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Insider Trading and White Collar Crime

Story Written by Rick Archer
October 2014

While we cover our mouths in horror at the evils of criminals and organized crime, I don't think anyone would argue that the behavior of many businessmen is any less corrupt. 

"My father used to always say to me that, you know, if a guy goes out to steal a loaf of bread to feed his family, they'll give him 10 years, but a guy can do white-collar crime and steal the money of thousands and he'll get probation and a slap on the wrist." - - Jesse Ventura

"The possibility of bringing white-collar criminals to justice is ever receding over the horizon." - - Sara Paretsky

The subject of "White Collar Crime" is so vast that I can't do justice to the topic.  So I will limit myself to a few examples that are easy to understand and hope I have said enough to make my point.

And what is my point?  

•  Take sides. Neutrality helps the oppressor, never the victim. Silence encourages the tormentor, never the tormented.

-- Elie Wiesel, accepting the Nobel Peace Prize

 If humanity does not opt for integrity, we are through completely. It is absolutely touch and go.  Each one of us could make the difference. 

-- Buckminster Fuller

Albert H. Wiggin

Albert Wiggin was the man who became a multi-millionaire during the Wall Street crash of 1929.  Mr. Wiggin wasn't your average cheat.  In fact, in certain circles he was a well-respected man.  You see, Albert Wiggin was the head of Chase National Bank.

He didn't even go to to jail for his cheating.  What he did was perfectly legal. 

During the Roaring '20s, many Wall Street professionals, and even some of the general public, knew Wall Street was a rigged game run by powerful investing pools.

Suffering from a lack of disclosure and an epidemic of manipulative rumors, people believed coattail investing and momentum investing were the only viable strategies for getting in on the profits. Unfortunately, many investors found that the coattails they were riding were actually smokescreens for hidden sell orders that left them holding the bag. Still, while the market kept going up and up, these setbacks were seen as a small price to pay in order to get in on the big game later on. In October, 1929, the big game was revealed to be yet another smokescreen.

After the crash, the public was hurt, angry, and hungry for vengeance. Albert H. Wiggin, the respected head of Chase National Bank, seemed an unlikely target until it was revealed that he shorted 40,000 shares of his own company. This is like a boxer betting on his opponent – a serious conflict of interest.

Using wholly-owned family corporations to hide the trades, Wiggin built up a position that gave him a vested interest in running his company into the ground. There were no specific rules against shorting your own company in 1929, so Wiggin legally made $4 million from the 1929 crash and the shakeout of Chase stock that followed. (source)

Not only was this legal at the time, but Wiggin had also accepted a $100,000 a year pension for life from the bank. He later declined the pension when the public outcry grew too loud to ignore. Wiggin was not alone in his immoral conduct, and similar revelations led to a 1934 revision of the 1933 Securities Act that was much sterner toward insider trading. It was appropriately nicknamed the "Wiggin Act".

Albert Henry Wiggin is our poster boy for the Myth of Business Ethics


Martha Stewart

On the cover of the May 1995 issue, New York Magazine declared her "the definitive American woman of our time". 

Ten years later she was convicted of insider trading.  Despite a net worth of $700 million at the time, Stewart jeopardized everything to save $45,000. 

Due to her prominence, Martha Stewart became the poster girl for insider traders who get caught.

Despite the window dressing of the "Wiggin Act" and many other laws like it, "Insider Trading" goes on and on whether we like to admit it or not. The story of Martha Stewart's insider trading is not important because it was remarkable. 

Just the opposite.  Stories similar to Martha Stewart happen to lesser-known people all the time.  Stewart's story is important because it hints at just how commonplace insider trading is. 

What we don't know is how easy it is to get away with it because we lack statistics on the frequency of successful cheating.  Instead all we have are the sordid tales of the ones who got caught. 

So what happened?  In December 2001, the Food and Drug Administration (FDA) gave news to ImClone CEO Samuel Waksal that it was rejecting ImClone's new cancer drug, Erbitux.  Since the drug represented a major portion of ImClone's pipeline, Waksal knew the company's stock was about to take a sharp dive.

Many pharmaceutical investors were hurt by the drop, but oddly enough, the family and friends of ImClone CEO Samuel Waksal were not among them. 

Among those with a preternatural knack for guessing the FDA's decision days before the announcement was homemaking guru Martha Stewart. She sold 4,000 shares when the stock was still trading in the high $50s and collected nearly $250,000 on the sale.  The timing was absolutely perfect.  The stock would plummet to just over $10 in the following months.

Stewart claimed to have a pre-existing sell order with her broker, but her story continued to unravel.  Perhaps Stewart thought her lawyers would find a loophole because in public she seemed to treat the whole thing as a joke.

