In response to yet another member of Congress being accused of insider trading, U.S. Representatives Tom Reed (R-N.Y.) and Kathleen Rice (D-N.Y.) announced on Friday that they will introduce a resolution to amend the current rules of the House of Representatives to prohibit members of the House from serving on the boards of publicly-held companies.

The resolution would create a House equivalent to Senate Rule 37.6(a), which states that no Senator “shall serve as an officer or member of the board of any publicly held or publicly regulated corporation, financial institution, or business entity.”

“We must change the rules to prevent members from serving on corporate boards in order to improve the public’s trust in Congress,” Reed and Rice said in a joint statement. “There should never be a doubt in the public’s mind to lead them to think their Representative could be corrupted or incriminated because of their stake or position in a private company.”

The initiative follows the public release of charges against Rep. Christopher Collins (R-N.Y.), his son, Cameron Collins, and a third individual, Stephen Zarsky, on Aug. 8.

The Securities and Exchange Commission brought a civil action against the men; the U.S. Attorney’s Office for the Southern District of New York on Friday announced related criminal charges.

Collins, who served as an independent director of an Australian biotech company, Innate Immunotherapeutics, is charged with tipping Cameron Collins after receiving confidential information about negative clinical trial results for Innate’s multiple sclerosis drug.

Cameron Collins and his girlfriend’s father, Stephen Zarsky, are charged with trading and tipping others on the basis of the material, nonpublic information. 

The SEC’s complaint alleges that Christopher Collins learned of the negative clinical trial results on the evening of June 22, 2017 in an e-mail from Innate’s CEO to the board of directors, which stated that the CEO had “extremely bad news” indicating that drug trial results “pretty clearly indicate ‘clinical failure.’”

The Commission alleges that he replied to the CEO’s email within minutes, expressing his surprise at the results, and then called and spoke to his son minutes later. Later that same evening, Cameron Collins drove to Stephen Zarsky’s home and tipped him. The next morning, almost two hours prior to the market opening, Collins and Zarsky allegedly entered orders to sell Innate shares, which were executed just after the market opened.

Over the next two trading days, Cameron Collins allegedly sold a total of nearly 1.4 million Innate shares. According to the complaint, a few hours after the last of these sales, Innate publicly announced the negative results of the clinical trial. The company’s stock price then plummeted by more than 92 percent.  Through their sales, Cameron Collins and Zarsky avoided losses of more than $700,000.

The complaint also alleges that they contacted other friends and family members who also sold Innate shares in advance of the negative announcement.

“We allege that Christopher Collins breached his duty of confidentiality to Innate’s shareholders, exploiting his access to nonpublic information about the company’s clinical trial results so that his son could avoid significant financial losses,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division.

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges Christopher Collins, Cameron Collins, and Zarsky with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. The complaint seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions. It also seeks an officer and director bar against Christopher Collins. 

This is not the first time that members of Congress had had to respond to the stock market improprieties of their peers.

The Stop Trading on Congressional Knowledge Act of 2012 was designed to curtail the use by lawmakers and staff of information not publicly available to trade stocks. A year later, however, lawmakers repealed a key portion of the law that required disclosure of congressional stock activity.

A 2017 study by the advocacy group Public Citizen offered both good news and bad when it reviewed the effectiveness of the STOCK Act. It found that the financial value of stock trades of Senate members has decreased 66 percent from before and after passage of the legislation. Additionally, the number of stock transactions dropped about 68 percent.

The research was derived from a database of stock trading activity by members of the Senate from 2009 through 2015, three years before and after implementation of the STOCK Act.

“Nevertheless, conflicts of interest remain prevalent among those who continue to be active players in the financial markets,” the report cautioned. “Many senators are trading in businesses their congressional committees oversee, some trade in companies with which they have an ongoing business relationship and others have introduced legislation that could have an immediate and direct impact on the value of their personal stocks.”

“To reduce these conflicts of interest, members of Congress, just like senior executive branch employees, should be required to avoid trading in businesses that they directly oversee in their official capacity,” the group added.

The report also recommended that Congress reestablish the searchable, sortable and downloadable disclosure regime of congressional trading activity that Congress repealed one year after passage of the STOCK Act.

Public Citizen proposed several reforms to strengthen the STOCK Act. These including banning trading stocks in businesses that members oversee in their official capacity. “As it stands today, the STOCK Act still bans congressional insider trading, but only a relatively small group of public officials are required to provide timely disclosure of their stock trading activities and these on-line disclosures are no longer sortable and downloadable,” it said.

Critics of Congressional trading claim that legislators trade stocks in businesses and industries that they oversee in their official capacity and some have been so bold as to introduce legislation that could have an impact on the stocks in which they trade.

At the time its report was released, Public Citizen formally requested that the SEC and Office of Congressional Ethics investigate the stock trading activity of Rep. Collins for possible violations of the insider trading law. “U.S. Attorney Preet Bharara was reportedly doing precisely that until he was fired by President Donald Trump,” it said in a statement.

Topics