New York, NY – Last week, Senator Charles Grassley (R, Iowa) spoke on the floor of the Senate about his investigation into a potential leak about the Centers for Medicare and Medicaid Services reversed decision regarding Medicare Advantage payments and his interest in re-introducing legislation regarding the political intelligence industry. The following is the text of his speech and our comments.
Grassley’s Floor Speech on Political Intelligence – May 8, 2013
Mr. President, with the passage of the STOCK Act last year, Congress made an important statement: When it comes to insider trading laws, there is no special exemption for Congress. If anyone in government provides confidential information to someone for the purpose of trading on it, that is insider trading.
It is illegal if the information is both material and nonpublic. The word “material” means a reasonable investor would want to know it before investing. “Nonpublic” means the information has not been released to the general public. To violate the law, the person making the disclosure must have a duty to keep the information secret.
Frankly, there is very little information in Congress that must be kept secret. Of course, that is a good thing. Unlike the executive branch, most of what Congress does is public immediately. But disclosing material nonpublic information can be a crime. Even if it is done intentionally, people might be investigated before getting a chance to clear their name. And there is a big difference between material nonpublic information and an expert’s educated guess about what a government agency might do.
We now know that Wall Street has been harvesting expertise and tidbits of information from Washington, DC, for years while keeping us largely in the dark. In fact, the political intelligence industry is so big and so opaque that the Government Accountability Office was unable to quantify it or judge its size despite 1 whole year of investigating.
Political intelligence firms extract pieces of information from the government and use that intelligence to make money on Wall Street. Each detail a political intelligence firm gathers may not be material or nonpublic on its own, but the purpose of collecting and analyzing those details is to get an edge in the markets over other investors.
That is not illegal, and I have never suggested that it should be. People should not be discouraged from sharing information and opinions about how our government operates. We should be more transparent, not less. The less open and transparent government is, the more opportunities there are to exploit government information for profit in the markets.
I have been investigating the role of political intelligence firms in the early release of information about Medicare Advantage rates prior to the public announcement on April 1st. There has been some confusion over the scope of my inquiry, so I want to be clear. There are reports that the Securities and Exchange Commission is investigating whether material non-public information was released about the Medicare Advantage rates. My interest is much broader than that.
Political intelligence is not the same thing as material non-public information. Gathering political intelligence includes a lot of activity that falls short of material non-public information. So, just because I am asking questions about how certain information or expert opinions flowed to these political intelligence firms, does not mean I am accusing anyone of any wrongdoing.
I am not seeking to ban the gathering of political intelligence. I am not suggesting that if someone was the source for some piece of political intelligence, that the source did anything illegal. But, the goal of these firms is to get an edge on other investors, and that should be understood by everyone who communicates with them.
This investigation has shed a great deal of light on the political intelligence industry. I hope to use this information to improve the legislation on political intelligence disclosure that I plan to re-introduce with Representative Slaughter. I am trying to learn how these political intelligence firms function by using this real-world example, so that I can write better legislation on disclosure.
To be clear, I am not focused on examining whether particular Congressional staff acted properly with regard to their professional duties. Any reports to the contrary are simply inaccurate. What I think we need is more transparency. Government officials need to know what happens with the information they provide to outside parties. I want to arm government officials with knowledge about who they are talking to.
My inquiry started with Height Securities, the firm that put out an alert 18 minutes before the markets closed on April 1st. That alert caused a huge spike in the health insurance stocks that stood to gain from the rate announcement.
I initially learned that an email on April 1st from a healthcare lobbyist to the analyst at Height Securities looked like the basis for the flash alert that moved the markets. In the interest of full disclosure, it has been reported in the press that the lobbyist was formerly on my staff. But, I continued to press for more information. I learned that Height paid for his expertise on healthcare, although his entire billing amounted to only 1.75 hours of work before sending the email on April 1st. I learned that the Height analyst had also communicated with two other healthcare policy experts before putting out his alert to the market.
Then, I learned that the Centers for Medicare and Medicaid Services (CMS) had already made its decision to reverse the rate cuts much earlier, two weeks before the Height Securities alert. The press has reported that there were major spikes in options trading on March 18th and March 22nd. Options trading is one way folks on Wall Street make big bets on a stock when they think they have a sure thing.
March 18th happens to be the first trading day after CMS made its decision internally. March 22nd happens to be the day that CMS transmitted its draft decision to the White House more than a week before the public announcement. On that date, the circle of people in the administration who would have known about the CMS decision expanded significantly.
This suggests that political intelligence firms may have obtained key information for their clients in mid-March, not just the day of the announcement on April 1st. The press also reported on the possible involvement of another political intelligence firm, Capitol Street. Capitol Street arranges conference calls between investors and governments experts.
