The Wall Street Journal published a disclosure about two weeks ago on the number of judges who held or traded shares in companies that they presided over legal proceedings. The item identified 131 federal judges nationwide who did this between 2010 and 2018. Of these 131 members of the judiciary, 61 judges allegedly traded in the stock corporation during the trial. Imagine! It is really incredible.
Turn on… is a monthly opinion column written by Marc Powers who, after serving with the SEC, spent much of his 40-year legal career handling complex securities cases in the United States. Today he is an adjunct professor at Florida International University College of Law, where he teaches a course on “Blockchain, Crypto and Regulatory Considerations”.
There seem to be ethical reasons for judges not to put themselves in this situation. When I cited litigation, the parties were required to disclose the public companies affiliated with the party so that the judges could assess whether they had potential conflicts in handling a particular case assigned to them. These conflicts can consist in the fact that the judge knows the parties to the proceedings or the witnesses personally. The written disclosure of the parties is also intended to trigger an obligation for the judge to check whether she or a family member holds shares in the public corporation involved in the proceedings.
There is also a 1974 law prohibiting a judge from directing a case if his family members own shares in a publicly traded company. It was passed shortly after the Watergate Crisis and the resignation of President Richard Nixon. This is an absolute prohibition; it is not at the discretion of the lawyer. The parties cannot do without this. The judge should exclude or exclude himself from the dispute. So why is this happening and should we tolerate it from our judicial authority?
The Federal Reserve
Let us now turn to the Federal Reserve, which is part of the executive branch of our government, and its 12 presidents of the reserve banks. The presidents of the Boston and Dallas Federal Reserve Banks – Eric Rosengren and Robert Kaplan, respectively – resigned last month, possibly on allegations of trading stocks last year while supporting macroeconomic policies for our country. For me, this was certainly rash behavior on the part of these former presidents. They continuously and confidentially know how the Fed might use certain monetary instruments to benefit certain industries and, as a result, the stock prices of companies in those industries.
Another Wall Street Journal publication just last week said: reported that Fed chairman Jerome Powell placed sweeping restrictions on personal investments on the Fed presidents and the seven governors on the central bank’s board of directors. These include a ban on buying or selling individual stocks, a one-year hold period, and a 45-day pre-approval process for buying or selling mutual funds. No wonder that the crypto crowd is losing trust in our institutions and is looking for autonomously driven technologies like blockchain to cleanse us and offer everyone a level playing field.
The 2012 Stock Corporation Act
While it may seem to many that prior to this new Powell investment policy, nothing prevented the judiciary or the Federal Reserve from owning or trading stocks, I disagree. Enter the STOCK Act of 2012, passed by Congress in April of that year during Barack Obama’s tenure. “STOCK” stands for “Stop Trading on Congressional Knowledge”. Catchy, isn’t it? Congress loves its abbreviations.
The STOCK Act applies to members of Congress, executive employees – including the President and Vice-Presidents – as well as judicial officers and employees. The stated purpose of the law is:
“Prohibit Congress members and Congress staff [and the executive and judicial branch] from using non-public information obtained from their official position for personal gain [or profit], and for other purposes.”
It was enacted in part because “political intelligence” companies emerged to advise hedge funds on the likelihood of government action. Sometimes these companies would get information from government officials that was otherwise not readily available to the public and pass it on to hedge fund managers, who traded stocks on the basis of that information. There is also a reporting requirement for stock transactions.
Before the law was passed, it became a problem for regulators and prosecutors that the securities act on insider trading was a bit gray, as to whether the source of the information – the government officials – did something wrong by giving it to the secret service. This law makes it clear that this is wrong and even a crime. One section of the law is specifically addressed to these government officials, stating that “every congressman or employee of Congress owes an obligation arising out of a relationship of trust.” It also states that the government employees concerned “are not exempt from the bans on insider trading that result from the securities laws”.
With the disclosure of the trading activities of some lawyers and Fed presidents, the question now arises as to whether they were in possession of non-public information and used it to trade stocks. As an argument, I think that a judge is clearly in possession of non-public information before deciding in favor of a party in a dispute, before making the decision in writing or orally in court. It becomes even more problematic for a Fed president. Don’t they always have non-public information, which means that any stock trading to avoid loss or to make a profit from the forthcoming Fed policies may violate this law?
To date, I am not aware of a single STOCK Act prosecution. The next thing closest to the law was 2018 accusation of former Congressman Chris Collins. However, the insider trading charge related to his alleged learning of information while on the board of directors of a publicly traded company, not his Congressional duties. It will be interesting to see if any reports from the WSJ will become known to the Securities and Exchange Commission or any criminal investigation in the coming days or months.
Marc Powers is currently Associate Professor at Florida International University College of Law, where he teaches Blockchain, Crypto and Regulatory Considerations and Fintech Law. He recently retired from Am Law 100 law firm, where he built both the national practice team for securities disputes and regulatory enforcement and the hedge fund industry. Marc began his legal career in the SEC’s Enforcement Division. During his 40 years as a lawyer, he has been involved in representations including the Bernie Madoff Ponzi program, a recent presidential pardon, and the insider trading lawsuit against Martha Stewart.
Views expressed are those of the author alone and do not necessarily reflect the views of Cointelegraph or Florida International University College of Law or its affiliates. This article is for general informational purposes and is not intended and should not be construed as legal or investment advice.