The best example of her cavalier attitude came on national TV on 25 June 2002.  CBS anchor Jane Clayson grilled Stewart on the air about ImClone during Stewart's regular segment on The Early Show.   Stewart didn't bat an eyelash.  She continued chopping cabbage and famously quipped, "I just want to focus on my salad". 

However, any way Stewart tossed her salad, this problem wasn't going away.  Public shame eventually forced her to resign as the CEO of her own company, Martha Stewart Living Omnimedia.

Stewart was sentenced to the minimum of five months in prison and fined $30,000.  In August 2006, the SEC announced that it had agreed to settle the related civil case against Stewart. Under the settlement, Stewart agreed to disgorge $58,062 (including interest from the losses she avoided), as well as a civil penalty of three times the loss avoided, or $137,019.

So how did Stewart get caught?

Immunologist Sam Waksal founded ImClone in 1984. The New York-based biotech firm remained relatively unknown until 1999, when it announced the creation of Erbitux — a cancer-fighting drug so promising it convinced pharmaceutical giant Bristol-Myers to purchase $1 billion of ImClone stock in one of the largest biotechnology partnerships in U.S. history.

But when the Food and Drug Administration rejected the drug, Waksal alerted several relatives and friends to dump their stock as soon as possible — before the FDA's decision had been made public.

Waksal's father and daughter sold $9.2 million worth of ImClone, a move that caught the attention of the SEC and eventually led to his arrest.

In retrospect, Waksal had made a rash and highly foolish move.  His action was not only highly illegal, it stuck out like a red flag.

Martha Stewart's situation was more complicated.  Although Stewart was a friend of Sam Waksal, he had actually done nothing to tip Stewart off personally.  Waksal had not spoken to Stewart at all day.

What happened was that Stewart and Waksal used the same Merrill Lynch stockbroker, Peter Bacanovic.  Although neither Bacanovic nor his assistant, Doug Faneuil, knew about the Erbitux decision, both men could see plain as day that Waksal was trying to dump his stock.

When Bacanovic arrived at the office on the fateful morning, his assistant Doug Faneuil told Bacanovic about a flurry of selling by the Waksal family that morning. Even though they didn't know 'why' Waksal was dumping stock, they could read the warning signals.  Something was badly wrong over at ImClone.  Bacanovic turned to Faneuil and blurted: "Oh my God, get Martha on the phone."

On their advice, Stewart promptly sold all her shares at the highest possible price before the big plunge kicked in the following day.

Martha Stewart was not caught directly.  It was Sam Waksal who was caught red-handed.  And since Bacanovic was both Waksal and Stewart's broker, Bacanovic's involvement is what indirectly led the investigators onto Stewart's trail.

Strangely enough, although what Stewart had done was unethical, it probably was on the borderline of being legal.  Technically speaking, Stewart had merely traded on a tip passed on by her stockbroker.  That is what investors do all the time - follow the advice of their stockbroker.

Insider trading is only illegal when a person bases their trade of stocks in a public company on information that the public does not know. It is illegal to trade your own stock in a company based on this information but it is also illegal to give someone that information, a tip, so they can trade their stock.  Stewart had not traded stock in her own company.  Nor had she been informed by Sam Waksal.  That put her into a gray area of sorts.

However, Stewart also knew Bacanovic had breached his duty as a broker when he told her about Waksal’s trades.  In other words, she knew full well what she was doing was wrong.  Seeing how Bacanovic had put 2 and 2 together and made a clever deduction, she expected to fly under the radar. 

What happened instead is that

Still, had she come clean at the start, Stewart would have likely gotten away with a wrist slap and a fine.  Stewart actually caused her own demise by lying about what she knew. 

The nuances in Stewart’s case ultimately drove the government to back down from charging her with insider trading. Instead, it focused its case on the lies she told to cover the trade. When questioned by the SEC and the FBI in the months following her trade, Stewart said she had no knowledge of Waksal’s trade and that she had sold on a standing agreement with her broker to sell if shares traded below $60. Bacanovic corroborated the story, but his assistant Faneuil eventually came forward and revealed the truth, furthering the case against Stewart. Later, Stewart’s own assistant, Annie Armstrong, testified that Stewart had tried to change a record of Bacanovic’s phone message to her about ImClone.

Some people consider it beyond amazing that Stewart was able to resurrect her career following her release from prison. 

Scott Turow is a well-known author of fiction involving legal cases.  His comments on Stewart's behavior goes right to the point.

What the jury felt Martha Stewart did -- lying about having received inside information before she traded -- is wrong, really wrong. And the fact that so many on Wall Street have unashamedly risen to her defense is galling -- galling because what she did actually harms the market. Wall Street leaders should be expressing chagrin that a corporate tycoon -- who was also a member of the New York Stock Exchange board -- could feel free to fleece an unwitting buyer.

