Many Congressional hearings don’t attract cameras, but today’s House Financial Services Committee discussion of the recent GameStop-Robinhood drama will.
This means we’ll be treated to the sight of some lawmakers expressing deep concern, furrowed-brow concern, over alleged wrongdoing and how the big guys often play by their own set of rules. It’s so unfair.
It’s also sanctimonious and hypocritical, given that when it comes to the stock market, members of Congress — i.e., those very same big boys — do in fact play by their own rules. More on that in a minute.
You’ll recall the day-trading frenzy around GameStop GME, +2.05%, the video game retailer, movie theater company AMC Entertainment Holdings AMC, +5.59% and fashion retailer Express EXPR, -2.05% was such that Robinhood, the online broker, briefly restricted trading in those stocks last month.
Lawmakers want to know if there was any collusion on the part of Robinhood and hedge funds Citadel Securities and Melvin Capital.
Robinhood’s hedge-fund ties
For his part, Robinhood Chief Executive Officer Vlad Tenev will say in prepared testimony that his firm did not improperly help hedge funds, and that the company restricted trades of GameStop to meet clearing demands.
“Any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric,” he said.
Robinhood has run into problems with regulators before. In December it agreed to pay $65 million in penalties after the Securities and Exchange Commission said it misled customers about how it made money, namely from fees made by routing customer orders to preferred trading firms.
While investors knew their trades were being executed commission-free, they didn’t know that they weren’t getting the best prices for those trades. Robinhood settled the charges without admitting or denying any wrongdoing, and a company lawyer told MarketWatch last month that “[t]he settlement relates to historical practices that do not reflect Robinhood today.”
Foxes guarding the henhouse
Now for the hypocrisy I mentioned above. It is rich. Members of Congress always act sanctimoniously about these sorts of things and will again today. But they are foxes guarding the henhouse, because they are privy to insider information and can buy and sell stock based on what they learn.
The most recent, and egregious, example of this occurred last year, when Republican senators Kelly Loeffler of Georgia, Jim Inhofe of Oklahoma, Richard Burr of North Carolina and California Democrat Dianne Feinstein got in trouble for selling millions of dollars in stock just before the crash that was triggered by the coronavirus pandemic. All four had just received a closed-door briefing on the pandemic from top health officials.
“Members of Congress have immediate and very convenient access to insider information that the rest of the public doesn’t have,” points out Craig Holman of Public Citizen, a Washington-based consumer-rights advocacy group. Those senators “after being briefed on the economic impact of the pandemic and the impact it would have on the stock market, immediately dumped their stocks. No one else had access to that information.”
Their peers — members of the Senate Ethics Committee, and in Burr’s case the Justice Department — eventually cleared all four senators of any wrongdoing. But some paid a price. Loeffler wound up losing her seat to Democrat Raphael Warnock, and Burr was forced to give up the chairmanship of the Senate Intelligence Committee and has since said he will not seek re-election in 2022.
This is the ecosystem in which Congress investigates and oversees matters like today’s GameStop hearing. I should emphasize here that as far as I can tell, most of our elected officials are decent and ethical about such things. But for those who aren’t, it seems awfully easy to act brazenly and get away with it.
You know what else is hypocritical? The Senate, which confirms presidential appointees, requires them to divest themselves of conflicting stocks — stocks that would conflict with their duties in the administration.
“They will make sure that these new appointees have done so,” Holman says. “But not the senators themselves, and not the House. Members of Congress can buy and sell in any stocks they want — including stocks that they directly oversee from their committee perches.”
STOCK Act watered down
In 2012, the “Stop Trading on Congressional Knowledge Act (“STOCK Act”) was passed, with the goal of combating insider trading. It banned the use of non-public information for private profit, including insider trading by members of Congress and other government employees. But just a year later, the law’s financial-disclosure requirements were watered down.
A new piece of legislation — the so-called “Ban Conflicted Trading Act” — is working its way through Congress. It would ban lawmakers and senior staffers from trading stocks entirely. We’ll see if this one passes, but the question then becomes: Would that be quietly watered down later, as the STOCK Act was?