Inside Job--Some members of Congress just can’t resist “honest graft”
Inside job -- Some members of Congress just can’t resist “honest graft”
Dr. Steven J. Allen’s REVOLT OF THE DEPLORABLES By Dr. Steven J. Allen
[Continuing our series on the need for term limits for members of Congress]
WASHINGTON, DC – George Washington Plunkitt, the New York politician of the late 19th and early 20th centuries, was a master of machine politics and of what he called “honest graft.”
Dishonest graft was making money in politics by pursuing your own selfish interests to the detriment of the people. Honest graft involved pursuing the interests of your party, your voters, or the country while making yourself rich. It was considered honest graft if a politician found out that the government was going to build a park on the edge of town, and rushed to buy the land so that he could re-sell it for the park and make a profit.
Plunkitt defended his own actions, saying: “I could get nothin’ at a bargain but a big piece of swamp, but I took it fast enough and held on to it. What turned out was just what I counted on. They couldn't make the park complete without Plunkitt's swamp, and they had to pay a good price for it. Anything dishonest in that?”
Dishonest? Yes. The money the grafter makes comes out of the pocket of someone else, the person or persons who would have made the money if the grafter hadn’t traded on inside information. And when a politician makes money on a law or regulation or public-works project that he or she supported, there’s a pretty good chance that the politician’s support was predicated on the profit he or she could make.
By Plunkitt’s way of thinking, using taxpayers’ money to build a park is a good thing, and therefore the graft is “honest,” but what if that money would have been better spent on fighting crime or educating kids or – one shudders at the thought! – being left in the pockets of those taxpayers?
Insider deals – deals that are otherwise legal, but based on inside information or special treatment – are one of the ways that politicians get paid off. These deals are often rationalized because politics, when conducted honestly, can be a difficult way to make a living. In his last year as governor of Arkansas, Bill Clinton made $35,000 a year (equivalent to $73,000 today), a level of pay low enough that, in the minds of many, it justified the Clintons’ involvement in questionable, sometimes crooked schemes to make more money.
When I was a young political reporter, I learned of a wealthy fellow who, occasionally needing favors from officeholders, financed their careers with special deals, often involving car washes. He’d select up-and-coming politicians, ones with the talent to get far, and sell them shares of car wash businesses. They’d pay a fraction of what the shares were worth, and they’d get enough income that they could spend most of their waking hours running for office rather than trying to make a living the regular way.
The rich guy made his money back, and then some, getting zoning decisions to his benefit, advance knowledge of government actions, and other preferential treatment. In his mind, he wasn’t doing anything wrong; he saw himself as a patriotic American using his wealth to make it possible for good people of limited means to hold office. To him, it was win-win, and it was legal! (I laughed as I watched the TV show Breaking Bad when some of the characters started laundering their drug-dealing fortune through a car wash.)
Thirty years ago, as we saw an explosion of wealth related to Silicon Valley and information technology, a fashionable method for funneling money to favored politicians was the Initial Public Offering (IPO).
Business corporations start off with money from private investors such as a company’s founders, their friends and family, and professional investors such as venture capitalists. When a corporation “goes public,” it offers shares for sale to other investors on a stock exchange.
Going public enables the company to raise capital and get existing investors some of their money back. Typically, when a stock is offered to the public for the first time, the price is set low and rises quickly. Most of the time, it’s institutional investors and the rich who get to buy at the low initial price and enjoy the rewards.
U.S. Representative Tom Foley (D-Washington), who served as House Majority Leader (1987-89) and Speaker of the House (1989-1995), was well-connected. Over just one four-year period, Foley reaped more than $100,000 in profits ($225,000 in today’s money) from IPOs.
His broker Peter De Roetth helped Foley turn quick profits in 40 of 42 new stock offerings with minimum financial risk. “I would like Tom Foley not to have to worry about money,” said De Roetth. Foley was a lawyer, the son of a Superior Court judge in Washington, his annual salary as Speaker was about $370,000 in today’s money, and, given his time in high office, he could look forward to a long career of serving on corporate boards whenever he re-entered the private sector. (In fact, he ended up as head of a major economic development group in Washington, D.C., was ambassador to Japan, and served as North American Chairman of a major organization representing the interests of political elites, the Trilateral Commission.) Foley, who died in 2013, would never have to worry about putting bread on the table, but to De Roetth, he was a charity case.
