Power, Money, and (Legal) Loopholes

Score one for the “old media” scions of journalism! Thanks to the investigative reporters at CBS News’ Sunday program 60 Minutes, the STOCK Act has now been passed by both houses of Congress and appears to be on its way into the law books.

The Act prohibits members of Congress from engaging in insider trading activities. Once passed, our elected officials will no longer be able to trade on confidential information that they obtain while performing their governmental duties.

It’s always a pleasure to watch the venerable news program, one that came of age over 40 years ago, serve the public interest by practicing the profession of journalism. But isn’t it odd that, at this moment in time, federal officials are still permitted to engage in insider trading?

Loopholes, Loopholes, Loopholes

Apparently, the criminal laws that prohibit insider trading have never covered members of Congress. Although they’ve been employed for decades to imprison business executives from the fictional Gordon Gekko to the real Martha Stewart, they’ve never been applied to our Congressional officials, thanks to loopholes that were written into the law by those same officials.

Such loopholes are, regrettably, relatively common. Elected officials at both the national and local levels, for instance, are often permitted to spend their political campaign contributions for personal benefit. And when Indiana Senator Evan Bayh recently announced that he would retire from government, government officials confirmed that he could dedicate his $13 million campaign fund to any legitimate charitable or political purpose.

To be sure, Bayh has undoubtedly earned far more money after leaving office by joining the “K Street” Washington law firm McGuire Woods and the private equity firm Apollo Global Management. Nevertheless, even though Senator Bayh has never been accused of committing an illegal act, the existence of the campaign contribution loophole — like the existence of the insider trading loophole — feeds the sense of ethical skepticism that Americans harbor about government ethics.

Words vs. Deeds: A National Republican

A similar sense of skepticism is generated when our elected officials fail to take the time to explain technical business concepts to the general public. Consider, for instance, the issue of Republican presidential candidate Mitt Romney’s recent tax returns. According to the Romney campaign, he simply pays the stipulated 15% tax rate that is applicable to long term capital gain transactions.

What they fail to explain, though, is that the vast majority of Romney’s earnings are not classified as capital gains at all. They’re actually deferred earnings, which — due to another loophole in the federal law — are classified as carried interest and are taxed at the 15% rate.

Like Democratic Senator Bayh, Republican candidate Romney follows the law and simply takes advantage of existing loopholes. And yet, by failing to fully explain the technicalities of the situation to the American people, Romney’s campaign arguably feeds a sense of public skepticism in government.

Words vs. Deeds: A Local Democrat

Some loopholes, incidentally, are verbal (and not legal) statements that utilize technical business jargon, albeit in ways that are incomprehensible to the general public. Last week, for instance, in the annual Governor’s State of the State Address in Hartford, Connecticut, Governor Malloy proudly proclaimed that his administration “brought honesty and transparency to the state’s books by moving to GAAP.”

He was referring, of course, to his heavily publicized (and deservedly praised) Executive Order #1, which ordered the Nutmeg State to adopt Generally Accepted Accounting Principles (i.e. GAAP) in lieu of non-traditional budgetary accounting methods. What he didn’t mention, though, was that he followed his Executive Order #1 with a subsequent order to delay GAAP’s adoption by two years. In other words, at the present time, Connecticut is not yet utilizing GAAP.

If a Governor initially announces the adoption of GAAP, and then subsequently delays its adoption, is it fair to assert that his State has moved to GAAP? It depends on how you interpret the phrase “moved to GAAP,” doesn’t it? The vagueness of the phrase itself represents a verbal loophole of sorts, given that very few citizens have any idea what it really means.

Power to the Press

And that’s why press stalwarts like 60 Minutes generate civic value. Once American citizens understand how these loopholes actually function, and what these technical terms truly mean, they can apply pressure to their elected officials to act more transparently and speak more clearly.

The STOCK Act, after all, languished for six years until 60 Minutes presented a story about it last November. Then, in response to public pressure, our Congressional leaders finally began to move it towards passage.

Although “new media” companies have earned a significant amount of respect for contributing to the public discourse, the 60 Minutes story demonstrates that “old media” journalists remain a potent force as well. Whether or not you read newspapers and watch traditional television newscasts, you are undoubtedly benefitting from their investigative activities.

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