Virtually everybody who takes Ms. Stewart's side conveniently ignores the fact that there was some poor schmo (or schmoes) out there who bought her shares of ImClone.

Those buyers, no matter how diligent, no matter how much market research they read, no matter how many analysts' reports they studied, could not have known what Martha Stewart did: that the Waksal family was dumping shares. In my book, that's fraud.

Martha Stewart ripped her buyers off as certainly as if she'd sold them silk sheets that she knew were actually synthetic.

In addition to being fraud, her actions were also a type of theft. She didn't learn about the Waksals and ImClone by overhearing idle talk on an elevator. According to Mr. Faneuil's testimony, he (under Mr. Bacanovic's orders) gave her the confidential information that was supposed to have stayed within the walls of their firm, Merrill Lynch. Stewart had to know she was in possession of confidential information she had no right to have, and by trading on it, she was a clear accessory to the Merrill employees' misappropriation of it.

It's true that Martha Stewart was not accused of securities fraud for selling her ImClone stock, because, the prosecutors said, historically no one else had been charged criminally with insider trading in similar circumstances. But Martha Stewart didn't make false statements to a federal agency because she thought her conduct in the sale was blameless. She did it to cover her tracks.

Furthermore, the right response to those Wall Streeters who point out that she was not indicted for insider trading is to ask, why not? 

Why would any sane person want to buy stock if Wall Street bigwigs can palm off shares that they know, on the basis of secret information, are about to nose dive?

What is wrong with our laws that such obvious misconduct can't be charged criminally? 

-- Scott Turow (source)



The 60 Minutes Segment About Congressional Insider Trading

Rick Archer's Note:

Do you know what an 'oxymoron' is?   No, it is not another name for an idiot Congressman.  An oxymoron is a figure of speech in which apparently contradictory terms appear in conjunction.

We are going to explore the concept of "honest graft".  Now those are two words I never expected to see side by side. 

According to the SEC, trading stocks based on advance knowledge of action in Congress is not considered 'insider trading'.

Others disagree.  According to the Washington-based consumer rights advocacy group Public Citizen, if one takes a look at the statistics, members of Congress are either geniuses when it comes to stock trading or they are in fact trading off of some of this insider information.

Several published studies have implied that members of Congress are in fact profiting from insider information.

A pair of 2011 academic studies found that House members beat the market in their personal stock trading by about 6 percent. The Senators did even better.  They beat the market by about 10 percent.

A 2011 study entitled Abnormal Returns from the Common Stock Investments of Members of the U.S. House of Representatives analyzed 16,000 common stock transactions made by around 300 House delegates between 1985 and 2001.  The study revealed the findings of four university professors that a portfolio replicating the purchases of House members beat the market by 55 basis points per month, or six percent annually. It also found that purchases made by Democrats outperformed those of Republicans.

Then one day 60 Minutes got wind of these findings. 

On a personal note, I can't believe I missed a story as incredible as this one, but I guess I was busy at the time.  However, when I saw this story as I did research, my mouth fell wide open.  I was stunned to discover it is perfectly legal for Congressman to exploit the inside knowledge they are privy to for their own personal gain.

You don't believe me?  Well, read on.

Back in 2011, Steve Kroft of the CBS news program 60 Minutes uncovered a doozy of a story... yes, indeed, it really is LEGAL for Congressmen to engage in Insider Trading. 

In 2006, Democratic Representatives Louise Slaughter and Tim Walz introduced the STOCK Act (Stop Trading On Congressional Knowledge).  This legislation was intended to stop members of Congress from benefiting from insider knowledge of stocks.

The legislation went nowhere.

It  was placed on the congressional backburner — that is, until it was featured on CBS's 60 Minutes.  The 60 Minutes episode which aired on Sunday, November 13, 2011, created a firestorm of protest.  

Overnight the bill garnered a significant number of co-sponsors in the Congress.  By the following Friday, the number of co-sponsors of the bill had shot from 9 to 91.  President Obama would sign the Stock Act into law on 4 April 2012.

Transcript of Steve Kroft's Insider Trading Episode  (source)

The following is a script of "Insiders" which aired on 13 November 2011.
Steve Kroft was the correspondent, Ira Rosen and Gabrielle Schonder were the producers.


Steve Kroft reports that members of Congress can legally trade stock based on non-public information from Capitol Hill

Washington, D.C. is a town that runs on inside information - but should our elected officials be able to use that information to pad their own pockets?

As Steve Kroft reports, members of Congress and their aides have regular access to powerful political intelligence, and many have made well-timed stock market trades in the very industries they regulate. For now, the practice is perfectly legal, but some say it's time for the law to change.