The Foley IPO scandal would be followed by the House Bank scandal, in which it was revealed that the House of Representatives allowed its members to overdraw their House checking accounts without the risk of being penalized by the House bank. In the ensuing investigation, four House members and one non-voting delegate, along with a House Sergeant at Arms, were convicted of wrongdoing, but many others were found to have abused the system. Foley would lose his seat – the first incumbent Speaker to do so in 132 years – in the Gingrich Revolution of 1994. That year, Republicans won majority in the House for the first time in 40 years.
Inside info: IPOs and special bank privileges weren’t the only ways for members of Congress to exploit their privileged positions financially. Another was insider trading.
The Securities and Exchange Commission defines insider trading as “the buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.” In other words, it has to be information known to the trader but not known to the public, information that would significantly affect whether someone buys or sells that security, and the trader must violate a position of trust or a duty to help or not to harm someone else.
Insider trading has long been illegal among people in private business, but until the past decade it wasn’t generally illegal for member of Congress to profit from information they obtained in the course of their jobs.
Some members of Congress appeared to have taken advantage of inside information during the 2008 financial crisis and the 2009-10 debate over Obamacare. Representative Spencer Bachus (R-Alabama). Investigative journalist Peter Schweizer and the CBS program “60 Minutes” reported that, from July through November 2008, Bachus traded in options at least forty times, betting that stocks would fall. At that time, he was the top Republican on the House Financial Services Committee, and he and certain other congressional leaders had received private briefings about the developing financial crisis from Treasury Secretary Hank Paulson and Federal Reserve Bank Chairman Ben Bernanke.
The case was investigated by the House Ethics Committee and the charges dropped, but the allegations raised concerns that helped push the STOCK (Stop Trading on Congressional Knowledge) Act to passage, 96-3 in the Senate and 417-2 in the House.
(After the 2010 election, Bachus absurdly blamed the Tea Party movement and Sarah Palin for Republicans’ failure to win the Senate. He retired from the House effective in 2015, and was rewarded for his service with a 2019 appointment to the board of the Export-Import Bank, which subsidizes Big Business.)
The STOCK Act prohibits members and employees of Congress from using “any nonpublic information derived from the individual's position . . . or gained from performance of the individual's duties, for personal benefit.” The act required members to disclose the purchase or sale of stocks and bonds and related investments within 45 days, as well as the terms of mortgages on their homes, prohibited members’ special access to IPOs, and banned pensions for members convicted of felonies for corruption.
No lawmaker has ever been prosecuted under the STOCK Act.
One Congressman, Chris Collins (R-New Jersey) pled guilty in 2019 to conspiring to commit securities fraud and making false statements to the FBI in an insider trading case, but that was with regard to information he received as a member of the board of a drug company, not as a member of Congress. He was sentenced to 26 months and fined $200,000, but was pardoned after two months by President Trump. (Some argued that Collins was targeted for his support of the then-President.)
The STOCK Act requirement that members disclose their trades within 45 days is often violated. A report last December indicated that 49 members and at least 182 staffers had failed to file reports on time. There is no public record tracking violators or revealing the identities of those who have been fined, which contrasts sharply with the treatment of those who were fined and shamed for violating mask mandates.
One case, involving Tom Malinowski (D-New Jersey), did become public, after he allegedly failed to report dozens of trades in 2019 and 2020 that were worth somewhere between $671,000 and $2.76 million. Malinowski subsequently placed his holdings in a blind trust approved by the House Ethics Committee. As of December 2021, only Malinowski and nine other members were using a blind trust.
Frequently, reports appear of investment-related conflicts of interest, or potential conflicts, involving members of Congress.
The Economist reported in January that Senator John Hickenlooper (D-Colorado) serves on the Subcommittee on Communications, Media, and Broadband while holding between $250,000 and $500,000 each in Alphabet, Amazon, and Facebook. Last May, Senator Ron Wyden (D-Oregon) was criticized for pushing legislation to help makers of computer chips while his wife traded hundreds of thousands of dollars in chipmaker stocks.
