run for president. 

           

The stockbrokers in the firm where I worked would have been fired for engaging in many, if not all of the trades listed in this book.

I believe that legislation exempting members of Congress from insider trading rules is tantamount to passing a bill that allows them to rob banks. But the SEC will not move to punish them because Congress funds the SEC.

I also believe that the brokers who completed these insider trades and the firms who supervise them broke the law.

Legislation was working its way through Congress as I wrote this, but more rules won’t work unless we enforce them.

“There are two passions which have a powerful influence in the affairs of men. These are ambition and avarice; the love of power and the love of money.” Benjamin Franklin, 1878

Next week, a few suggestions as to what we can do about insider trading, earmarks, and cronyism.Then we'll go back to telling stories.