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Why Is Congress Investigating Insider Trading?

Do not be so quick to dismiss the Congressional probe into insider trading at SAC Capital Advisors.

The news that Senator Charles Grassley, the top Republican on the Senate Judiciary Committee, is looking at roughly 20 trades in which the Financial Industry Regulatory Authority suspected SAC Capital Advisors could have traded based on inside information is being described by some as “not serious.”

“This seems almost entirely like a political move and thus, not that serious,” Courtney Comstock wrote recently at Business Insider.

I suspect there's a lot of this going on. Isn't this the job of the Securities and Exchange Commission or the FBI?

Contempt for the investigatory activities of lawmakers has a long and well-pedigreed tradition in the United States. Walter Lippman, one of America’s most revered voices in journalism, once described Congressional investigations as “that legalized atrocity…. in which Congressmen, starved of their legitimate food for thought, go on a wild and feverish manhunt and do not stop at cannibalism.”

Fear and loathing of Congressional investigations have a bipartisan history. Liberals began to truly despise congressional investigations during the McCarthy era; conservatives hated them during the Watergate era. In some sense, you can trace this line of thought all the way back to the conviction of Socrates by the Athenian Assembly.

This view of things is echoed in the current structure of our government, which hands over much of the investigatory function of Congress to administrative agencies staffed by experts and specialists. It reflects a belief that investigations are best handled not by partisan politicians but by those who, by virtue of their expertise, are somehow beyond politics.

The Constitution does not specifically recognize a congressional power to hold investigations. Instead, the power to investigate has been seen as growing out of the power to legislate. And, indeed, it was frequently been exercised by both the British Parliament and the Assemblies of the American Colonies prior to independence.

“The English Parliament is a continuing committee of inquiry, and its chief power and influence lie in that fact,” HL Mencken once wrote.

For Mencken the congressional investigation was not an atrocity but “the grand inquest of the country.” He pointed out that it was a congressional investigation that dealt the first heavy blow to Prohibition.

“Even carried on by fools…such an investigation often reveals facts of value,” Mencken wrote.

Legally, congressional investigations must be related to the legislative function. If the view of the Constitution as granting only limited or enumerated powers to Congress still prevailed, it may be that this requirement would impose true limits on congressional investigations. Matters reserved for the states or individuals would be out-of-bounds.

But, in reality, this limitation has never been reached—must less breached. Indeed, since Congress' powers to legislate are not unlimited—even an individual mandate for health care may pass constitutional muster—there may be nothing at all outside of the purview of a congressional investigation. The limit may be more like an imaginary border demarking the “end of the universe”—as soon as you reach it, you expand the universe by as far as you cross it.

(I’m not sure why, but this expansion of investigatory authority is something few people seem to consider when they propose unlimited legislative authority.)

Unlike investigations aimed at bringing cases before the courts, Congressional investigations have few limitations when it comes to evidence or procedure. Many evidentiary privileges—such as the right of an individual not to reveal ‘trade secrets—do not carry weight in a Congressional investigation. Even some common-law privileges—such as attorney-client privilege—may not strictly apply, although most Congressional committees attempt to respect these. Only hard and fast, enumerated Constitutional rights work, such as the Fifth Amendment protection against self-incrimination.

Perhaps of particular concern for SAC is the fact that “trade secrets” are not protected from Congressional investigations. This means that Senator Grassley could require the hedge fund to reveal the underlying strategies that led to its decisions to buy or sell the stocks subject to inquiry.

This broad investigative power is part of the reason Congressional investigations can often reveal those “facts of value.” Another part is that Congressmen and Senators may be less ideologically constrained than experts, who tend to allow their specialized knowledge to create intellectual barriers that can blind them to evidence and arguments that don’t comport with their vision of the world. Politicians—you may have noticed—tend to adopt a flexible point of view aimed more at getting votes than rigidly sticking to a preconceived view of the world.

And that fact about the world—that experts are ideologically rigid while politicians are often more flexible—is why Comstock, Lippman and the anti-legislative investigatory voices are wrong. A political investigation can be very, very serious.

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