With the 2020 US presidential election officially decided, it remains to be seen which political party will get the majority in the Senate. Senate scrutiny depends solely on the results of a second round and a special election, both in Georgia, in January 2021.
Republican candidates for two seats, senators David Perdue and Kelly loeffler, have drawn attention for their stock trading activities, the first one supposedly being the most prolific stock trader in Congress. Indeed, the two Georgia senators were the subject of an investigation for potential insider trading, the investigations having been abandoned by the Senate Ethics Committee. However, several facts surrounding these cases have yet to be discovered and brought to light.
Insider trading by representatives or senators has long been a concern of citizens and politicians. One attempt to reduce the likelihood of such fraudulent activity was the passage and promulgation of the Congressional Knowledge Stop Trading Act (STOCK) in April 2012. The STOCK Act prohibits trading based on inside information (acquired at various congressional briefings and hearings) and requires more frequent disclosure of financial transactions by members of Congress.
While this legislation is certainly a step in the right direction, it does not go far enough to prevent members of Congress from exploiting their access to inside information. Episode Perdue is a case study of why the STOCK law is clearly insufficient, and provides an opportunity to establish a roadmap to stem these abuses.
In a previous case in March 2020, Senator Richard Burr and several other members of Congress sold shares worth millions of dollars before the stock market crash, which could be, at least in part, attributable to their access to privileged private information during confidential hearings and internal meetings in Congress. Although the Department of Justice has closed its investigations into three other senators, the investigation into Burr is still in progress.
Given the 2,596 transactions Perdue made during his six-year tenure, he continues to come under scrutiny by multiple media outlets as the pandemic continues. He has traded around 200 stocks in different industries, some of which fall under his position on Senate committees and his previous position in the private sector. Indeed, several stocks linked to the pandemic, such as Pfizer, DuPont and Caesars Holdings, are included in its businesses.
While on the cybersecurity subcommittee, Perdue also actively bought and sold shares of cybersecurity firm FireEye when signing a contract with Army Cyber Command. He bought shares of BWX Technologies before taking over the subcommittee, and sold it after the company secured funding from the Navy.
As a member of the Senate Banking, Housing, and Urban Affairs Committee, Perdue actively traded shares of banking companies, such as JPMorgan Chase, Bank of America, and Financial regions Corporation, all of which have potentially benefited its deregulation bills. This is also true of First data Corporation, a financial services company with which its jobs seem particularly opportune, given that he bought the stock weeks before it was acquired by Fiserv at Premium. He also sold shares of Cardlytics, of which he was a board member, after receiving an email from its CEO. This was followed by an announcement of leadership changes and a sharp drop in the share price.
Against the background of allegations that Perdue’s transactions involve suspicious transactions, we have assessed its trading performance against a passive benchmark. The performance of the market as a whole is a natural benchmark, as it is well known that it’s hard to consistently beat the market.
Senate Stock Observer provides financial information from the Senate, which can be used to track Perdue’s performance. We focused on all shares bought and then sold between January 2015, when Perdue entered the Senate, and April 2020, when he sold almost all of his shares. We then evaluated the weighted return performance of all stocks in Perdue’s portfolio against that of the total return of the S&P 500 stock index, taking into account the reinvestment of dividends.
The left panel of the graph above compares the cumulative return of the Perdue portfolio to that of the S&P 500, with growth expressed as a percentage. This evidence suggests that Perdue performed worse by far than a passive investment in an S&P 500 index fund. For example, $ 1 invested in 2015 in Perdue’s portfolio would not have made any money in April. 2020, while the same amount invested in the overall stock market would have increased by around 50% to $ 1.50. In other words, the evidence suggests he was not a superior title picker overall.
A radically different picture emerges in the right panel, where we focus only on the 10 stocks in Perdue’s portfolio that were found to potentially be related to his committee’s oversight or dealings with the private sector. For this sub-sample of stocks, $ 1 invested in January 2015 would have doubled in April 2020, while the market rose by around 50% during this period. Specifically, the effective annual return of Perdue’s trading strategy is 14.05%, which is significantly higher than the effective annual return of 8.92% achieved by the S&P 500 Total Return Index during this period. .
Perdue’s performance in stock selection in these information-sensitive stocks is impressive. It doesn’t just beat the overall stock market by a significant margin, but it also outperforms the performance of all equity hedge fund indices compiled by Hedge Fund Research over the same period. Obviously, such a performance would be seen as that of a star trader, not that of a politician with other onerous duties.
Notably, Perdue also outperformed a technology index and a healthcare index, which posted effective annual returns of 8.54% and 8.13%, respectively. While any investor can just “get lucky,” such a performance may raise eyebrows, not least because it is recorded for investments in a number of stocks for which Perdue has had access to inside information. On the other hand, if the performance is a demonstration of Perdue’s skills, then a successful career in the hedge fund industry will likely await him after his many years of congressional service.
It is difficult to establish a clear link between the information obtained during closed hearings of the committees and the trades. Although some suspicious business activity has been widely condemned, the fact that no member of Congress has been prosecuted under the STOCK Act reveals the challenge of proving insider trading by elected politicians. Those accused of such activity often claim that their transactions are based on public information or are managed by independent trusts. The difficulty arises from the lack of clarity in US securities legislation; indeed, years of legal practice in this area suggest that the limits of insider trading are difficult to define. The point is, the law ultimately fails to deter members of Congress from engaging in such activities.
Given the difficulty of controlling financial markets, a simple but extreme solution would be to prohibit members of Congress from completely trading individual stocks. This would not prevent public officials from trading securities on the basis of broad market indices such as ETFs, which are less sensitive to inside private information. In a similar vein, Senator Jeff Merkley introduced the Conflicting Trade Prohibition Act, which prohibits members of Congress individual stock trading but do not proscribe their property. A similar bill was also presented to the House.
It is important that these bills be enacted so that citizens can be reassured that their representatives in Congress are not taking advantage of their privileged positions.
Patrick Augustin is Associate Professor of Finance at the Desautels Faculty of Management at McGill University.
Francis Cong is a researcher at the Desautels Faculty of Management at McGill University.
Marti G. Subrahmanyam is the Charles E. Merrill Professor of Finance and Economics at the Stern School of Business at New York University.
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