The next national election is now less than a year away and congressmen and senators are expending much of their time and their energy raising the millions of dollars in campaign funds they'll need just to hold onto a job that pays $174,000 a year.

Few of them are doing it for the salary and all of them will say they are doing it to serve the public. But there are other benefits: Power, prestige, and the opportunity to become a Washington insider with access to information and connections that no one else has, in an environment of privilege where rules that govern the rest of the country, don't always apply to them.

It has long been suspected that most former congressmen and senators manage to leave Washington - if they ever leave Washington at all - with more money in their pockets than they had when they arrived.

As you are about to see, the biggest challenge is often avoiding temptation.


Honest Graft -  Steve Kroft Interview with Peter Schweizer

Peter Schweizer is a fellow at the Hoover Institution, a conservative think tank at Stanford University.

A year ago he began working on a book about soft corruption in Washington with a team of eight student researchers, who reviewed financial disclosure records.

It became a jumping off point for our own story, and we have independently verified the material we've used.

Schweizer says he wanted to know why some congressmen and senators managed to accumulate significant wealth beyond their salaries, and proved particularly adept at buying and selling stocks.

Peter Schweizer:  This is a venture opportunity.

This is an opportunity to leverage your position in public service and use that position to enrich yourself, your friends, and your family.

Peter Schweizer: There are all sorts of forms of honest graft that congressmen engage in that allow them to become very, very wealthy. So it's not illegal, but I think it's highly unethical, I think it's highly offensive, and wrong.

Steve Kroft:  What do you mean by 'honest graft'?

Schweizer: For example insider trading on the stock market. If you are a member of Congress, those laws are deemed not to apply.

Kroft: So congressman get a pass on insider trading?

Schweizer: They do. The fact is, if you sit on a healthcare committee and you know that Medicare, for example, is-- is considering not reimbursing for a certain drug that's market moving information. And if you can trade stock on-- off of that information and do so legally, that's a great profit making opportunity. And that sort of behavior goes on.

Kroft: Why does Congress get a pass on this?

Schweizer: It's really the way the rules have been defined. And the people who make the rules are the political class in Washington. And they've conveniently written them in such a way that they don't apply to themselves.

The buying and selling of stock by corporate insiders who have access to non-public information that could affect the stock price can be a criminal offense, just ask hedge fund manager Raj Rajaratnam who recently got 11 years in prison for doing it.

But, congressional lawmakers have no corporate responsibilities and have long been considered exempt from insider trading laws, even though they have daily access to non-public information and plenty of opportunities to trade on it.

Schweizer: We know that during the health care debate people were trading health care stocks. We know that during the financial crisis of 2008 they were getting out of the market before the rest of America really knew what was going on.

Spencer Bachus

In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Schweizer: These meetings were so sensitive-- that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.

While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts.

Rick Archer's Note:  In the interest of fairness, I took a look at what Wikipedia had to say about Spencer Bachus.

In 2007, Bachus was falsely accused of insider trading.

He was subsequently cleared by the Office of Congressional Ethics. The Congressional Ethics inquiry stemmed from an allegation by Peter Schweizer and later reported by 60 Minutes that Bachus made trades with a number of short term stock options, betting that stocks would rise or fall for a quick profit or loss.

Schweizer claimed that from July through November 2008, Bachus traded in options at least forty times. During this period, Bachus was one of the Congressional leaders getting private briefings from Secretary of the Treasury Hank Paulson and Federal Reserve Bank Chairman Ben Bernanke about the worsening financial crisis.

Bachus said that he "never trades on non public information, or financial services stocks".

On April 30, 2012 the Office of Congressional Ethics announced that they had found no evidence of violations of insider-trading rules and recommend that the case against him be closed.

Roderick Hills and Harvey Pitt, former Chairmen of the Securities and Exchange Commission who reviewed the accusations, wrote "the original source for these allegations was a sensational, but factually inaccurate, book, followed by an adulatory (but equally inaccurate) '60 Minutes' segment about it. The allegations in the book, vis-à-vis Mr. Bachus, are inaccurate; far worse, however, is that these allegations are laughable to serious students of insider trading law."



Congressman Bachus declined to talk to us, so we went to his office and ran into his Press Secretary Tim Johnson.

Kroft: Look we're not alleging that Congressman Bachus has violated any laws. All...the only thing we're interested in talking to him is about his trades.

Tim Johnson: Ok...Ok that's a fair enough request.

What we got was a statement from Congressman Bachus' office that he never trades on non-public information, or financial services stock. However, his financial disclosure forms seem to indicate otherwise. Bachus made money trading General Electric stock during the crisis, and a third of GE's business is in financial services.

