The Justice Department is investigating a series of stock transactions made by lawmakers ahead of a steep drop in the market due to the coronavirus, according to CNN. Former DOJ Prosecutor and Ifrah Law Partner James Trusty joins Yahoo Finance's Zack Guzman to discuss.

Video Transcript

ZACK GUZMAN: In the meantime, the investigation into some troubling stock trades by senators of both parties is gaining some traction. Last week, we got the update that the Justice Department launched a probe into those traits, which includes up to $1.7 million shed by Senator Richard Burr ahead of the market route we saw play out as coronavirus fears gripped the country, as well as nearly $1 million in stock shed by Senator Kelly Loeffler and her husband, who is the chairman of the New York Stock Exchange.

And for more on this in terms of the pressure being applied to those trades and what the Department of Justice might need to build a case against those trades, we're joined by former DOJ prosecutor, Jim Trusty, who's now an Ifrah Law Partner. And Jim, thank you so much for taking the time.

First up, I mean, from the outside looking in, it's understandable why people might be upset by this, when you think about a senator, in the case of Senator Burr, who is the chair of the Intelligence Committee, getting updates on the ground about coronavirus and saying to the public things are under control, while telling VIP donors that maybe it could potentially be as bad as the Spanish flu. I mean, how does the DOJ and prosecutors look into this? What do you look for? And how could it potentially lead to actual charges here?

JAMES TRUSTY: Well, the key thing they're going to be looking for is whether he's acting, or she, are acting on non-public information. And you know, this was actually permissible in Congress up until 2012. They finally passed the Stock Act, which was basically an insider trading prohibition.

So if you're getting briefed up on the coronavirus and it's not public information and then you act on that by either unloading or acquiring a bunch of shares, that's the red flag for DOJ. Now most of these cases start at an SEC level, but some of them will graduate. And this one may already be on a bit of a fast track for US attorney's office or Main Justice consideration of whether these cases add up to criminal cases.

ZACK GUZMAN: Yeah, and I mean, when you look at it, you've got the criminal case side of things that'll be looked at, too. But then there's also just the ethical question. I know people who are more angry would say, no, we need to get the criminal charges here. But when you look at the ethics side, it's interesting because the code of ethics for government service, which applies, of course, to senators, does kind of lay this out specifically.

And I just want to read the rule from paragraph eight of that, saying that a senator or staffer shall, quote, "never use any information coming to him confidentially in the performance of government duties as a means for making private profit." And confidential information there would be applying to things that they gleaned because of their senate position-- for the case of Senator Burr, because he is the chairman of the Intelligence Committee.

So I mean, maybe not from just the criminal side, but of course, there's other ways to go here civilly, ethically, in terms of how this was handled.

JAMES TRUSTY: Right. Well, remember, you know, the other thing that's really interesting is Senator Burr has the added burden of being one of I think either two or three senators that voted against the Stock Act. So you know, here's a guy who's on record saying insider trading for congressmen and senators should be OK. And of course, Senator Loeffler has the problem of being married to the CEO for the stock market. So there's a lot of imputed knowledge there, and that's going to be the key, is whether they had non-public information and acted on it.

And let me just say, the moral part of it is pretty easy. If they really did this, whether or not it results in a criminal prosecution, there's plenty of room for criticism for ethical censure, whatever they want to do on a political level.

The criminal level, or even the administrative level for SEC, can be pretty challenging. It comes down to exact timing. And for instance, if they had a whole bunch of people saying that, you know, these stocks are going to take off and those stocks are going to fall because of this illness, if that's out in the public sector, they can use that as a defense.

Similarly, they can say-- and I think the senator from Nevada has already done this-- hey, mine was a blind trust. I didn't really know what my advisors were doing. Well, that would be an absolute defense here. Again, maybe it doesn't eliminate the political picture, the appearance picture, but if you can say, hey, my advisors do these things, I just report what they tell me, and they're smart advisors, that would be a full defense.

The problem is what I think Senator Collins, who is running against the senator from actually, it's Georgia, would say is, well, it's a peek-a-boo trust. There is actually a little bit more visibility into these investment decisions. That would probably be the worst of all worlds if she was my client. If she had that kind of sneaky perspective of knowing what's going on, but pretending she doesn't, that's almost the worst of all worlds for whether a prosecutor will look at this case is one that has criminal intent.

ZACK GUZMAN: Yeah, because that's kind of-- I mean, that gets to the heart of why this might be so hard for people who aren't legal experts like myself. I mean, the question to you would be all right, well, we've got Martha Stewart, you know, as a similar example you could point to, probably the most famous insider trading case for people who might not be in it all the time. When you think about if that's what applies to a television personality, shouldn't we be applying similar standards, if not more stringent standards, against people in Congress?

And I guess, the main question, of course, would be, how do you prove it, and does it get any more difficult when you think about what you just described, a blind trust, and actually saying, all right, here's the specific proof that says they traded specifically because of this. And that, I would assume, is a very difficult thing to show.

JAMES TRUSTY: Yeah, and look, a true blind trust would be an absolute defense here. You could say basically I didn't act on any inside information. My advisors made the call, and I reported it in accordance with the Stock Act. And that's why so many of these cases end up being administrative, and they go to the SEC and don't elevate to proof beyond a reasonable doubt for a criminal case on criminal intent.

Remember, Martha Stewart's case, as bad as the insider tip was that was alleged there, that she got on a private plane and got this great tip, the reality is she only pled guilty to the false statements. She never pled guilty in a criminal case for the insider trading. That was like a-- I think it was about a $4,500 SEC administrative fine. So these cases are easy to spot from the abstract, but pretty difficult to actually put together and prove in a satisfactory way. And that's why not too many of them get criminal.

ZACK GUZMAN: All right, there you go, latest on that from James Trusty. Thank you so much for joining us. Appreciate the expertise.