In addition, I have asked two major hedge funds mentioned in the press whether they profited from trades in advance of the rate announcement. So the scope of my inquiry is broad. It is not focused on particular people. It is focused on the facts.
The Securities and Exchange Commission is also investigating. It is their job to determine whether any material non-public information was passed to Height or to anyone else in this case. That is not my job. I am working on legislation to make the political intelligence industry more transparent. I am gathering facts to inform that legislation.
Remember, political intelligence does not necessarily involve material non-public information. But, people in government need to know who they are talking to and what they will do with your information. That is why it is so important to ensure that political intelligence relationships are transparent. Even if the information you provide is merely an educated guess, it can still move markets. It can still create an impression that a fortunate few are making money from special access to insiders.
If political intelligence transparency is passed, government officials would be more fully informed when they provide expertise to these firms about how the information might be used. But as things stand, without transparency, you do not necessarily know what firms like Height Securities or Capitol Street do with the information you provide to them.
You don’t know if they have a contract with a lobbyist who is bringing in some other client for a meeting. You don’t know that your discussion with that lobbyist’s client might be repeated to people who are looking for an edge in the stock market. What you think may be an innocent detail or an educated guess may move markets.
At the end of the day, that is what these firms want to exploit. That is what they are after. That is what they sell. They should be honest and upfront with people about how they make money. Lobbying disclosure isn’t perfect, but it has brought more transparency to the process.
Now, we need political intelligence disclosure too, for the same reasons. Transparency increases the public’s ability to trust that we are working for them, not for just for special interests. That principle should apply just as much to special interests on Wall Street as it does to special interests on K Street.
Senator Grassley wanted to make it clear in his floor speech last week that he IS NOT accusing anyone of wrongdoing in the CMS case, nor is he interested in banning political intelligence firms. He is also saying that political intelligence is not necessarily the same as material nonpublic information.
Grassley, in his speech, was clear that his primary interest in investigating political intelligence firms Height Securities and Capitol Street, law firm Greenberg Traurig, and various hedge funds mentioned in a Wall Street Journal article on the subject is to “gather intelligence” so he can draft better legislation to have political intelligence firms purportedly register like lobbyists do.
Grassley was also extremely clear about why he thinks registration of political intelligence firms would be a good idea. In his speech he explains:
“If political intelligence transparency is passed, government officials would be more fully informed when they provide expertise to these firms about how the information might be used. But as things stand, without transparency, you do not necessarily know what firms like Height Securities or Capitol Street do with the information you provide to them. You don’t know if they have a contract with a lobbyist who is bringing in some other client for a meeting. You don’t know that your discussion with that lobbyist’s client might be repeated to people who are looking for an edge in the stock market. What you think may be an innocent detail or an educated guess may move markets.”
He believes that additional legislation is needed to create transparency about the type of information that investors glean from Washington DC. He also wants government officials to be able to know if the people they are communicating with and providing information to are using this information to make profitable investments.
While the Senator is clear about why he wants more transparency on the political intelligence space, I have a few problems with Senator Grassley’s arguments. First, I am confused why the Senator believes government officials need to know when the information they are providing is going to potential investors versus to any other type of constituent? Shouldn’t everyone have unfettered access to the same information about what is happening in Washington DC?
The only reason I can find is that the Senator wants to discriminate in some way against investors versus every other type of interested party. Perhaps this is because he is concerned about the negative perception that is created when stories like the one about the CMS reversal breaks. This seems to be consistent with his comments that, “It [political intelligence] can still create an impression that a fortunate few are making money from special access to insiders.”
The Senator also argues that transparency for the political intelligence industry would, like the transparency created for lobbyists under the Lobby Disclosure Act (LDA), be a good thing to rebuild the public’s trust and confidence in Washington.
However, I think comparing political intelligence firms to lobbyists is an unfair comparison. The LDA was created because of the extreme conflicts of interest that exist between lobbyists who lobby on behalf of special interests and the lawmakers themselves who could financially benefit from those lobbyists and their clients through political donations. These relationships demanded transparency.
Political intelligence firms, however, typically don’t have the same conflicts of interest when it comes to their Washington sources as lobbyists do with lawmakers. While political intelligence firms and hedge funds could provide political donations to Washington insiders who share information with them, these donations are typically small in nature (and they are already covered by laws limiting and tracking political donations).
Clearly, Senator Grassley is convinced that political intelligence firms, and the institutional investor clients who hire them, warrant some level of special attention and transparency. Perhaps this is because many of these firms – and particularly those from the hedge fund community – have attracted a growing distrust among the public given the significant number of insider trading investigations and convictions that regulators have obtained over the past few years against them.
Certainly, it is pretty easy for Washington to hold hedge funds up as the poster child for Wall Street excesses and misdeeds. Very few will feel sorry for them. Unfortunately, political intelligence firms are getting caught in the cross fire.