John Boehner

During the healthcare debate of 2009, members of Congress were trading health care stocks, including House Minority Leader John Boehner, who led the opposition against the so-called public option, government funded insurance that would compete with private companies. Just days before the provision was finally killed off, Boehner bought health insurance stocks, all of which went up. Now speaker of the House, Congressman Boehner also declined to be interviewed, so we tracked him down at his weekly press conference.

Kroft: You made a number of trades going back to the health care debate. You bought some insurance stock. Did you make those trades based on non-public information?

John Boehner: I have not made any decisions on day-to-day trading activities in my account. And haven't for years. I don't-- I do not do it, haven't done it and wouldn't do it.

(Republican Speaker John Boehner's office would later call his inclusion into this 60 Minutes story "idiotic.")

Later Boehner's spokesman told us that the health care trades were made by the speaker's financial adviser, who he only consults with about once a year.

Peter Schweizer: We need to find out whether they're part of a blind trust or not.

Peter Schweizer thinks the timing is suspicious, and believes congressional leaders should have their stock funds in blind trusts.

Schweizer: Whether it's uh-- $15,000 or $150,000, the principle in my mind is that it's simply wrong and it shouldn't take place.

But there is a long history of self-dealing in Washington. And it doesn't always involve stock trades.

Dennis Hastert

Congressmen and senators also seem to have a special knack for land and real estate deals. When Illinois Congressman Dennis Hastert became speaker of the House in 1999, he was worth a few hundred thousand dollars.

He left the job eight years later a multi-millionaire.

Jan Strasma: The road that Hastert wants to build will go through these farm fields right here.

In 2005, Speaker Hastert got a $207 million federal earmark to build the Prairie Parkway through these cornfields near his home. What Jan Strasma and his neighbors didn't know was that Hastert had also bought some land adjacent to where the highway is supposed to go.

Strasma: And five months after this earmark went through Hastert sold that land and made a bundle of money.

Kroft: How much?

Strasma: Two million dollars.

Kroft: What do you think of it?

Strasma: It stinks.

We stopped by the former speaker's farm, to ask him about the land deal, but he was off in Washington where he now works as a lobbyist. His office told us that property values in the area began to appreciate even before the earmark and that the Hastert land was several miles from the nearest exit.

Judd Gregg

The same good fortune befell former New Hampshire Senator Judd Gregg.  Gregg helped steer nearly $70 million dollars in government funds towards redeveloping this defunct Air Force base, which he and his brother both had a commercial interest in. Gregg has said that he violated no congressional rules.


Nancy Pelosi

Gregg's good fortune is but one more example of good things happening to powerful members of Congress.  Another is the access to initial public stock offerings (IPOs), the opportunity to buy a new stock at insider prices just as it goes on the market. IPOs can be incredibly lucrative and hard to get.

Schweizer: If you were a senator, Steve, and I gave you $10,000 cash, one or both of us is probably gonna go to jail. But if I'm a corporate executive and you're a senator, and I give you IPO shares in stock and over the course of one day that stock nets you $100,000, that's completely legal.

Former House Speaker Nancy Pelosi and her husband have participated in at least eight IPOs. One of those came in 2008, from Visa, just as a troublesome piece of legislation that would have hurt credit card companies, began making its way through the House. Undisturbed by a potential conflict of interest the Pelosis purchased 5,000 shares of Visa at the initial price of $44 dollars. Two days later it was trading at $64. The credit card legislation never made it to the floor of the House.

Congresswoman Pelosi also declined our request for an interview, but agreed to call on us if we attended a news conference.

Kroft: Madam Leader, I wanted to ask you why you and your husband back in March of 2008 accepted and participated in a very large IPO deal from Visa at a time there was major legislation affecting the credit card companies making its way through the-- through the House.

Nancy Pelosi: But--

Kroft: And did you consider that to be a conflict of interest?

Pelosi: The-- y-- I-- I don't know what your point is of your question. Is there some point that you want to make with that?

Kroft: Well, I-- I-- I guess what I'm asking is do you think it's all right for a speaker to accept a very preferential, favorable stock deal?

Pelosi: Well, we didn't.

Kroft: You participated in the IPO. And at the time you were speaker of the House. You don't think it was a conflict of interest or had the appearance--

Pelosi: No, it was not--

Kroft: --of a conflict of interest?

Pelosi: --it doesn't-- it only has appearance if you decide that you're going to have-- elaborate on a false premise. But it-- it-- it's not true and that's that.

Kroft: I don't understand what part's not true.

Pelosi: Yes sir. That-- that I would act upon an investment.

Congresswoman Pelosi pointed out that the tough credit card legislation eventually passed, but it was two years later and was initiated in the Senate.