Weirdly, the media have attacked Representative Marjorie Taylor Greene (R-Georgia) for purchasing stock in Lockheed Martin, the largest defense contractor in the country, and for tweeting the next day, “War and rumors of war [are] incredibly profitable and convenient.” Note that Greene was attacking war profiteers like Lockheed, which, in the unlikely event her tweet had any significant effect, would drive the stock’s value down – so, basically, the media were attacking Greene for making an honest comment.
Overall, about 45 percent of members of Congress report owning or trading individual stocks (as opposed to index funds or mutual funds, the value of which is not tied to that of any one stock). That compares to about 15 percent of Americans in general.
The Campaign Legal Center analyzed all stick trades made by members of Congress between February 2 and April 8, 2020, and reported that a dozen Senators made a combined 127 transactions during that time, and 37 House members made at least 1,358 transactions.
The most popular stocks among members are Apple, Microsoft, Disney, Alphabet (Google), and Amazon, all companies with ties to the Left. Almost 75 members reportedly hold stock in Pfizer, Moderna, or Johnson & Johnson, the main producers of the Wuhan coronavirus vaccine.
At least 15 members of the House and Senate Armed Services Committees own stock in defense contractors. It’s notable that, according to one study, defense stocks outperformed the market overall by 58 percent in the 20 years after 9/11.
“If you purchased $10,000 of stock [$15,300 in inflation-adjusted dollars] evenly divided among America’s top five defense contractors on September 18, 2001 — the day President George W. Bush signed the Authorization for Use of Military Force in response to the 9/11 terrorist attacks — and faithfully reinvested all dividends, it would now [almost two decades later] be worth $97,295,” wrote Jon Schwarz of the left-wing publication The Intercept. That compares to less than $62,000 for the S&P 500 index.
A 2019 analysis by finance professor Serkan Karadas, of almost 62,000 trades, indicated that public officials’ portfolios outperformed the market by 20 percent.
An April 2021 study by the Campaign Legal Center indicated that there were hundreds of cases in which members bought and sold stocks whose values were affected by the pandemic. They bought stock in pharmaceutical and remote-work companies, and sold stock in hotels, travel businesses, and restaurants.
Tyler Gallasch of Duke University Law School’s Global Financial Market Center told Teen Vogue: “It constantly amazes me that we have extremely sophisticated pre-clearance procedures and limits on what financial services executives can do. . . . [They have] compliance staff to make sure they aren't trading on material public non-information, and yet we have essentially nothing for Congress. [Finance service executives] have to pre-clear every trade. They have lists of things they're not allowed to trade in. And they just comply with it. So thousands and thousands and thousands of financial services professionals are looking at Congress, like, 'I have to comply with these basic rules, why can't you?'”
Burr and company: In January 2020, Senators received a briefing on the coming pandemic from Robert Redfield, director of the Centers for Disease Control, and the infamous Dr. Anthony Fauci. One of those who was briefed was Senator Richard Burr (R-North Carolina), and Burr was accused of profiting from insider information.
Securities and Exchange Commission filings noted that Burr sold $1.652 million in stocks — “all but one of the equities in his and his wife’s” retirement account — on February 13, 2020, at a time when he had “material nonpublic information concerning COVID-19 and its potential impact on the U.S. and global economies.” The SEC claimed that Burr called his brother-in-law Gerald Fauth after selling the stock, and that, after speaking with Burr for 50 seconds, Fauth called his broker and dumped his own stock.
Burr claimed he based his trading on publicly available information such as news reports on CNBC.
The Justice Department obtained a warrant for Burr’s cellphone, but, after months of investigation, closed the case without bringing charges against him. Likewise, the Senate Ethics Committee took no public action against him. The SEC disclosed in October that it was investigating Burr.
There were at least 25 Senators whose campaigns contributed to Burr’s defense fund.
Burr, who’s retiring this year, is known as a “Democrats’ Republican” in the manner of Liz Cheney. He used the Senate Intelligence Committee, which he chaired in 2015 to 2020, as a vehicle to promote the Clinton campaign’s Trump/Russia hoax. He voted to convict President Trump of the impeachment charge that Trump caused the deaths of Capitol police officers in the January 6th riot, despite the fact that the charge was unquestionably false; no police officers died as a result of the January 6th riot. For his fraudulent vote on impeachment, Burr was censured unanimously by the central committee of the North Carolina Republican Party.
