Public Servants And Their Material Non-Public Information

By John H. Haldeman, Jr., CFA

  During the 1840s, before Texas was admitted to the Union and before oil was discovered, bonds issued by the territory were deemed speculative, and traded at a large discount.  Embedded in the treaty of annexation was a provision that the United States would assume the debt of Texas upon that territory’s admission, but the treaty was stalled in the Senate for several years because exactly one-half of the fifty-four senators resisted admitting another slave state.  

  One of those senators, Benjamin Tappan of Ohio, was about to change his vote, opening the door for Texas to become a state. Before he voted, and without notifying anyone that he was about to change his vote, he and his family bought thousands of dollars worth of the deeply discounted Territory of Texas bonds.  When the treaty passed, he was enriched when the Texas bonds became U.S. Treasury bonds and appreciated sharply.  Tappan broke no laws at the time, and his actions would not break any today, because those who make our laws specifically exempt themselves and their staff.  If an investment manager or a business official trades a security based on material inside information, the SEC will quite properly level a stiff fine or perhaps even jail time.  

  Tappan’s actions, and those of the staffers mentioned in the Wall Street Journal (subscription required), undermine the confidence that is such an important component of our capital markets.  If they buy from or sell to an investor without such information, the investor loses the benefit of whatever event is about to unfold.  Moreover, how can we be sure that Congress does not pass laws that are not in the nation’s best interest, but only in the interest of those who have bought or sold securities of affected companies?  How does that differ from a bribe? 

  There are many examples (including Obamacare) where members of Congress exempt themselves from the effects of what they sow.  This practice obviously shows disdain for their constituents, and dilutes their focus on the laws they pass.

“A total of 86 legislators and congressional aides on both sides of the aisle reported frequent trades of securities last year—in one case, an aide posted nearly 2,300 trades in his brokerage account—according to a Wall Street Journal’s analysis of disclosure forms covering trading activity on Capitol Hill in 2009. “

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