Following complaints filed by Common Cause, U.S. Sen. Richard Burr (R-N.C.) is under investigation for possible violations of the STOCK Act, a bill that prohibits members and employees of Congress from using private information derived from their official positions for personal benefit. The U.S. Department of Justice, in cooperation with the Securities and Exchange Commission, recently began a probe of stock sales made by Burr and other senators following confidential briefings on COVID-19.
Staff writer David Richman spoke with Thomas Hazen, a UNC law professor who has written extensively on the topics of securities law and insider trading law, to get more information on the STOCK Act and how this investigation may affect Burr.
The Daily Tar Heel: What is the significance of Burr’s actions?
Thomas Hazen: Well, if he had information that was material and if he made the investment decisions, then he would be in violation of the STOCK Act. And those are two pretty big ifs in terms of the facts, I’m not commenting or trying to speculate on what he did or did not know.
So even if he had information, if he could show that, number one, he did not make investment decisions for his own stock, and two, the person making those investment decisions did not know and did not communicate with Burr about that information, then he would probably be okay.
DTH: What does the STOCK Act say?
TH: Basically what the STOCK Act says is that the normal rules against insider trading that apply to corporations and corporate executives also apply to members of Congress and to their staff. And basically what the law is, is that if someone in a special position, in this case it would be a member of Congress, which includes the Senate of course, knows material, nonpublic information about a company, then he or she is precluded from trading on that information to their advantage.
So translated to this case, what that would mean is if the information that was discussed at the meeting was, number one, nonpublic — it’s possible the information would have been publicly known anyway — if it was nonpublic, and more importantly, was the information material. A fact is material if it is the type of fact that a reasonable investor would consider important or significant in deciding whether or not to buy or sell stock.
And one other thing just to add on that: whether or not information is material depends not simply on that particular information itself, but whether the information would alter or change the totality of the public information available.
DTH: If Burr were to be found guilty of violating the STOCK Act, what would happen then?
TH: The consequences of (violating federal security law) are, or can be, the Securities Exchange Commission can bring a suit, a civil suit, against him, and one of the remedies of a civil suit like that could involve disgorging the profits he made by selling early and also a possible penalty of up to three times the profit he made.
And it’s also possible that the Department of Justice would refer it to the SEC for civil litigation. And those are all the possible outcomes that could occur, and this could happen also, any investor who was buying that company’s stock the day he was selling could sue in federal court for a private suit, a private right of action.
The remedy there would be he would have to give back whatever profit he made by selling early. So there is the possibility that even if the SEC or the Department of Justice does not go after him, that an investor who bought stock on that day, the same stock, could bring suit.
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