The insider trading accusation against Burr came at a time when similar claims were made about Senators Dianne Feinstein (D-California), James Inhofe (R-Oklahoma), and Kelly Loeffler and David Perdue (both R-Georgia). Those investigations concluded without formal charges, but, in two of the cases, the accusations had a significant political effect.
Loeffler was an appointed Senator, vulnerable to the criticism that she had been picked because of her wealth and elite connections; her husband is the chairman of the New York Stock Exchange. Perdue responded poorly to the accusation, refusing to share a debate stage with his opponent on the ground that his honor had been besmirched. Loeffler and Perdue lost their Senate seats to leftist Democrats, which, with the tie-breaking vote of Vice President Kamala Harris, gave Democrats control of the Senate.
Perdue, at least, seems to have been innocent. As Erick Erickson noted, Perdue bought stock in Delta, Disney, Starbucks, and concert promoter LiveNation while selling Clorox, Kroger, and Proctor & Gamble – the opposite of his buying pattern if he had advance knowledge of what was to come.
Pelosi: Among other politicians who made money from IPOs during the same period as then-Speaker Tom Foley, in the early 1990s, was a House member from San Francisco named Nancy Pelosi. Back then, as legislation affecting credit card companies was being debated in the House, she got in on the IPO for Visa.
Today, Pelosi is the Speaker, and one of the wealthiest members of Congress, with net worth estimated at more than $106 million. (Because the ranges on financial disclosure documents are extremely broad, her wealth could be as high as $252 million and as low as negative-$40 million.) Another analysis puts the Speaker’s personal net worth at $29 million, or $43 million to $236 million when combined with her husband’s wealth.
Pelosi comes from a political family. Her father, Thomas D'Alesandro, was a Congressman and served as mayor of Baltimore. He was a strong admirer of Robert E. Lee and “Stonewall” Jackson, speaking at the dedication of statues of the Confederate generals. A strong contender for governor of Maryland in 1954, he dropped out of the race after it was revealed that he had received undeclared money from Dominic Piracci, a parking garage owner convicted of fraud, conspiracy, and conspiracy to obstruct justice. Pelosi also had a brother who served as mayor of Baltimore, and her husband’s brother was on the San Francisco Board of Supervisors.
Paul Pelosi, the Speaker’s husband, owns stock in a range of left-wing companies including Netflix, Facebook, Disney, and Salesforce. As of December, he owned stock or options in Visa, Amazon, and Apple worth between $5 million and $25 million each, and in Comcast, $1 million to $5 million.
For a few hundred thousand dollars, Paul Pelosi bought 40 options covering 4,000 shares in Alphabet, parent company of Google, on February 27, 2020, just as stocks began their slide during to the pandemic. The options let him buy the stock later at a predetermined price, so it was a gamble that the price would go up.
Sixteen months later, Pelosi was able to convert the options into shares at $1,200 each, at a time when the company was trading at $2,550. His profit was in the range of $5.2 million. At the time, the House was considering antitrust action affecting Alphabet, and the amount of profit he made might have been affected by the House’s decision, but the decision to exercise the options was probably not affected by inside information (the options were expiring, and he had to us them or lose them).
Among Paul Pelosi’s bets were Crowdstrike, the company that played a major role in the Trump’s-a-Russian-asset hoax; Tesla, the electric-car company, whose success is closely linked to “green” policies on energy and transportation; and Google. At the time of his comments in October 2021, her 2020 investments were up 20 to 30 percent.
Pelosi asserts that her husband’s holdings are his own. She reports her home in Napa and a small checking account as assets, and her spokesman Drew Hammill said last year that “The Speaker does not own any stocks. As you can see from the required disclosures, with which the Speaker fully cooperates, these transactions are marked ‘SP’ for spouse.”
Walter Shaub, the former director of the United States Office of Government Ethics during both the Obama and Trump administrations, called this defense “absolutely insulting.” He told the New York Post: “The idea that the stocks are in her husband’s name is a complete red herring. Unless members of Congress are willing to wear microphones around the clock when they’re having dinner with their spouses and going to bed, the public has no way of knowing what information they intentionally or inadvertently shared.”
The Pelosis own about $20 million worth of real estate, including a vineyard and mansion in Napa Valley, a four-bedroom townhome in the Pacific Heights section of San Francisco, and a 2,325-square-foot condo on K Street in the Georgetown section of Washington, D.C. They bought the condo from a campaign donor in 1999.
