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S. Hrg. 112–344 INSIDER TRADING AND CONGRESSIONAL ACCOUNTABILITY HEARING BEFORE THE COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED TWELFTH CONGRESS FIRST SESSION DECEMBER 1, 2011 Available via the World Wide Web: http://www.fdsys.gov/ Printed for the use of the Committee on Homeland Security and Governmental Affairs ( U.S. GOVERNMENT PRINTING OFFICE 72–559 PDF WASHINGTON : 2012 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001 VerDate Nov 24 2008 11:03 May 14, 2012 Jkt 072559 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 P:\DOCS\72559.TXT SAFFAIRS PsN: PAT COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS JOSEPH I. LIEBERMAN, Connecticut, Chairman CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts MARK L. PRYOR, Arkansas JOHN MCCAIN, Arizona MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin CLAIRE MCCASKILL, Missouri ROB PORTMAN, Ohio JON TESTER, Montana RAND PAUL, Kentucky MARK BEGICH, Alaska JERRY MORAN, Kansas MICHAEL L. ALEXANDER, Staff Director TROY H. CRIBB, Senior Counsel JONATHAN M. KRADEN, Counsel NICOLAS A. ROSSI, Minority Staff Director MARK B. LEDUC, Minority General Counsel LORINDA B. HARRIS, Minority Counsel TRINA DRIESSNACK TYRER, Chief Clerk PATRICIA R. HOGAN, Publications Clerk LAURA W. KILBRIDE, Hearing Clerk (II) VerDate Nov 24 2008 11:03 May 14, 2012 Jkt 072559 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 P:\DOCS\72559.TXT SAFFAIRS PsN: PAT C O N T E N T S Opening statements: Page Senator Lieberman ........................................................................................... 1 Senator Collins ................................................................................................. 3 Senator Brown .................................................................................................. 22 Senator Begich .................................................................................................. 25 Senator Tester .................................................................................................. 27 Senator McCaskill ............................................................................................ 31 Prepared statements: Senator Lieberman ........................................................................................... 39 Senator Collins ................................................................................................. 41 WITNESSES THURSDAY, DECEMBER 1, 2011 Hon. Kirsten E. Gillibrand, a U.S. Senator from the State of New York ........... 4 Hon. Scott P. Brown, a U.S. Senator from the State of Massachusetts .............. 6 Melanie Sloan, Executive Director, Citizens for Responsibility and Ethics in Washington ...................................................................................................... 9 Donna M. Nagy, C. Ben Dutton Professor of Law, Indiana University Maurer School of Law ........................................................................................................ 11 Donald C. Langevoort, Thomas Aquinas Reynolds Professor of Law, George- town University Law Center ............................................................................... 12 John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia University Law School ............................................................................................................ 14 Robert L. Walker, Counsel, Wiley Rein LLP ......................................................... 16 ALPHABETICAL LIST OF WITNESSES Brown, Hon. Scott P.: Testimony .......................................................................................................... 6 Prepared statement .......................................................................................... 45 Coffee Jr., John C.: Testimony .......................................................................................................... 14 Prepared statement .......................................................................................... 139 Gillibrand, Hon. Kirsten E.: Testimony .......................................................................................................... 4 Prepared statement .......................................................................................... 43 Langevoort, Donald C.: Testimony .......................................................................................................... 12 Prepared statement .......................................................................................... 126 Nagy, Donna M.: Testimony .......................................................................................................... 11 Prepared statement with an attachment ....................................................... 54 Sloan, Melanie: Testimony .......................................................................................................... 9 Prepared statement .......................................................................................... 48 Walker, Robert L.: Testimony .......................................................................................................... 16 Prepared statement .......................................................................................... 155 APPENDIX Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Ex- change Commission, prepared statement .......................................................... 164 (III) VerDate Nov 24 2008 11:03 May 14, 2012 Jkt 072559 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 P:\DOCS\72559.TXT SAFFAIRS PsN: PAT IV Page Bob Edgar, President and Chief Executive Officer, Common Cause, prepared statement .............................................................................................................. 172 David Arkush, Director, Public Citizen, prepared statement .............................. 174 VerDate Nov 24 2008 11:03 May 14, 2012 Jkt 072559 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 P:\DOCS\72559.TXT SAFFAIRS PsN: PAT INSIDER TRADING AND CONGRESSIONAL ACCOUNTABILITY THURSDAY, DECEMBER 1, 2011 U.S. SENATE, COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS, Washington, DC. The Committee met, pursuant to notice, at 2:34 p.m., in room SD–342, Dirksen Senate Office Building, Hon. Joseph I. Lieber- man, Chairman of the Committee, presiding. Present: Senators Lieberman, Carper, McCaskill, Tester, Begich, Collins, Coburn, Brown, and Johnson. OPENING STATEMENT OF CHAIRMAN LIEBERMAN Chairman LIEBERMAN. The hearing will come to order. Good afternoon. A recent book by Peter Schweizer and a story based on it on ‘‘60 Minutes’’ have raised the very serious question of whether Members of Congress have been using ‘‘insider information’’ to make investments that enable them to make money they could not have made if they were not Members of Congress. The Members of Congress who have been specifically accused have denied the allegations. Our purpose here this afternoon is not to determine the guilt or innocence of individual cases. Our pur- pose is to determine whether the existing law is sufficient to pre- vent and punish congressional insider trading. Perceptions are very important in public service. That means that if the law seems to allow Members of Congress to take advan- tage of their public position for personal gain, the trust that needs to exist between the American people and our government will be further eroded than it already is. So what is the state of the law governing insider trading by Members of Congress? It will surprise most people to learn that there is no explicit pro- hibition in our laws against insider trading by anyone, including Members of Congress. That is to say, the term ‘‘insider trading’’ is not mentioned or defined in statute. All the investigations and prosecutions of insider trading over the years by the U.S. Securities and Exchange Commission (SEC) or the Department of Justice (DOJ) have been carried out pursuant to the broad anti-fraud pro- visions of the Securities Exchange Act of 1934, which makes it un- lawful, in Section 10(b), to ‘‘use or employ, in connection with the purchase or sale of any security—any manipulative or deceptive de- vice or contrivance in contravention of such rules’’—this sounds like it was written not in 1934 but in 1734—‘‘and regulations as (1) VerDate Nov 24 2008 11:03 May 14, 2012 Jkt 072559 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 P:\DOCS\72559.TXT SAFFAIRS PsN: PAT 2 the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors.’’ The specific rules making insider trading illegal are found in a large body of SEC regulatory activities pursuant to Section 10(b), that broad anti-fraud statute I just read, and court decisions inter- preting those activities. The rules against insider trading now clearly encompass not just corporate ‘‘insiders’’ but others who have bought and sold securities based on material, nonpublic informa- tion they obtained and used in violation of a duty of trust. Now, I gather that some have said that Congress has exempted itself from these insider trading rules, but that is not true. In fact, in a statement submitted to our Committee for the record for this hearing, Robert Khuzami,1 Director of the Division of Enforcement at the U.S. Securities and Exchange

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