Pelosi: I will hold my record in terms of fighting the credit card companies as speaker of the House or as a member of Congress up against anyone.

(Democratic Congresswoman Nancy Pelosi's office would later call this 60 Minutes report a "right-wing smear.")

Corporate executives, members of the executive branch and all federal judges are subject to strict conflict of interest rules. But not the people who write the laws.

Peter Schweizer: If you are a member of Congress and you sit on the defense committee, you are free to trade defense stock as much as you want.  If you're on the Senate banking committee you can trade bank stock as much as you want.  This practice regularly goes on in all these committees.

Brian Baird

Brian Baird is a former congressman from Washington state who served six terms in the house before retiring last year. He spent half of those 12 years trying to get his colleagues to prohibit insider trading in Congress and establish some rules governing conflicts of interest.

Brian Baird: There should only be one thing in your mind when you're drafting legislation, 'Is this good for the United States of America?' That's it. If you're starting to say to yourself 'how's this going to affect my investments,' you've got-- you've got a mixed agenda and a mixed purpose for being there.

Baird: One line in a bill in Congress can be worth millions and millions of dollars. There was one night, we had a late, late night caucus and you could kind of tell how a vote was going to go the next day. I literally walked home and I thought, 'Man, if you-- if you went online and made some significant trades, you could make a lot of money on this.'

You could just see it. You could see the potential here to get rich.

So in 2004, Baird and Congresswoman Louise Slaughter introduced the Stock Act which would make it illegal for members of Congress to trade stocks on non-public information and require them to report their stock trades every 90 days instead of once a year.

Kroft: How far did you get with this?

Baird: We didn't get anywhere. Just flat died. Went nowhere.

Kroft: How many cosponsors did you get?

Baird: I think we got six.

Kroft: Six doesn't sound like a very big amount.

Baird: It's not, Steve. You could have 'National Cherry Pie Week' and get 100 cosponsors at the drop of a hat.


When Brian Baird finally managed to get a congressional hearing on the Stock Act, almost no one showed up.  Since then, the Stock Act is reintroduced every session, but is buried so deep in the Capitol we had trouble finding congressmen who had even heard of it.

[Rick Archer's Note:  At this point, Steve Kroft attempted to buttonhole various members of Congress.  Here were their reactions.]

Kroft: Have you ever heard of the Stock Act?

Steve Palazzo: The what?

Kroft: The Stock Act. Do you know anything about it?

Congressman Palazzo:  No.

Kroft:  Congressman Quayle, have you ever heard of the Stock Act?

Congressman Quayle: I haven't heard about that one yet.

Congressman Watt, have you ever heard of something called the Stock Act?

Congressman Watt:  No.

Male voice:  I've heard about it, but not much. I can't say it's an issue I've spent a lot of time on.

Another Male voice:  I would have no problem with that.

Kroft:  Okay.

Male voice: But then again I am a big fan of, you know, instant disclosure on almost everything.

Kroft:  They're looking for co-sponsors.

Male voice: And yet, I've never heard of it.

Baird: When you have a bill like this that makes so much sense and you can't get the co-sponsorships, you can't get the leadership to move it, it gets tremendously frustrating. Set aside that it's the right thing to do, it's good politics. People want their Congress to function well. It still baffles me.

But what baffles Baird even more is that the situation has gotten worse. In the past few years a whole new totally unregulated, $100 million dollar industry has grown up in Washington called Political Intelligence.

'Political Intelligence' employs former congressmen and former staffers to scour the halls of the Capitol gathering valuable non-public information in a manner akin to mining for nuggets of gold.  These "miners" then turn around and sell their information to hedge funds and traders on Wall Street who can trade on it.

Baird: Now if you're a political intel guy, you get that information long before it's public.  Long before somebody wakes up the next morning and reads or watches the television or whatever, you've got it.

And you can make real-time trades before anybody else.

Baird says "political intelligence" has taken what would be a criminal enterprise anyplace else in the country and turned it into a profitable business model.

Baird: The town is all about people saying-- what do you know that I don't know. This is the currency of Washington, D.C. And it's that kind of informational currency that translates into real currency. Maybe it's over drinks maybe somebody picks up a phone. And says you know just to let you know it's in the bill. Trades happen. Can't trace 'em.

If you can't trace 'em, it's not illegal. It's a pretty great system. You feel like an idiot to not take advantage of it.


White Collar Crime

It is depressing to know that all walks of life are rife with cheaters. 

As much as we like to point fingers at the Russians, American athletes are no strangers to cheating.  Think "Lance Armstrong", "Marion Jones",  and steroids in baseball.  Nevertheless, even in this arena, we can shrug our shoulders and still go on to enjoy our lives. Some people even begin to take sports less seriously.