Some critics, including those styling themselves as Progressives, have laid some of the blame on Pelosi for the image that Democrats are out of touch with regular Americans. As an example of her elitist attitude, they note that, during an April 2020 interview for “The Late Late Show with James Corden,”
Pelosi showed off a $240,000 sub-zero freezer in her kitchen that was fully stocked with $12-a-pint ice cream. That was around the time that many businesses were shutting down due to the pandemic. In response to the controversy, Pelosi tweeted: “We all have found ways to keep our spirits up during these trying times. Mine just happens to fill up my freezer.”
In January, The Daily Caller cited Unusual Whales, which monitors members’ trading pattern, in claiming that, “Of the 35 members who beat the S&P 500 index fund, 19 were Democrats and 16 were Republicans. Speaker of the House Nancy Pelosi, whose trades are often scrutinized by social media users, had the best performance of congressional Democrats, and the sixth-best of all members.”
Not surprisingly, people have noticed the success of the Pelosi and are attempting to follow in their wake. “We've been tracking their performance and every single stock she has bought in the last two years has gone up significantly,” said Christopher Josephs, whose company produces an app allowing users to see the same stocks that friends and influential people are buying. Josephs told Yahoo! News last October:
"The reason why Speaker Pelosi became so popular was because every trade she was making inevitably turned out to be such a long-term winner . . . [T]hese are very, very risky bets because she's been buying [long-term] options as opposed to just stock.” One Tik-Tok video described Pelosi as “the stock market’s biggest whale,” that is, most influential investor, although that’s an exaggeration.
What is to be done?: The Speaker said last December that lawmakers should not be barred from trading stock, declaring that “We are a free market economy. They should be able to participate in that.” By February, Pelosi had altered her position somewhat, supporting tightened fines for violations of STOCK Act reporting requirements. “We have to do this to deter something that we see as a problem. . . . And if that’s what the members want to do, then that’s what we will do.” She said any ban on individual stock trades should be applied “government-wide.”
As one might guess from Pelosi’s shift, there appears to be significant support for further restricting the ability of members of Congress to trade individual stocks.
The group Convention of States Action said that it conducted a poll with the Trafalgar Group, asking “Should member of Congress and their spouses be allowed to trade stocks while serving in Congress?” “No, it gives them an unfair advantage,” said 69.4 percent, while 5.3 percent selected the response “Yes, it’s perfectly fine.” Obviously, the wording of the question suggests a response, but the poll results are generally consistent with others on the topic.
A Morning Consult/Politico poll in January indicated that support for a ban on members’ trading in stocks was fairly evenly divided across ideological lines. The percentage of respondents expressing strong support for the idea was roughly the same among people who voted for Biden in 2020 and those who voted for Trump, among those who voted for Clinton in 2016 and those who voted for Trump, and among those with a favorable opinion of Biden and those with an unfavorable opinion. Overall, 63 percent of registered voters supported the idea (47 percent “strongly”), while 19 percent opposed the idea (8 percent “strongly”).
A number of measures that would restrict members’ trading have been introduced in the current Congress, with support from both liberal and conservative members (conservatives including Senator Josh Hawley, R-Missouri, and Representatives Matt Gaetz, R-Florida, and Chip Roy, R-Texas). Blake Masters, the current front-runner for the GOP nomination for the U.S. Senate in Arizona, has made the issue a cornerstone of his campaign.
Ultimately, though, it’s unlikely that we can stop members of Congress from using their positions to get wealthy, if they are willing to abandon their ethical standards to do so. They might have to find new ways to hind what they’re doing, but where there’s a will…
There is a way to ensure that members stay rooted in the real world, and that they don’t come to see political office as a job rather than an opportunity to serve the people. That’s by limiting the amount of time they can spend in Congress. The longer someone serves in Congress and the more seniority he or she accumulates, the greater the opportunity to get rich at the public’s expense.
Term limits won’t end political corruption, but they will make it harder to engage in graft – either the dishonest type or the type that’s “honest” (but not really).
Dr. Steven J. Allen (JD, PhD) is vice chairman of The Conservative Caucus and of its project, Americans for Term Limits. Contact us for permission to reprint.