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Senators stocks did extremely well in bull market Original Source Link: (May no longer be active)
http://www.philly.com/mld/inquirer/10116641.htmhttp://www.philly.com/mld/inquirer/10116641.htm
Posted on Sun, Nov. 07, 2004
Senators' stock picks bring profit, scrutiny
By Joseph N. DiStefano
Inquirer Staff Writer
Staff at the Securities and Exchange Commission say they considered, but rejected, investigating the U.S. Senate early this year after a study found senators made suspiciously high profits from stocks during the 1990s bull market.
Senators' investments beat the Standard & Poor's 500 by an average 12 percent a year from 1993 to 1998, according to the study by Alan J. Ziobrowski of Georgia State University and colleagues at three other schools.
Put another way, a typical investor who matched the S&P's performance in those years collected about $220 in profit for each $100 invested. The average senator, by contrast, collected $460 on a $100 investment.
"The economic returns earned by the senators are abnormally large," and are even greater than those corporate inside-traders typically collect using illegally obtained information, the study concluded.
The 100 members of the Senate often have access to business information that ordinary investors cannot get. They acquire this information in the course of holding hearings at which company executives appear, reviewing Senate staff and regulatory agency reports, and considering legislation that governs business conduct, the study said.
In addition, senators socialize with and collect campaign contributions from regulated businesses, their executives, and lobbyists. They also acquire information from overseeing federal regulators, such as the SEC, and their budgets.
Titled "Abnormal Returns in Stock Investments by the U.S. Senate," the study is scheduled for publication in December's Journal of Quantitative Finance.
The results "suggest that senators are trading stock based on information that is unavailable to the public, thereby using their unique position to increase their personal wealth," the authors wrote. It is as if "senators knew appropriate times to both buy and sell their common stock," they said.
The Senate does not keep a public record of how often members recuse themselves to avoid a potential conflict of interest on investments they own.
Members of Congress are not like regulators, who typically focus on a single sector of the economy; they make laws for everyone. To prevent any conflicts of interest, members who invest would have to abstain from most congressional business, or they would have to be prevented from buying virtually any stocks, said an individual familiar with Congress and its relations with business.
Indeed, many senators do not buy stocks; others put their investments in trust and do not trade them. But there has been no interest in an outright ban on stock investing; most senators believe it is enough to disclose what they buy and sell.
"Legislators are exposed to reams of confidential information - it's the nature of what they do," said Ari Gabinet, head of the SEC's Philadelphia Office.
Gabinet and other SEC officials said agency staff reviewed a draft of the study in March but decided not to press the issue because it is hard to win insider-trading cases without detailed knowledge of what, if any, privileged information the subjects received and proof insiders used it to trade. The SEC lacked such information in the senators' case.
The study did not break down results for individual senators. But just four - Claiborne Pell (R., R.I.), John Warner (R., Va.), John Danforth (R., Mo.) and ex-stockbroker Barbara Boxer (D., Calif.) - made nearly half of all Senate stock trades in the years covered. The study also found, however, that senators who made few trades did as well as heavy traders.
According to the Senate's Code of Conduct, senators "may not use official position to introduce or pass legislation, where a principal purpose is to further a Member, officer, employee, or other immediate family member's financial interests, or the financial interests of a limited class to which such individuals belong."
The Code of Ethics for U.S. Government Service, which covers all government workers including elected officials, is more sweeping: It says a federal employee should "never use any information coming to him confidentially in the performance of government duties as a means for making private profit."
Senators are expected to comply with the codes, but their compliance is hard to measure.
For example, the Senate did not block Lyndon Johnson from using "political influence" with the Federal Communications Commission to "block competition" for radio and TV stations he owned while a senator from Texas before he became President, the study noted.
Indeed, no senator has been censured for doing favors for a company whose stock he owned since the transcontinental railroad scandal of 1873.
Ziobrowski and his colleagues reviewed all Senate public disclosure forms - a list of investments senators must file annually - from 1993 through 1998, including records of 6,052 transactions reported by senators. The study tracked stocks for a year after they were bought or sold by senators.
The data suggests "there is cheating going on, at a 99 percent level of confidence," Ziobrowski said in a recent interview.
But, he added, the SEC's reaction was to be expected: "Could you get any convictions? I don't think so. I suspect most of these conversations in which insider information could be passed take place over the phone. Unless they're willing to confess they had some inside information, it would be claimed as just dumb luck."
The SEC may have little incentive to tangle with the Senate, given their relationship. Senators approve members of the SEC's governing body, as well as the agency's budget.
Senators critical of what they considered the agency's overly activist role trimmed the SEC budget in the 1990s, but the SEC has won larger enforcement appropriations since the stock market decline of 2000-02 and the ensuing corporate financial scandals.
The text of the study was peer-reviewed, and its methods and conclusions withstood scrutiny, Ziobrowski said.
Since the Senate reports only broad ranges for the value of investments, not exact values or the number of shares, Ziobrowski and his collaborators used mathematical models developed by University of Chicago economist Eugene Fama and his colleagues, while tracking the rise and fall of senators' portfolios.
How can senators avoid conflict and the appearance of conflict? "It's a tough question - everyone in the world who owns stock is going to own some companies" whose business comes before Congress, said business ethicist Charles Elson, director of the corporate governance study center at the University of Delaware.
"The fundamental issue is you shouldn't vote in a way that benefits you personally," Elson added. "That's why a lot of people who might have these conflicts," such as federal judges and regulators, "buy mutual funds instead of stocks."
Disclosure Data
To view financial disclosures for members of Congress, see opensecrets.org, the Web site of the Center for Responsive Politics. Enter "personal financial disclosures" and the name of any member of Congress in the Search 2004 Cycle box.
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