Editor’s Note: In this weekly column “Cross Exam,” Elie Honig, a CNN legal analyst and former federal and state prosecutor, gives his take on the latest legal news. Post your questions below. The views expressed in this commentary are his own. View more opinion on CNN. Watch Honig answer readers’ questions on “CNN Newsroom with Ana Cabrera” at 5:40 p.m. ET Sundays.
Now that the Justice Department reportedly has started reviewing stock transactions made by lawmakers shortly before the dramatic market downturn caused by the coronavirus, we should get answers to key questions about whether those transactions were criminal or otherwise improper. While we cannot know what the Justice Department will ultimately find, the very fact that it has started to probe could be bad news for those involved.
As a former federal prosecutor, I know that the Justice Department does not begin reviewing financial transactions based on guesswork or hunches. As the FBI’s formal guidelines describe the standard to open even a preliminary investigation, there must be at least some “allegation or information indicative of possible criminal or national security-threatening activity.” In other words, you don’t need a fire, but you do need a spark.
The Justice Department review reportedly is focused, at least in part, on Sen. Richard Burr of North Carolina, who claims he relied solely on public news reports to guide his investment decisions. Other senators – including Kelly Loeffler from Georgia, Dianne Feinstein from California, and Jim Inhofe from Oklahoma – may have benefited from fortunately-timed stock sales before the market downturn.
Loeffler, Feinstein and Inhofe’s offices said the FBI had not contacted them in connection with the stock sales. Loeffler denied any wrongdoing, stating she has used a third-party adviser and had not learned of the sales until afterward. Senate records show that Feinstein’s husband – and not Feinstein herself – sold stock, and she denies having any input into her husband’s financial decisions. And Inhofe similar denied any involvement in the investment decisions in question.
Meanwhile, Burr’s attorney has stated that he “welcomes a thorough review of the facts in this matter, which will establish that his actions were appropriate.” The attorney added, “The law is clear that any American – including a Senator – may participate in the stock market based on public information, as Senator Burr did. When this issue arose, Senator Burr immediately asked the Senate Ethics Committee to conduct a complete review, and he will cooperate with that review as well as any other appropriate inquiry.”
Whether the case ultimately results in criminal charges for insider trading depends primarily on one key phrase: “material, non-public information.” If the stock sales at issue were based on such information, then insider trading charges could be in play.
Let’s break that down. Senators may have received non-public information before these stocks were sold. In fact, senators routinely receive closed-door briefings – including about public health crises, such as coronavirus, so potentially pertinent information could have been shared with them. That said, we cannot be certain who was in those briefings.
And information is “material” if a reasonable investor would consider it relevant to the decision to buy or sell stock; in other words, information is “material” if it is important enough to move an investor’s needle. We don’t yet know precisely what information the senators received behind closed doors, but briefers don’t tend to waste senators’ time with trivial or irrelevant chatter.
Even if Burr’s decision, for example, to sell stock were based on a mixture of material, non-public information (which is prohibited) and information known to the general public (which is not), it could still be insider trading under federal law if the material, non-public information “was a factor, however small, in the defendant’s decision to purchase or sell stock.”
And while some of the senators have claimed they did not directly make the stock transactions themselves, they could be liable for insider trading if they provided material, non-public information to others with the intent that it be used to make stock purchases or sales.
For now, we must wait for officials to complete their investigation, which could result in criminal charges by the Justice Department, civil charges brought by the Securities and Exchange Commission (which reportedly is participating in the review), congressional investigation and disciplinary action – or nothing at all.
But the conveniently-timed trades – which collectively saved millions of dollars in losses for senators – have raised the public specter of wrongdoing and profiteering as the nation grapples with a massive public health and economic crisis.
Now, your questions
Chris (New York): How much power does the President have under the Defense Production Act, and to what extent has he actually used those powers?
The Defense Production Act of 1950 – passed as the Korean War began – gives the President extraordinary powers, though President Donald Trump has used those powers sparingly thus far.
The most important provisions of the act empower the President to require private companies to accept and expedite orders to produce essential items, and to allocate any such already-existing essential items as necessary to promote the public welfare. It is extraordinarily rare for our laws to give public officials the direct power to dictate what a private company must do, but the act is one such example.
Trump’s use of the act thus far has been confused and halting. Over recent weeks, Trump has made several public statements about “invoking” the act – including a confusing tweet in which he declared “invoke P” – but did not issue any order to any particular private company to manufacture anything until this past Friday, when he formally ordered General Motors to “accept, perform, and prioritize contracts or orders for the number of ventilators that the Secretary (of Health and Human Services) determines to be appropriate.”
But notably absent from this presidential order is any specification about how many ventilators GM must produce, by when, and at what price. And people familiar with the discussions with the White House told CNN, “We announced our partnership ahead of the DPA announcement. We still have not received anything official from the (White House about the order).”
So, while the act gives the President broad power to compel production of essential items, he has used those powers sparingly, at best, thus far.
Darrell (Idaho): Could our elected officials pass a law banning members of Congress from holding stock in any private company while in office?
Congress certainly has the authority to pass a law banning any sitting members from holding (or, to a lesser extreme, from buying or selling) stocks while in office. But Congress simply has not chosen to do so.
Some members have voluntarily taken steps to distance themselves from their stock holdings. For example, some have placed their stock portfolios in a blind trust – meaning they’ve empowered a third party (often a financial manager) to handle their stock trades, independently of the member, while he or she is in office.
The argument for broad legislation limiting the ability of members to buy or sell stock is clear: Senators and representatives have access to sensitive information and could make decisions affecting the very companies in which they are invested, so a broad prohibition would reduce potential conflicts of interest.
The argument against such a law is that first, it might dissuade people from running for office if holding office entailed a financial opportunity cost (the lost opportunity to invest in the market). Second, we already have laws, including prohibitions on insider trading, that punish wrongdoing by officeholders – though those laws address only more extreme types of misconduct.
Patrick (Florida): Do anti-price gouging laws apply to all products or only certain products, and how are those products defined?
Most states have laws against price gouging. Many, but not all, of those laws are triggered when a governor declares an official state of emergency. Some of those state laws prohibit “unconscionable” or “excessive” price increases during a state of emergency, while others outlaw specific increases, typically 10% or 15%.
Most of the state laws broadly define the scope of products subject to price gouging laws. Some state laws apply to any and all goods and services sold during a state of emergency, while other states apply the law a bit more narrowly to “essential” goods and services. A few states are more specific. Idaho, for example, bars price gouging on “fuel or food, pharmaceuticals, or water for human consumption.”
Bottom line: most states that have price gouging laws apply them very broadly, and those laws likely cover any item in significant demand during a crisis.
Three questions to watch
1. Will Trump use the Defense Production Act to require additional companies to manufacture or expedite essential items such as ventilators and masks?
2. Will the federal government impose formal quarantines or travel restrictions, as Trump publicly contemplated last week (before issuing a travel advisory for the New York-New Jersey-Connecticut area instead)?
3. How long will the Supreme Court postpone arguments in key pending cases?