The Poison Pill: Insider Trading in Frist and Delay's Office: Story Growing

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Sat, 21 Jan 2006 18:05:19 -0800 (PST)

The Poison Pill

 

 

Daily Kos

 

Insider Trading in Frist and Delay's Office: Story Growing

by josh orton

Thu Jan 19, 2006 at 03:04:45 PM PDT

 

In an exclusive last night on Air America Radio's The Majority Report,

Rep. Louise Slaughter alleged that day-traders had been operating

inside the offices of Senator Frist and Congressman Delay. Telling us

that her source was " as good as gold, " Rep. Slaughter promised to

investigate further and get back to us. Audio available via

AMERICAblog here.

 

" I'm going to track this down, I know it's true, " Slaughter told

us, " that Frist, DeLay and probably others had some day traders working

out of their offices. " Those working out of the Congressional offices

" would find out there's a bill being written by lobbyists, that there

would be no asbestos bill ... and when the market opened the next day,

the cost of asbestos stock had doubled. "

 

UPDATE: Congressman Baird (leading this cause on the Hill) laid out

the problem on The Majority Report tonight...audio over at AMERICAblog

here.

 

The context of this story, and the practice of spreading insider

" political intelligence " is starting to unfold...developments on the

other side...

 

* josh orton's diary :: ::

*

 

The backstory of this involves what's called " political intelligence. "

 

The Hill did a story nearly a year ago on firms that harvest insider

political info and feed it to Wall Street to get ahead of the news

cycle; obviously much of what happens in DC affects the market.

The Hill piece is here.

 

" We provide customized political intelligence and deliver the

information ahead of the news cycle, " Portnoy said.

 

In a business that is in large measure a gamble, information that

helps a trader pick one side or the other is critical.

 

" It's all about comparative advantage and market efficiency. ...

There are lots of things that happen in Washington that affect the

market, " said Tim VandenBerg, a senior policy analyst at Washington

Analysis, a D.C.-based group that advises Wall Street on Congress. " If

you are reading about it in The Wall Street Journal, you are reading

about what has happened, not will happen. "

 

For its information, the financial sector can turn to firms such

as VandenBerg's, which does not lobby. Another example is Charles

Schwab's Washington Research Group, which keeps clients abreast of

legislative and regulatory moves.

 

Many larger players, including some major hedge funds, have set up

their own offices in town. Others hire such firms as Sonnenschein that

specialize in lobbying to mine their Hill contacts for another purpose.

 

Because they aren't, in fact, lobbying for these clients, firms

don't have to register with the Senate or the House. Most firms don't

identify their clients or disclose the revenues from the work.

 

Then, this past December, Business Week reported on the phenomenon:

 

 

Washington Whispers To Wall Street

 

Low-profile firms enjoy a lucrative business selling " political

intelligence "

 

Day traders were confused. On Tuesday, Nov. 15, they couldn't

figure out why there was so much action in USG Corp. (), a Chicago

building-materials company whose subsidiary is mired in asbestos

lawsuits. The stock was trading at double the normal daily volume and

would gain $2.12 to close at $61.55. But there wasn't any major news

to power the run-up.

 

Public news, that is. Behind the scenes, Senate Majority Leader

Bill Frist (R-Tenn.) had decided to override the qualms of Budget

Committee leaders and press ahead with a bill to create a $140 billion

fund to relieve companies such as USG of their asbestos liabilities.

Frist wouldn't announce his move until Nov. 16. But the news got to

key Wall Street players a day early via a little-known pipeline: a

small group of firms specializing in " political intelligence " that

mine the capital for information and translate Washington wonkspeak

into trading tips.

 

The business started with a couple of cottage firms in the early

1970s. But now it's taking off. Industry insiders say the explosion of

hedge funds has driven new clients and bigger dollars to

Washington-watchers. " What hedge funds do is look for inefficiencies

in the market, " says one hedge fund manager who buys several firms'

reports. " And Washington is the world's greatest creator of [market]

inefficiencies. "

 

Unlike lobbyists, political intelligence outfits are not required

to disclose their clients or annual revenues, masking the size of this

very quiet business. One veteran estimates there are more than a

half-dozen contenders collectively raking in $30 million to $40

million a year. Prominent players include the Washington research

shops of Prudential (), Lehman Brothers (), and Stanford Washington

Research Group, owned by Stanford Financial Group of Houston.

 

The business stretches beyond Capitol Hill. " We analyze public

policy -- macroeconomics, the Fed, budget, trade, currency -- that

affects overall financial markets, sectors, or companies, " says Leslie

Alperstein, a founder of the firm Washington Analysis. And while leaks

such as Frist's asbestos news are welcome, Alperstein says his

business is mostly about explaining trends. " If we only dealt in [hot

tips], I wouldn't be living in Potomac, " he says, referring to a

pricey Maryland suburb. " It doesn't happen often enough. "

 

LOOSE STANDARDS

 

It happens enough, however, to trouble some lawmakers. On Nov. 23,

Representative Brian Baird (D-Wash.) asked the House Committee on

Standards of Official Conduct to issue guidance for staffers sitting

on some of the capital's most valuable information. " The possibility

of direct kickbacks [is] enormous, " says Baird, who read about the

political intelligence business in The Hill, a newspaper covering

Congress. He worries that the trafficking comes " very close " to

insider trading.

 

But ethics experts say no one's breaking the rules. Hill staffers

and government employees are forbidden from personally profiting from

confidential data and can't share information that's classified or

deemed secret by their employers. But within those loose standards,

political intelligence is just another legal way for investors to

perform due diligence. The intelligence operatives say that Congress,

where decisions are made publicly, is fair game.

 

So already there is a hugely lucrative practice of trading insider

political info...something that needs to be shut-down as is.

But now, it seems as though the traders may have actually been

operating from INSIDE the offices of Republicans. So even if mining

" political intelligence " is still technically legal, this development

seems like unambiguous insider trading if true: Republican lawmakers

gave market info exclusively to these firms, info that was not yet

available to the general public.

 

Representative Brian Baird (D-Wash.), quoted in the Business Week

story and the Congressional point man on the potential scandal, will

be on The Majority Report tonight at approx. 7:51 Eastern tonight to

talk to Sam Seder. The audio stream and a list of affiliates can be

found here.

 

The next step is tying the employees of these intelligence firms to

both the Repoublican party in general, and Delay, Frist, and their

staffers specifically. Rep. Baird has already written to the House

Ethics Committee to investigate (we'll hold our breath on that) and is

proposing legislation to end this corruption. We've also heard that

outside law-enforcement agencies may soon become involved.

 

Tags: Louise Slaughter, Ethics, Day Traders, Tom DeLay, Bill Frist,

Air America, Sam Seder, Brian Baird, Recommended, insider trading (all

tags)

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