Four senators came under fire last week for making financially advantageous stock trades after receiving information about the then-approaching coronavirus pandemic. 

The optics of that are terrible.

While the country faced an unprecedented situation, those senators executed trades for their own gain while simultaneously seeking to quiet public fears

Reactions from across the political spectrum have been swift and furious.  Commentators and colleagues demanded “explanations” and ethics investigations, with some even going so far as to demand their resignations—or worse, their indictments and prosecutions for violating securities laws. 

But what laws did they potentially violate? And could any of these senators really face prosecution for their actions? Maybe, but it’s complicated.

U.S. law currently does not statutorily define “insider trading.” But it’s understood to take place when someone with a fiduciary duty executes trades on the basis of material, nonpublic information. 

Those who engage in insider trading most frequently face civil penalties pursued by the Securities and Exchange Commission and/or criminal prosecution by the Justice Department. Section 10(b) of the Securities Exchange Act of 1934 and the SEC-promulgated Rule 10b-5 provide the basis for most enforcement actions and prosecutions of insider trading.

Members of Congress made clear with the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012 that they and their staff members were subject to the same insider trading prohibitions as everyone else. 

In other words, if a member of Congress or his or her staff learned of any material, nonpublic information as part of their jobs, they cannot trade securities “on the basis of” that information.

In order to avoid even the appearance of insider trading, many executives establish “blind trusts,” in which third parties manage their investments and only inform them of executed trades after the fact. 

That appears to be the explanation that three of the four senators who have been receiving criticism put forward. Sens. Kelly Loeffler, R-Ga.; Dianne Feinstein, D-Calif.; and Jim Inhofe, R-Okla., all claim they are not involved in their investment decisions and instead rely on third parties to handle their stock portfolios.

Assuming those assertions to be true, there’s likely no insider trading, just bad optics.

That leaves Sen. Richard Burr, R-N.C. We don’t yet know precisely what information he received or when he received it. But unlike the other three senators, Burr didn’t claim that third parties managed his portfolio. Instead, he issued a statement saying:

I relied solely on public news reports to guide my decision regarding the sale of stock on Feb. 13. Specifically, I closely followed CNBC’s daily health and science reporting out of its Asia bureaus at the time.

But even assuming that to be true, Burr could still face problems. His explanation is essentially that he did not make any trading decisions “on the basis of” any material, nonpublic information he received as chairman of the Senate Select Committee on Intelligence or as a member of the Senate Health, Education, Labor, and Pensions Committee. 

Legally, this statement may not be enough, assuming he had material, nonpublic information in his possession when he executed those trades. 

Currently, U.S. courts of appeal are split on what it means to make trading decisions “on the basis of” material, nonpublic information, with some holding that the mere possession of the inside information is enough, while others have held that the government must prove that that inside information was a “significant factor” in a defendant’s decision to buy or sell stock.

Problematically for Burr, the 2nd U.S. Circuit Court of Appeals, whose jurisdiction includes New York City (where the New York Stock Exchange is located) and handles many securities-related cases, has given “on the basis of” a very broad definition. 

That court has said that someone trades a security “on the basis of” material, nonpublic information if that person merely had “knowing possession” of that information when trading the security.

The SEC has taken essentially the same position by promulgating Rule 10b5-1(b), which states that “a purchase or sale of a security of an issuer is ‘on the basis of’ material, nonpublic information about the security or issuer if the person making the purchase or sale was aware of the material, nonpublic information when the person made the purchase or sale.”

The government has even suggested that other court circuits, which have interpreted “on the basis of” to require a higher causal relationship between the information and any trade, may have to reevaluate those decisions in light of Rule 10b5-1 because that rule would be entitled to the infamous Chevron deference, in which courts are supposed to defer to any reasonable interpretation of an ambiguous statute offered by an agency charged with implementing that statute.

At least one sitting Supreme Court justice, Clarence Thomas, has—with good reason—rejected that notion, but it still doesn’t bode well for Burr or others potentially accused of insider trading.

Of course, it’s perilous to predict the outcome of any legal proceeding or to condemn someone who has been accused of wrongdoing until all the facts are known. 

Burr has taken a step in the right direction by asking for the Senate Ethics Committee to investigate his actions. He also should waive any privilege, such as the speech and debate privilege, that he might have as a member of Congress and cooperate with any investigations by the SEC or the Justice Department. 

Burr’s actions likely caused significant erosion of public trust in him and in Congress during a time of crises. He sold stock—especially stock in hotel chains, which have been hit hard by the pandemic—while receiving daily briefings about the coming crises. 

The overall stock market has declined by at least 30% since Burr sold his shares. And he was one of only three senators to vote against the STOCK Act in 2012. On top of all that, he has previously admitted to using information he received during the course of his job to protect his own financial interests. 

In light of all this, Burr should consider what other steps he can take to restore the public’s trust. 

But more importantly, what steps can Congress take to restore the public’s confidence and to prevent a similar situation in the future? After all, these are not the first members of Congress to face allegations or charges related to insider trading.

Broadly speaking, more members of Congress might consider placing their investments in blind trusts, or at a minimum, implementing pre-determined plans for trading securities, thereby taking advantage of one of the safe-harbor provisions found in Rule 10b5-1.

While it’s hard to say whether any of these senators breached any ethics rules or broke any laws without knowing more about what information they received and when they received it, relative to their stock transactions, public officials must have, and must appear to have, the public’s interest in mind when facing times of crises. 

When they do not, it leaves everyone, including those officials, less able to respond to this and future crises because of the public’s eroded trust in them.