I think everyone agrees that members of Congress should not engage in trading based on information they encounter. That is, everyone except members of Congress. There have been several attempts to limit congressional trading. None have made it to the floor for a vote. The current efforts are the Ban Congressional Stock Trading Act sponsored by Senate Democrats and the House Republican sponsored Stop Insider Trading Act.
No, I don’t think either will pass.
A news event last week shined a light on this. (or maybe it didn’t.) Michigan Representative Lisa McClain faced stories of insider trading on stock purchases in xAI, Elon Musk’s artificial intelligence company. The stock purchases occurred shortly before Secretary of Defense Pete Hegseth announced an Artificial Intelligence Acceleration Strategy that would provide access to generative AI models like xAI. (It is still legally the Department of Defense. Laws have not been passed to change the name.)
The xAI shares are not publicly traded. The House bill is limited to public companies. The Senate bill is not limited. That highlights the focus on the House bill on insider trading, with the Senate bill being a much broader investment restriction.
Since the investment was in a private company, that leads to the somewhat philosophical discussion of whether you can have insider trading in a private company. Given the lack of liquidity in private markets, it’s much harder to make a short-term profit that you usually get with insider trading of public securities. The cases in the area have been more fraud focused. An insider selling when they know there is bad news that has not been disclosed.
I think Representative McClain’s stock purchase in xAI may be based on information she learned. However buying into a private company, with no ability to sell after that announcement gives her few options to turn that into cash. Her defense to the claim of insider trading “Because if it was, we wouldn’t have bought 100,000 shares, we would’ve bought a heck of a lot more.”
For a private stock sale, we should focus on how a member of Congress was able to purchase the shares to begin with. Those shares are not publicly available. Therefore, someone would be doing the member a favor by making the shares available to purchase. What’s not clear is whether the shares came from the company or a third-party.
In Representative McClain’s case, the shares most likely came through an announced offering of shares by x.AI. As part of the AI frenzy, the company was able to raise $20 billion to fund expansion. Any inside knowledge she may have obtained is locked in the x.AI capital structure until there is a liquidity event. Many more turns are likely to affect the return on that investment that some small program by the Department of Defense.
Sources:
- S.1879 – Ban Congressional Stock Trading Act
- H.R.7008 – Stop Insider Trading Act
- Republican confronted over alleged insider trading in Elon Musk’s Grok in Securities Docket
- The Importance of Insider Trading Controls for Private Markets by Dan Campbell & Vivek Pingili
- Insider Trading in Private Companies by Matt Levine
- War Department Launches AI Acceleration Strategy to Secure American Military AI Dominance
- Elon Musk’s xAI Raises $20 Billion