Research Paper: Identification of Potential COVID-Related Insider Trading by US Representatives Based on Financial Disclosures
No no no, we’re not doing the same joke as we did in the previous post. As was the case in our previous post on the subject, our initial foray into the stock transaction data of the US Congress was to find a potential trading signal based on the portfolio movement of certain less-scrupulous congresspersons. The results of this branching path have been…muddled, to say the least (the 45 day reporting window makes short-term strategies impossible due to data delay and longer-term strategies difficult due to a lack of enough data in the current set). The hypothesis at the beginning was that these congresspeople who were abusing their elected position toward profiting in public equities would make trades that would 1) be based on a combination of public and non-public information, and 2) bear fruit over a long-term investment horizon. We wouldn’t have an expectation of specific trades or equities, mind you; the idea was that there would be alpha overall in the portfolio due to a general catch-all of positions that would contain some non-zero percentage of trades made with an insider edge. Sure, it’s probably a somewhat morally grey area to attempt to perform off of the back of illegal actions taken by others, but if they’re self-enriching, why not spread that advantage to the public while also calling them out on it?
Again, we’re still working on it, but it did provide the branch-off point for this and the previous research paper. Whereas the tradable strategy would benefit from a smattering of disparate insider trades (that would be varying degrees of identifiable <ex post or ex ante?>), the onset of the COVID-19 pandemic resulted in a very clear singular instance of insider information that could be observed for senators and representatives all at once. We’ve touch on a lot of the details in the aforementioned post that focused on the US Senate version of the paper, but here’s the quick rundown:
The US Congress had closed-door COVID-19 briefings in late January (Jan 24th for the Senate, Jan 29th for the House).
Trading public equities based on non-public information is illegal in-general, but doubly-so for elected representative thanks to the 2012 Stop Trading on Congressional Knowledge (STOCK) Act. (Add on to this that elected officials were literally profiting on a global pandemic ahead of working on the safety of their constituents)
Four Senators were investigated for potential STOCK Act violations starting in March 2020, with three of the four cleared after a brief investigation and the fourth cleared in January 2021.
However, Novatero found strong evidence of COVID-based insider trading by three senators at-the-time: Sens. Richard Burr, Kelly Loeffler, and David Perdue.
Our analysis was three-fold: a look into alterations in transactional volume, significant changes in strategy relative to the US market, and a market timing advantage relative to two baselines (SPY and a Senate Average virtual portfolio).
Needless to say, some things have changed for the better since the publishing of the US Senate-based paper: Loeffler and Perdue lost their Senate reelection campaigns in the Georgia run-offs (due in-part to their unscrupulous stock transactions around the COVID-19 pandemic), the vaccine rollout has blazed ahead in the US, and ICU beds are once again mostly available after the monstrous surge in cases during the holiday season.
Still, that doesn’t mean the work is done. It was always our plan to look at both chambers of the Legislative branch, with the House of Representatives coming after the Senate due to the 4x magnitude of data to peruse (once again, big thanks to Quiver Quantitative <https://www.quiverquant.com/sources/housetrading> for their data dashboard!). We have finally completed work on this, resulting in our latest research paper up on SSRN.
While the two papers are fairly similar in terms of narrative and process, there were a couple key differences between the two. The first is the timing of the COVID-based closed-door briefing: as mentioned earlier, the Senate had their briefing five days before the House. This means that COVID inside knowledge was available in some form in the US Capitol on the 24th. There is no way of knowing how much of this information was shared by Senators and/or their staffs with Representatives and/or their staffs in the five days before the House had their own version of the meeting. This makes for an information uncertainty from Jan 24-29, and required us to take a look over this period as well instead of the singular point-in-time moment used for the Senate version. The other key difference was the lack of established “persons of interest” in the House. The Senate had four members identified as per the SEC investigation into violations of the STOCK Act, providing us with a starting point for that analysis. The House didn’t have any members investigated, so there was no starting point in terms of representatives themselves. However, we did have the established groundwork from the previous paper to provide a foundation this time around. In fact, the lack of identified representatives made for a carte blanche analysis: we could allow the data to provide a picture of what occurred without any pre-conceived notions of guilt or innocence.
Much like the Senate paper, we found indications of insider trading in this chamber as well. Unlike the previous paper, we chose to provide a range of likelihoods regarding insider trading, ranging from “doubtful” to “strong likelihood” for 15 representatives.
Unfortunately, we are not hopeful of any movement toward deeper investigations of insider trading in either chamber. With the slow decline of COVID cases and slow reopening of businesses back toward some new normal, the righteous fury of the public toward those who acted against the best interests of society during the pandemic is waning. With that decline in ire and indignation comes a lack of interest in the pursuance of justice toward those that would seek to personally profit off of the pain of others. Despite this, we push on: not only for the hopes that this information and analysis leads to a more-informed (voting) public, but that some of our proposed solutions to prevent insider trading by elected officials get a push toward law (or deeper consideration at the very least).
Once again, feel free to reach out to us if there’s any questions or comments you have on the paper. We’re more than happy to address them.