New Normal: Covid-19, Ethics, and Stock Tips with Patrick Augustin

Episode 4 of The ‘New Normal’ hosted by Dave Kaufman: Covid-19, Ethics, and Stock Tips with Patrick Augustin
Dave Kaufman – host: Ours is a world of haves and have nots, and nothing has quite laid bare that disparity like the COVID-19 pandemic. One need only to look at the performance of the stock market, where the pandemic has created lucrative opportunities for those who can afford to invest leaving those who can’t afford to even further behind. What happens though, when those that are in power, take advantage of their positions and profit off of a global pandemic that has brought so many people to their knees? Are there consequences when elected officials are accused of insider trading? Or is there too much of a gray area to prove beyond a doubt, when accusations are levied.
Dave Kaufman – host: Welcome to The New Normal, the podcast exploring management research, brought to you by Delve, the official publication of McGill University’s Desautels Faculty of Management. I’m your host, Dave Kaufman. On this episode of The New Normal, we will discuss allegations of insider trading in American politics against former senators, Kelly Loeffler and David Perdue, the stock act, and the gray areas that exist therein. How easy is it to get away with insider trading, especially for those in positions of power. If politicians aren’t allowed to benefit from the knowledge of the market, will they continue to run for office? And are there more ethical alternatives that would allow elected officials to make money off of the stock market?
Dave Kaufman – host: First, let’s hear from former President Barack Obama, who said this in November of 2020 to Georgia voters.
Dave Kaufman – host: I started by asking professor Faraj what he viewed as some of the major issues affecting the gig economy and its response to the COVID-19 pandemic, which he views is one of the most seismic events we’ve ever seen.
Former President Barack Obama I served in the Senate.
Former President Barack Obama I remember when we used to get briefings in the Senate for threats, that including the kinds of briefings that your two current senators got about COVID-19. They got briefed. You know, you go into this room and it’s all top secret and you got to kind of close everything off, you can’t take anything out of the briefing room because this is part of your responsibility as a public servant. And the point of these briefings is so that you can take quick action to protect the American people before it’s too late.
Former President Barack Obama That’s why the Senate gets these special briefings. To serve the interests of the people who have sent you to Washington, to serve their interests before your own. When I heard that your two senators here in Georgia and understand what I’m about to say now is not a partisan statement, I’d be just as hard if I heard the Democrat was doing this. Your two senators publicly were telling you that the virus would be no big deal, but behind closed doors, they were making a bunch of moves in the stock market to try to make sure their portfolios were protected instead of making sure you’re protected, man, that’s shady.
Former President Barack Obama That, I mean, that ain’t right.
Dave Kaufman – host: Joining me for this episode is Patrick Augustin, an associate professor of finance, at the Desautels Faculty of Management at McGill University. Augustin holds the Canada research chair in macro finance and derivatives, and is an associate fellow with the Canadian Derivatives Institute. He holds a PhD in finance from the Stockholm School of Economics, and held visiting research positions at the New York University Stern School of Business, the Stockholm School of Economics, the University of Sydney and the Luxembourg School of finance. Before joining academia, he worked as an attache to the Luxembourg ministry of foreign affairs. Augustin’s work on insider trading and options has been widely covered in the financial press, including in the New York Times, the Wall Street Journal, the Washington Post and Fortune. I started by asking Professor Augustin what exactly Loeffler and Perdue were accused of.
Patrick Augustin: We have also discovered that certain algorithms that had been running our supply chains have been unable to deal with the interruptions that have happened. We also found ourselves with organizational surveillance entering the privacy of our homes, and being exposed also, is happening quite a bit in public spaces.
Patrick Augustin: Well, both senators were among a number of senators that were accused of insider trading due to the coronavirus pandemic. So that’s an episode that nowadays you can look that up. It’s considered to be one of the big scandals that occurred in Congress during last year. And so in particular, there were a number of senators, including Loeffler and Perdue, who had access to privileged information and briefings about the upcoming pandemic in closed meetings, and that acted upon that kind of information that they received in confidentiality to trade in the stock markets. And they benefited from these trades, by either buying stocks that would benefit from the pandemic such as pharmaceutical companies like Pfizer or selling stocks of companies that will be obviously hurt by the pandemic, such as entertainment companies
Dave Kaufman – host: You say accused, does that mean it’s not been proven that they did this? Have they admitted it?
Patrick Augustin: Well, none of these senators has admitted any wrongdoing, effectively, There is consistently been denying of any wrongdoing. The SEC initiative investigation into their investing activities and their stock trades, up to date all of the investigations have been stopped. And so effectively, none of them has been prosecuted for any potential wrongdoing.
Dave Kaufman – host: Is what they did illegal?
Patrick Augustin: Illegal, as it particularly in the context of insider trading is a very charged word, in particular because it’s extremely challenging to prove wrongdoing by illegal insider trading. If you actually look at the history of insider trading cases on a recurring basis, it becomes very, very apparent that it’s extremely difficult to prove insider trading though we often, the devil actually likes in the details of being able to make the case. And so what specifically, he raised the issue about insider trading by members of Congress.
