Mendes Hershman Winner Abstract: “Creating an Effective Vaccine to Prevent Insider Trading in Congress: Legislation Needed to Address Defects in the STOCK Act”

The Mendes Hershman Student Writing Contest is a highly regarded legal writing contest that encourages and rewards law students for their excellent writing on business law topics. The contributions are assessed according to research and analysis, choice of topic, writing style, originality and contribution to the literature on the topic. The esteemed and respected former chairman of the business law department, Mendes Hershman (1974-1975), gives his name to this legacy. Check out the round-up for this year’s third place winner Kristen Kelbon of Villanova University Charles Widger School of Law, Class of 2021, below.

The impact of the novel coronavirus pandemic (“COVID-19”) has changed operations, financial performance and market forecasts for the vast majority of companies and industries within a matter of weeks. In January 2020, the Senate held a private briefing where Senators learned of classified information related to COVID-19. Four US senators then dumped their shares – just days before the market collapsed. The senators faced severe disparagement and allegations of potential insider trading. Hence, the overriding question was whether these senators were actually breaking insider trading laws.

Before 2012, the conventional insider trading laws arguably did not apply to Congress. However, in 2012, Congress passed the Stop Trading on Congressional Knowledge Act (“STOCK Act”), which specifically prohibits members of Congress from trading in tangible, nonpublic information they collect on Capitol Hill. The STOCK Act sought to clarify whether members of Congress are subject to bans on insider trading. However, it remains unclear whether the Securities and Exchange Commission or the Department of Justice can successfully take civil and criminal action against members of Congress under applicable securities laws. Indeed, the STOCK Act has some shortcomings that make it difficult to successfully track insider trading in Congress, and the coronavirus controversy has again raised concerns about its effectiveness as a deterrent.

The latest insider trading scandal shows that the AKTIENGESETZ and the existing insider trading laws are insufficient to prevent corruption and financial conflicts of interest. Therefore, high-profile stock deals during the country’s worst pandemic and the accompanying economic crisis should provide sufficient impetus for a new Congress to reconsider the issue of Congress insider trading and take appropriate action.

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