We also know that there are people who taking cheating at cards and dice to the level of art form. 

Why not mark your cards with a special dye that only your special contact lens or sunglasses is able to see? 

Wouldn't it be fun to seem so damn smart? 

It is one thing to lose to a cheater at Scrabble, Bridge, or Chess, even at the highest levels. 

Fortunately, unless we make a living at games, most of us can live with the experience and still go on to lead comfortable lives.

However, when it comes to cheating in other areas of our lives such as business and medicine, this kind of corruption affects all of us in profound ways. 

Many years ago, upon my stockbroker's advice, I invested practically my entire savings in oil stocks.  This was back in the early Eighties. 

I saw practically my entire investment go down the drain when the price of oil plummeted drastically. 

As it turned out, the perilous downfall was due to a serious surplus of crude oil caused by falling demand following the 1970s Energy Crisis. 

This resulted in an enormous oil glut.  The world price of oil, which had peaked in 1980 at over US$35 per barrel ($100 per barrel today), fell in 1986 from $27 to below $10.

During the oil crisis, my stockbroker advised me to sell and cut my losses.  So that's what I did.  I noticed he made commissions on the sale of these ruined stocks as well.  Hmm. 

The stockbroker gave me lousy advice, yet he made money on the purchase of the oil stocks and he made money on the sale of oil stocks.  He cleaned up and I was wiped out. 

It didn't seem right that this incompetent broker made money while I was losing it based on his recommendation. 

No other profession that I can think of rewards losers so consistently. 

All I got from my stockbroker in return was an apology and a valuable lesson - this investment game is for people who take it very seriously, not for the average guy like me. 

I concluded there are people out there who know far too many things I do not and that this advantage would always doom me to remain in the loser's bracket.  I have never invested another dime in the stock market. 

This decision has allowed me to watch scandals like Enron, the Savings and Loan fiascos, the 2008 collapse of Wall Street, and the existence of morally-bereft monsters like Bernie Madoff with the equanimity that can only come from not having my own ass on the line.

While I have not suffered direct consequences from these events, I have watched in sadness as other people's lives were ruined. 

Back in the Eighties, no doubt somebody knew that there was a coming oil surplus, but it wasn't me.  I was one of the "schmoes" who paid the price of ignorance.

Something the average American doesn't know is there were people in watchdog positions who were tipped off about Madoff on several occasions but did nothing.  The individual who brought Madoff down - Harry Markopolos - stated he believed Madoff was 'protected' by someone very high in government.

The Victims of Enron

The stunning collapse of the once-mighty Enron Corp. was a disaster for thousands of workers.  The fiasco wiped out 12,000 employees retirement savings and cost 5,000 workers their jobs.

Meanwhile Enron executives scandalously lined their own pockets and made millions while game-facedly lying to employees and shareholders alike.

Employees' Retirement Plan Is a Victim as Enron Tumbles

New York Times  (source)
Published: November 22, 2001

The rapid decline of the Enron Corporation has devastated its employees' retirement plan, which was heavy with company stock, and has infuriated workers, who were prohibited from changing their investments as the stock plunged.

Through the 401(k) retirement plan, employees chose to put much of their savings in Enron shares, and the company made contributions in company stock as well. But around the time Enron disclosed serious financial problems last month, the company froze the assets in the plan because of an administrative change. For several weeks, as the stock lost much of its value, workers stood by helplessly as their retirement savings evaporated. They were not allowed to switch investments at all -- even though the plan had far less risky choices.

The unfortunate timing caps a year of pain for Enron's workers.  At the end of last year, the 401(k) plan had $2.1 billion in assets. More than half was invested in Enron, an energy conglomerate. Since then, the stock has lost 94 percent of its value.

At Portland General Electric, the Oregon utility acquired by Enron four years ago, some workers nearing retirement have lost hundreds of thousands of dollars. The utility has lined up grief counselors to help them work through their problems.

''We had some married couples who both worked who lost as much as $800,000 or $900,000,'' said Steve Lacey, an emergency-repair dispatcher for Portland General. ''It pretty much wiped out every employee's savings plan.''

''Shortly after it was frozen, the articles started coming out about some of the questionable activities of Enron,'' Mr. Lacey added. ''The stock took a tremendous drop, and we were pretty much helpless.''

The loss serves as a grim reminder of the danger of relying too heavily on one investment.

There were crooks at Enron who cooked the books and deceived the stock holders at every turn.

There were executives at Enron who got out AHEAD of the collapse by cashing in their stock options.

You don't suppose they knew something, do you??

Rick Archer's Note:  I think Scott Turow said it the best.  He made it clear that when the cheats of the world get away with their insider trading schemes, the average guy on the street is the one who pays.