Patrick Augustin: It actually turned out that used to be not illegal. So when members of Congress traded on them on private information, that they did receive confidentially through their representation in closed Senate hearings, then that was not considered illegal. And so here’s a number of kind of issues that have that arose over the years. There was a legislation that was passed in 2012 by president Barack Obama that led to this specifically, this Stock Act, which is the stop trading on congressional knowledge. That was meant to prevent senators and politicians to trade on private inside information.
Patrick Augustin: Even though the frequency of trading by members of Congress has gone down ever since, there has to date, not been a single case of prosecution of insider trading by members of Congress, which ultimately does not mean necessarily that there has been insider trading, but there are a number of cases where the stock price performance just seems too good to be true. And that raises a red flag, again in the corporate context, as well as in the context of trading by Congress members is very, very challenging to prove any wrongdoing given the current legislation.
Patrick Augustin: While it may be very comfortable for the person sitting at home to receive their goods… Every day in my own household, we receive multiple packages. So I am not going to complain about the help. It provides in the comfort, and the safety it provides at a time of pandemic. But it is true that for the drivers, there’s a certain amount of precarity in those jobs.
Dave Kaufman – host: Does the Stock Act actually serve its purpose?
Patrick Augustin: It’s a big question that relates to your earlier question in the sense that, should senators at this be allowed to trade illegally? Well, first of all, again, it’s not clear whether it has been any illegal trading. So many of the Congress members deny any wrongdoing. They often refer to the fact that they trade based on public information or that they have deferred all the investment decisions to an independent advisor, without any kind of communication between them and their advisors. Given the problem is that there might be insider trading by members of Congress who have access to privileged information through their functions as members of the Senate or the House in that sense, the Stock Act has not been successful in curbing that activity.
Patrick Augustin: Again, the big scandal arose last year with the coronavirus pandemic, the frequency and intensity of news and information that came out and that was impacting stocks across a number of industries, raised that issue significantly. And in particular, the fact that a number of senators were accused of illegal insider trading, and that there were investigations started, raises, going to get a red flag, whether any legislation to prohibit such activity has been enough so far.
Dave Kaufman – host: The Stock Act is a bill to prohibit members of Congress and employees of Congress from using private information derived from their official positions for personal benefit and for other purposes. Should politicians be allowed to not just buy and sell stocks, but own stocks?
Patrick Augustin: The law also says anyone who has a fiduciary duty to someone else should not violate that fiduciary duty, right? And not breach that trust and trade based on information that was provided in confidentiality. Certainly politicians should never be able to exploit any sensitive or privileged information that they have access to through their position in politics.
Patrick Augustin: The question though becomes, it is attractive, right? So in the stock markets, you have a way of capitalizing on your investments to make money. So there’s financial industry that can be profitable. If you want to attract talented individuals into politics, where salaries are significantly lower than the financial industry, I think, it becomes tricky to outright ban any trading in stocks. Now the problem is though that that stocks of individual companies where the prices of the stocks are very sensitive to information, by allowing politicians to trade on stocks that are sensitive to private information, you’re giving them an ability to be tempted to trade on information they receive and to exploit that information at the expense of main street. If you completely ban trading, politicians will not necessarily have an interest in joining politics. So I think there’s a middle ground where potentially you can still allow them to invest in stocks indirectly by a large venture invest in broad-based indices, such as exchange traded funds or regular markets stocking basis. But perhaps disallow them from trading directly in individual stocks. That might be a good middle ground.
Dave Kaufman – host: Have we heard politicians come out and say that if I was not allowed to do this, I would not run for Senator or I would not want to be your elected representative?
Patrick Augustin: I personally haven’t heard that specific statement directly, but I think there are other politicians that have proposed legislations where Senators would not be allowed effectively to trade stocks at all, or where they would be allowed to hold stocks, but not trade them, during the terms in office. And even just going back to what we discussed earlier, the Stock Act is essentially a legislation that’s intended to effectively ban insider trading by a Congressman or politicians more generally, that again, that legislation was in response to scandals that arose in earlier years.
Dave Kaufman – host: I’m concerned that the Stock Act might look good on paper, but what we’ve seen in the last year has proven that it’s fairly toothless. We have examples of politicians attending meetings last year in the United States that informed Senators and Congress people of what was coming in a way that Joe Public couldn’t have known. And then we tie that into trades, selling of stocks that made people like former senators, Perdue and Loeffler, a lot of money.
Patrick Augustin: If indeed the trades that all the senators implemented were directly in response to the information they received during the timeframe when no other one has access to information, then I would consider this personally as being trading on non-public information and in breach of fiduciary duty that politicians have to the citizens. In that sense while it will be illegal and essentially you could argue that in that case, the Stock Act was toothless.
