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74 US Lawmakers Violated Insider Trading Laws but Won’t Face Charges as Ex-Coinbase Employee

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US regulators have been complicit as belligerent lawmakers allegedly broke a law meant to prevent insider trading and conflict of interest. Some 74 members of Congress will likely go scot-free after they bought and sold millions of dollars in stocks that they failed to report.

It comes as the US Securities and Exchange Commission (SEC), which oversees issues of market manipulation, clamped down on similar violations in crypto. The sector has always maintained a cynic detachment from any form of central control.

Issues of insider trading in crypto might have festered for some time. But its characteristic distrust of centralized oversight could be justified after this apparent selective application of the law by the securities regulator, according to observers.

“Because of the lack of regulation, various questionable and market manipulating practices have gained traction – such as pump and dump schemes,” Soham Panchamiya, an associate at crypto-focused law firm Reed Smith, told BeInCrypto.

“Ultimately, these sorts of efforts have always existed historically – we have seen this in the stock market for many years until regulations clamped down on the worst of it,” he added.

74 lawmakers fail to report their financial trades

On Thursday, Business Insider published a list of 74 members of Congress it claimed to have failed to “properly report their financial trades”. A 2012 law called “Stop Trading on Congressional Knowledge Act” demands that they do so within 45 days of the trades.

Also known as the STOCK Act, the US Congress passed the law in order to prevent issues of “insider trading and conflicts of interest” among its own members. It also wanted to “force lawmakers to be more transparent about their personal financial dealings.”

The lawmakers are required to make a speedy public disclosure of “any stock trade made by themselves, a spouse, or a dependent child.”

“But many members of Congress have not fully complied with the law,” said the report. “They offer excuses including ignorance of the law, clerical errors, and mistakes by an accountant.”

Some of the lawmakers identified include Pat Fallon, a Republican from Texas. Fallon failed to disclose more than 93 stock trades worth as much as $17.53 million on time. He was late by up to four months. The trades occurred sometime during the first half of 2021.

Bitcoin proponent Sen. Cynthia Lummis was several days late reporting a $100K purchase of the cryptocurrency in August. The Wyoming Republican said the more than 45-day delay was caused by a “filing error”.

Representative Susie Lee, a Democrat from Nevada, reportedly failed to properly disclose over 200 stock trades from early 2020 and mid-2021. The trades are worth up to $3.3 million. Lee and her husband also traded eight stocks in 2021 that were not reported until Aug. 13, 2022.

Why members of Congress shouldn’t trade stocks

US lawmakers have continued to buy and sell individual stocks with few limitations. That is despite the influence they wield as makers of laws that govern corporate activity. And also the unfettered access they have to information that may not be available to the public.

Between 2019 to 2021, around 183 current senators or representatives reported their trades of stocks or other financial assets. Either by themselves or by an immediate family member, according to an investigation by The New York Times.

However, 97 of them “sat on congressional committees that potentially gave them insight into the companies whose shares they reported buying or selling,” it said. For example, Sen. Tommy Tuberville is a Republican from Alabama.

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He is also a member of the Agriculture Committee. Beginning last year, Tuberville frequently reported trading “contracts tied to cattle prices.” That was at a time the committee, by the Senator’s own admission, had “been talking about the cattle markets.”

Representative Bob Gibbs, an Ohio Republican on the House Oversight Committee, reported buying shares of the pharmaceutical company AbbVie in 2020 and 2021. It happened “while the committee was investigating AbbVie and five rivals over high drug prices,” said the paper.

The examples show a failure in ethical conduct, conflict of interest, and risk of insider trading by sitting lawmakers. Insider trading is illegal. The practice gives one an advantage in stock market trading because of their privileged access to confidential information.

Double standards: the crypto regulatory dilemma

So, what happens to lawmakers who flout insider trading laws?

Not much really. In the example of the 74 members of Congress who failed to report a trade on time in breach of the STOCK Act, they will most likely face a fine. However, the penalty is usually a pittance of just $200, as the standard fee, reported the Business Insider.

Sometimes it is simply “waived by House or Senate ethics officials.” While lawmakers get off easy on insider trading offenses, crypto investors cannot say the same. The SEC is cracking down on the industry in actions that come across as a double standard of morality.

In July, the SEC and the US Department of Justice (DOJ) filed civil and criminal charges against Ishan Wahi, a former product manager at crypto exchange Coinbase Global. It was the SEC’s first insider trading charge involving cryptocurrency.

Wahi was charged together with his brother Nikhil, and an associate, Sameer Ramani. Ishan Wahi is alleged to have shared with his brother and friend “confidential information” about crypto assets that Coinbase was on the verge of listing on its exchange.

Nikhil Wahi and Ramani allegedly made a profit of over $1.1 million buying and selling 25 Ethereum-based cryptocurrencies before Coinbase announced their listing. This happened on at least 14 occasions between June 2021 and April 2022, the charges say.

Nikhil Wani pleaded guilty to a wire fraud conspiracy charge in September. He is expected to be sentenced in December. His brother, Ishan, pleaded not guilty and is scheduled to appear in court on March 22, 2023. Ramani remains at large.

“Insider trading in the crypto/Web3 industry has been on the rise for some time,” Soham Panchamiya, the Reed Smith law firm associate, told BeInCrypto.

“Between various scandals (OpenSea, Coinbase), the lack of regulation in the industry has allowed some bad actors to malign the overall market and undermine trust.”

However, this is something that can be “easily controlled.” Continuing, Panchamiya said:

“Countries around the world have begun to seriously implement and incorporate crypto-specific laws and regulations in their national frameworks to protect consumers and weed out bad actors.”

Moral authority

There’s only one other charge of insider trading related to cryptocurrency, which is on record. In June, the DOJ charged Nathaniel Chastain, a former product manager at OpenSea “with wire fraud and money laundering” related to a scheme to commit insider trading in NFTs.

Chastain allegedly traded on inside information about non-fungible tokens (NFTs) that were scheduled to be featured on OpenSea, the largest NFT marketplace. He did this for “personal financial gain,” said U.S. Attorney Damian Williams.

“NFTs might be new, but this type of criminal scheme is not,” he stated then. “[The] charges demonstrate the commitment of this Office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”

Charges involving wire fraud and money laundering each carry a maximum sentence of 20 years in prison, according to the DOJ. It is interesting that the maximum potential sentences are prescribed by Congress.

These are the same guys who pay a $200 fine for breaking insider trading laws. Or who simply gets their peers in the Ethics Committee to drop the penalty? By this standard, US lawmakers have no moral right to project themselves on crypto as beacons of justice.

They are too soiled to be the ones leading the crusade against matters of insider trading or conflict of interest in the cryptocurrency industry. From the evidence, there’s a clear selective application of the law: one for lawmakers and the other for crypto participants.

The intervention of Congress hints at the failure of crypto as a radical alternative to money, or to self-regulate. But it does not offer a different solution to the problems of financial censorship, state authority, and complicity addressed by Bitcoin and its derivatives.

The blockchain might have its flaws as an alternative to the traditional idea of money and property. But its democratic infrastructure is a fair starting point for conscientious progress, particularly in the fair application of the law.CRYPTOCASTER® - DECENTRALIZED FREEDOM!
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