• Virtually everybody who takes Ms. Stewart's side conveniently ignores the fact that there was some poor schmo (or schmoes) out there who bought her shares of ImClone.

• Those buyers, no matter how diligent, no matter how much market research they read, no matter how many analysts' reports they studied, could not have known what Martha Stewart did: that the Waksal family was dumping shares. In my book, that's fraud.

• Martha Stewart ripped her buyers off as certainly as if she'd sold them silk sheets that she knew were actually synthetic.

In addition to being fraud, her actions were also a type of theft. She didn't learn about the Waksals and ImClone by overhearing idle talk on an elevator. According to Mr. Faneuil's testimony, he (under Mr. Bacanovic's orders) gave her the confidential information that was supposed to have stayed within the walls of their firm, Merrill Lynch. Stewart had to know she was in possession of confidential information she had no right to have, and by trading on it, she was a clear accessory to the Merrill employees' misappropriation of it.

For every cheater, there is a long line of victims.

What Scott Turow is saying is that the "$45,000" that Martha Stewart saved had to come out of someone's pocket.  Various investors who were completely ignorant of the behind-the-scenes drama at ImClone unwittingly bought Martha Stewart's shares on ImClone.  And one day later, they gasped as the value of their shares plummeted drastically. 

What I worry about are the victims.  I worry about the people who know they are being shoved to the back by the cheaters.  For example, how many cyclists and how many baseball players turned to drugs as the only way to stay even with the competition? 

And how many people avoid the stock market like the plague? 

What this cheating does is make us all cynical.  We don't trust the stock market.  We don't trust Wall Street.   We don't trust our politicians. 

And we don't trust our fellow man much either.   That is the cost of cheating... it makes us all believe that this is a dog eat dog world where the worst behavior is rewarded and honesty is for chumps and people too stupid to cheat.

As I grow older, I find it saddening to observe what seems like the collapse of values in a society.  I see one TV show after another where the message is that the fastest way to get ahead is to climb over the shoulders of the person in front of them. 

Why outwork somebody or be more creative when you can cheat your way to the top?

And how many people on Wall Street feel the need to cheat to keep up with the insider trading of their competitors?  

Personally speaking, I don’t think believe that cheating is the correct path to happiness.  I believe in doing things the right way.  I think that real integrity is doing things the right way even when no is looking.  

However, I also believe that I have to protect myself.  Many people in this world will cheat if they think they can get away with it.  These people require external controls.  They need to believe they will be punished if they are caught.  And they need to believe that there is a good chance they are going to be caught.

To me, many of these stories reveal how the honest people absolutely must work together to expose the cheaters. 

Bernie Madoff, for example, was exposed by a man who was once supremely chewed out by his boss for underperforming vis a vis Madoff.  The man, Harry Markopolos, was made to feel ashamed because he was being beaten so badly.  So Markopolos decided to study Madoff closely and discover his secret. 

And when Markopolos discovered the secret, to his dismay, it took ten years to get anyone to believe him!   And why did it take so long?

Markopolos said that Madoff was being protected by people in government.  In other words, the cheaters watch out for the cheaters.

And that says it all.  Our society has become split down the middle... the honest people trying to defend themselves against dishonesty in every walk of life.  

As they always say, if you look the other way and take the easy way out, then the cheats become more confident.  The problem is finding the guts to confront and defeat the cheats before they get too powerful.  If people speak up, then maybe these jerks will think twice.

•  Take sides. Neutrality helps the oppressor, never the victim. Silence encourages the tormentor, never the tormented.

-- Elie Wiesel, accepting the Nobel Peace Prize

•  In the bitter end, we will not hear the words of our enemies, but the silence of our friends

-- Martin Luther King Jr.

•  In matters of conscience, the law of majority has no place.

-- Mohandas K. Gandhi

 It is your karma to fight evil. It doesn't matter if the people that evil is being committed against don't fight back. It doesn't matter if the entire world chooses to look the other way. Always remember this. You don't live with the consequences of other people's karma. You live with the consequences of your own

-- Hindu Proverb

 First they came for the socialists, and I did not speak out -- because I was not a socialist. Then they came for the trade unionists, and I did not speak out -- because I was not a trade unionist. Then they came for the Jews, and I did not speak out -- because I was not a Jew.  Then they came for me -- and there was no one left to speak for me.

--Attributed to Pastor Martin Niemöller (1892–1984) about the cowardice of German intellectuals following the Nazis' rise to power and the subsequent purging of their chosen targets, group after group.

 If humanity does not opt for integrity, we are through completely. It is absolutely touch and go.  Each one of us could make the difference. 

-- Buckminster Fuller


Rick Archer
October 2014

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