Patrick Augustin: However, like I said, up to this date, the allegations have been dismissed, and the investigations were dropped. So I do not have enough insight into the actual investigations by the SEC, to be able to verify the accuracy of these allegations, and to state whether the trades were actually legal. In my own research with my coauthors, what we did look at were the individual trades implemented by one particular Senator, Senator Perdue, who was running for office in Georgia in the most recent election.
Dave Kaufman – host: As Augustin was speaking, I was reminded of when former president Donald Trump used his then robust social media platforms to promote certain stocks.
Patrick Augustin: It’s clear that when a president makes bold statements, that that might be perceived by the market as bullish for some industry, or a certain stock or bearish, is that manipulation? It is difficult to address directly. I think there was a case where Elon Musk was effectively accused of manipulating the market, by wrongfully disclosing information about a certain company, trading in it, and then in the end, it came to light that information was not true. My understanding is if you disclose information or you make statements that aren’t true, in order to influence the markets in either direction, and these statements turn out to be false, I mean, that’s manipulative activity. You have manipulated [inaudible 00:14:04] where you’re conducting something illegal. Now, but just making a statement about your opinion? I mean, that’s public information and you’re not necessarily liable for how the market sees your information.
Dave Kaufman – host: There was a moment last year where president Trump was promoting a drug called hydroxychloroquine, saying that this was the COVID miracle cure, or it had a potential to combat the Coronavirus when science and his own doctors, like doctors Birx and Fauci couldn’t back up what he was saying.
Former President Trump: I happen to think based on what I’ve read, I’ve read a lot about hydroxy. I happen to think that it has an impact, especially at the early years, there were some very good tests that Ford and the doctor from Yale came up with a very, very strong testament to it. There was a group of doctors yesterday, a large group that were put on the internet, and for some reason, the internet wanted to take them down and took them off. I guess, Twitter took them off. And I think Facebook took them off. I don’t know why. I think they’re very respected doctors.
Dave Kaufman – host: Trump continued to promote it in press briefings, to the media, and on Twitter. Then at a certain point, some entrepreneurial journalists found out that he had invested in a mutual fund that owned shares in the company that produced hydroxychloroquine. Should that be considered out of bounds in your opinion?
Patrick Augustin: I would personally consider it certainly unethical without doubt, proving without beyond reasonable doubt that actual illegal insider trading was in play is extremely challenging. The fact that there has been so much uncertainty over the years in terms of what exactly insider trading legislation permits and what it does not permit with decisions by the second circuit, overturning the initial court decisions and vice versa again by the Supreme Court overturning decisions by the second circuit just shows the difficulty and how actually proving the illegality of something. I would certainly argue that in this particular case, again it’s unethical and it’s very closely related to what we discussed, that politicians perhaps not be trading individual stocks but rather instead that the only investing in broad based stock market indices , which are not as sensitive to specific information about a particular company.
Patrick Augustin: As we concluded our conversation, I asked Professor Augstin what I think is ultimately the most important issue we’ve been looking at in this conversation: Do you believe that politicians should be able to profit from their positions of power? And if they can’t benefit from insider trading, would there be other ways that they could financially benefit?
Dave Kaufman – host: Which I’m guessing is difficult, especially in the midst of a pandemic that has really put under a magnifying glass our over-reliance on all of these different online tools.
Patrick Augustin: They should certainly not be permitted to benefit from the position power and politicians entering into Congress or the Senate or whatever role they take effectively, they have an oath they put forward to further the best interests of the United States and any US citizen. Any activity or action that they take at the expense of the United States, at the expense of your citizens to work, even if not at the expense of them, but to benefit themselves and to give themselves an unfair advantage, their take so to speak over the constituents, is in my point of view unethical and unjust, the answer is certainly no, they should not be allowed to.
Patrick Augustin: And of course it’s not only trading on the stock markets where they can benefit financially, if they have access to private information. I think there’s also evidence of real estate deals benefiting from purchasing or selling of land opportunistically in response to developments. I think it is of course, numerous other ways of benefiting from the position of power. But again, that’s a very clear no, my answer is that they should not be allowed or able to, to exploit their position and power.
Dave Kaufman – host: Insider trading in politics has been an issue for as long as there have been politicians, but in the midst of a pandemic that has affected so many people so seismically, it feels even more inappropriate and opportunistic than it does under normal circumstances. As former president Barack Obama said in his remarks to the voters in Georgia, that we heard off the top of this episode, politicians should be looking after the interests of their citizens, not using the pandemic as an opportunity to protect their portfolios or to be profiting off. Is it so unrealistic to expect altruism from those that we have elected and entrusted to serve? Or is this the unfortunate cost of doing business? Ultimately much like we saw with the defeats of both Senators, Loeffler and Perdue in the state of Georgia, it will be up to the voters to decide whether these actions are appropriate, or not. Stay tuned, as we navigate this new normal, together.