The Lookout

Bachus probed for insider trading, but will Congress reforms go far enough?

Zachary Roth
The Lookout

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Rep. Spencer Bachus (R-Ala.). AP Photo/Charles Dharapak

How serious is Congress about ending insider trading among members?

On Thursday, the House passed legislation intended to crack down on the practice. And that turned out to be the very day the congressman in charge of regulating the nation's banking and financial-services industries acknowledged he's being investigated for possible insider trading.

Since late last year, the Office of Congressional Ethics, an internal ethics watchdog, has been investigating Rep. Spencer Bachus, the Alabama Republican who chairs the House Financial Services committee, according to The Washington Post, which first reported the news. The probe is said to be focused on several suspicious trades listed on Bachus's financial disclosure forms.

"I welcome the opportunity to set the record straight" Rep. Bachus told Yahoo News in a statement. "I respect the congressional ethics process. I have fully abided by the rules governing members of Congress and look forward to the full exoneration this process will provide."

While hardly an epidemic, the problem of insider trading by lawmakers has been drawing attention. A November "60 Minutes" report, sparked by "Throw Them All Out," a book about congressional ethics published last year by the journalist Peter Schweizer, raised questions about the trading activities of several members of Congress, including Bachus and Rep. Nancy Pelosi. At issue: Existing laws bar fiduciaries of a company -- employees, generally speaking -- from trading on material non-public information. But members of Congress aren't defined as fiduciaries. The Senate last week passed legislation aimed at addressing that, and the House passed a similar measure Thursday.

But some good-government advocates  view the new legislation as lacking teeth. A stronger version, which would have required that lawmakers put their stocks in blind trusts, was sidelined.

There's also the problem of enforcement. The Bachus probe reportedly centers on whether the congressman violated Securities and Exchange Commission (SEC) laws. Asked by Yahoo News whether the SEC has begun its own investigation of the matter, a spokesman for the agency, John Nester, declined to comment. A spokesman for Rep. Bachus did not respond when asked whether the congressman had been contacted by the SEC.

Schweizer told Yahoo News that, because the SEC relies on Congress for funding, he is skeptical that it will take an aggressive approach, even if it does investigate. "The SEC is going to be asked to take on powerful members of Congress …. when Congress sets their budget," he said. "I'm rather doubtful."

As for the Office of Congressional Ethics (OCE), established in 2009, it lacks subpoena power, and must forward its findings to a panel of lawmakers who then decide whether to take action. In recent years, that panel has often been beset by partisan infighting.

Schweizer described the OCE investigation as "a small step," adding: "I don't think it's going to fix the problem."

Bachus has made several trades that might pique investigators' interest, the Post reports.  In July 2008, while President George W. Bush's fiscal stimulus was being put together in Congress, Bachus bet that the stock of Burlington Northern Railroad would rise -- and ended up making a profit of over $16,500. (The following month, Bachus lost $2,900 on the same bet.)

In September of that year, at the height of the financial crisis, Bachus attended a private meeting at which top Bush administration economic officials warned that the economy might well be on the verge of collapse without drastic action. The next day, the Post reports, Bachus bet that the markets would decline broadly, and made $5,715. He also made $12,713 on a trade based on the expectation that G.E.'s stock price would likely fall.

In response to the allegations about those trades, which first appeared in Schweizer's book, Bachus has said the instability of the economy was hardly a secret by the time of the meeting, which took place on September 18.

But Schweizer thinks that explanation doesn't hold water. "The Dow Jones on September 18 was still over 11,000," he told Yahoo News. "Panic had not set in."

Bachus also has come under fire for using his post to delay regulation of derivatives under financial reform legislation, even though a county in his own district went broke last year after falling prey to a derivatives financing scheme pushed by JPMorgan.

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