Ethics on the Exchange: Inside Information Lining the Pockets of Our Elected Officials
By John Flynn ’25 Associate
The United States Congress crafts bills and laws that wield significant influence over the stock market, while senior officials are entrusted with overseeing their implementation. Given the immense power and privileged knowledge held by these individuals, one would expect stringent laws and regulations to prohibit them from publicly trading individual stocks. Despite the existence of bills to protect against this, they often fall short of curbing entrenched corruption within our government. Members of Congress and elected officials frequently engage in trading based on classified information inaccessible to the American public.
In 2008, immediately after the market crash and the fall of The Lehman Brothers investment bank, reporting on insider trading from members of Congress started to become clear. In 2012 the Stop Trading on Congressional Knowledge (STOCK) Act was passed through the House and the Senate almost unanimously before President Obama signed it into law. The STOCK Act’s main purpose was not only to prohibit insider trading but to also make it required that members of Congress publicly disclose their trades.
In theory, The Stock Act would make all trades not only public but ethical and this would be the answer to the problem. Unfortunately, the act only partially worked. No congress member would see any consequence for using their confidential knowledge to make trades under The Stock Act. The one benefit that did come out of the act was transparency as Congress members have disclosed their trades since 2012. One would think that making these trades public would mean people of power wouldn’t make corrupt trades, unfortunately, they would be wrong. In a quote from Campaign Legal, “Transparency alone is not enough to prevent the appearance of corruption — or the actual occurrence of corruption.”
Nancy Pelosi has a net worth of roughly $120 M although she has been in Congress for 36 years and her salary never exceeded $223,500. This is no coincidence. In late November, Rep. Nancy Pelosi (D-CA) and her husband placed an order for call options in Nvidia (NYSE: NVDA), a Silicon Valley-based semiconductor chip manufacturer. She purchased the options at an estimated $380 per option contract for 50 December 20, 2024, 120 call options. On that contract, The Pelosi’s made an estimated profit of $1.4 M, and the stock has risen more than 70% since then. Pelosi has held a large part in legislation, particularly with semiconductor chip technology in the U.S. The Creating Helpful Incentives to Produce Semi-Conductors In America (CHIPS and Science Act) initiative was first started as a recommendation by President Trump’s national security team before becoming a bi-partisan piece of legislation that President Biden signed into law in 2022. Pelosi publicly supported the act and made financial gains on her knowledge of how it would affect domestic chip manufacturers such as Nvidia.
Another second example of suspicious trading has occurred just in the past few weeks with Rep. Kevin Hern (R-OK). Since 2019, the Hern Family Revocable Trust’s Brokerage Investment Account and the Hern Family Foundation have made small and incremental Lockheed Martin (NYSE: LMT) trades of up to $15,000 with the last trade being placed on March 29th. On April 15th Lockheed Martin was awarded a $17 B contract to build the next generation of missile defense systems for the United States. Kevin Hern sits on the Taiwan Caucus, The Republican Israel Caucus, The Air Force Caucus, and other groups in the House of Representatives that are regularly reviewing and making decisions on these types of defense contracts.
These are just 2 short examples of an overarching issue in our system that is not just in Congress but all throughout our government. The Wall Street Journal recently reported that about one-third of the energy department’s senior officials or their families own stocks related to the agency’s work. After a few failed attempts, Sen. Josh Hawley (R-MO) teamed with Sen. Kristin Gillibrand (D-NY) to introduce a bill to ban stock trading and stock ownership from elected officials. The bill will further strengthen the original Stock Act from 2012 and enforce strict penalties on any officials who disobey it. “It is critical that the American people know that their elected leaders are putting the public first — not looking for ways to line their own pockets,” said Senator Gillibrand.
Unfortunately, government corruption doesn’t stop at larger publicly traded firms but can begin at the start-up level. In the entrepreneurial and innovative firms, manipulation of public policy is often used as a strategy for increasing profits and corruption. A paper published by the Journal of Financial and Quantitative Analysis titled “Corruption and Corporate Innovation,” investigated how political corruption in the United States affects firm innovation. In the paper, they discovered that political figures can bribe or extort entrepreneurial innovation in many different ways. One of the largest ways this can happen is by forbidding firms from receiving from receiving the operating licenses, building permits, patents, or approvals required to innovate.
Corruption throughout all of government will continue and grow if politicians and leaders know that the decisions they make on large defense contracts, food, or pharmaceutical regulations will affect their personal gain. We cannot live in a world where the people who are making vital decisions about our health and safety are more focused on themselves than the people they represent.
John is a junior pursuing a Business Administration major with a focus in Entrepreneurial Studies. On campus, John holds a position as an administrative assistant at Military and Veterans Services. John is also a member of the E-Club as well as the Founders Club which allow him great opportunities for entrepreneurial growth and networking. Beyond campus life, John is a proud member of the New Hampshire Air National Guard where he works as an Operations Manager in Civil Engineering. In his first year, John is eager to gain start-up and investing experience and knowledge, as well as make new connections and network as a member of the fund.
