As one of the few lawyers in the USA with a JD and MBA and who has earned, NASD/FINRA professional licenses, it is always amusing but frightening to see media from financial centers such as New York get the law so wrong and make crazy allegations based on ignorance of the law and political bias.
Occasionally, the media will attack the people for potential insider trading and market manipulation, and often time they are confused. However, the Trump DOJ and SEC has an opportunity to level the playing field for the average investor if they investigate and file charges against those who appear to be manipulating the markets or committing insider trading.
Trump’s ALJs or Administrative Law Judges can provide due process to any alleged offender and render judgment and fines. If the defendants disagree with the ALJ's decision, they can appeal to the SEC Commissioners, and from there, potentially to federal courts.
How 10-B-5 Insider Trading Works
Insider trading is one of the most heavily scrutinized offenses in U.S. financial law, governed by regulations under the Securities Exchange Act of 1934. Section 10(b) of the Act, along with Rule 10b5-1, specifically addresses the issue of illegal trading based on non-public, material information. The scandalous implications of insider trading have been made more evident by high-profile cases involving corporate executives, politicians, and even celebrities.
The trading activity that follows the release of non-public information—such as that surrounding the potential of a material event such as a war or government expenditure can lead to allegations of insider trading and legal consequences, especially when individuals stand to gain financially from the advance knowledge of critical events.
The Insider Trading Framework Under Rule 10b5-1
Rule 10b5-1, enacted by the U.S. Securities and Exchange Commission (SEC) in 2000, clarifies what constitutes "insider trading." This rule states that any person who buys or sells securities while in possession of material, non-public information can be prosecuted for insider trading, regardless of whether they intended to profit from that information. The key element is the possession of "material" information—information that a reasonable investor would consider important when making a decision to buy or sell a security.
The SEC defines "non-public" information as knowledge that is not yet available to the general public. If, for example, a political figure or a corporate executive uses confidential, internal data to make stock trades based on the anticipation of future events—such as economic policies, a pandemic, or government financial support—then those trades can be considered illegal.
Keep in mind, I once saw a speech by a top S&P 500 company where the CEO said, “I ain’t selling my stock”. To be clear, this type of confidence and hyperbole is not material information or market manipulation, but for some left leaning journalists, they may be perplexed with this type of positive rhetoric.
Pandemic Insider Trading: The Fake Case of Congress Members
Before the COVID-19 pandemic, Yahoo articles, and similar publications, highlighted the possibility of an impending global health crisis even recommending stock ideas to protect your wealth from the pandemic. [i] In the days following the articles, some U.S. senators and congress members were reportedly briefed (Jan 24 th, 2020)[ii] on the potential implications of the pandemic.
A series of stock sales and purchases occurred shortly after these briefings, with some officials ignorantly accused of taking advantage of their access to non-public information when anyone with the internet would have known better. [iii] These trades, made AFTER the public had full access to the unfolding news, raised questions about the comprehension of basic insider trading 101 laws by the media. [iv]
While investigations into these trades was encouraged, no charges were brought against the senators involved as the rules prohibit allegations against anyone who trades AFTER the public information is released.. However, this situation sparked debates about political ethics of many like Pelosi who actually had access to material insider information on financial markets, and the appropriateness of such trades by public officials. [v]
Comparing Ebola and H1N1 Swine Flu of 2009-2010 to COVID
A notable historical comparison can be drawn between the handling of the 2009-2010 H1N1 (Swine Flu) pandemic and the COVID-19 crisis. During the H1N1 outbreak, the U.S. government did not take drastic action, leading to a lower overall mortality rate, despite significant numbers of child deaths. While the Obama-Biden did relatively nothing, the failure to act decisively almost certainly contributed to the higher death toll of children during that national pandemic. [vi]
In contrast, the COVID-19 pandemic, which began at the end of the Trump administration, saw a more aggressive and wide-ranging governmental response. Sadly, COVID death tripled after Biden took office, highlighting disparities in public health management and pandemic preparedness.
Critics argue that if Biden and Pelosi had not resisted the Travel banks, Trump could have saved thousands of lives, suggesting that inadequate leadership during critical phases of the pandemic contributed to unnecessary deaths. Remember, Pelosi was in Chinatown in San Francisco begging people go shopping right as the COVID pandemic began which killed over one million people in the USA where 2/3rds died after Biden and Pelosi took over. [vii] However, the public was not able to trade on the H1N1 Swine Flu as compared to the COVID and the rumors on each were fairly frightening
In contrast, the Ebola scare during the Obama administration could have killed millions, but researchers developed an Ebola treatment from tobacco plants during the 2014 outbreak and later treatments prevented mass death in developing nations.
Insider Trading and Political Figures
The issue of insider trading extends beyond corporate executives to political figures. Nancy Pelosi, Speaker of the House, has been accused of leveraging her position to engage in profitable stock trades based on information that may have been gleaned from her political role.
These accusations center on the idea that leading politicians and others in similar positions use access to secret information—such as upcoming legislative changes or government contracts—to inform personal stock trading decisions. Experts argue that this behavior constitutes a conflict of interest and undermines public trust in government officials.
While there is currently no clear legal framework preventing politicians from buying or selling stocks based on public information, the appearance of unethical conduct is significant. For example, Pelosi’s husband, Paul Pelosi, was reported to have traded stock options in Tesla, a company that stood to benefit from government decisions regarding electric vehicles. Such transactions raise questions about whether government officials should be prohibited from engaging in personal financial investments that could be influenced by their access to legislative decisions and insider information.
The Case of Martha Stewart
One of the most infamous insider trading cases in recent history involved television personality Martha Stewart. Stewart was investigated and eventually convicted of charges related to her sale of stocks based on a tip from her broker, who had received insider information.
While Stewart's case focused on a specific instance of stock trading based on non-public information, many legal experts have questioned whether she was unfairly targeted. While Martha Stewart was not ultimately convicted of insider trading, she was found guilty of conspiracy, obstruction of justice, and lying to federal investigators. [viii]
Piggybacking refers to a situation in which an individual or entity takes advantage of a trade or investment decision made by someone else, without having access to insider information but benefiting from observing or following their actions. In the context of stock trading, piggybacking typically involves one investor following the investment choices of another, especially a more knowledgeable or influential investor, without engaging in illegal or fraudulent activities.
Stewart's prosecution for insider trading, even though she did not technically profit from the trade (she avoided further losses by selling her shares), is often cited as an example of how public figures can be prosecuted for insider trading based on circumstantial evidence.
Many argue that Stewart’s case highlights the inconsistencies in the application of insider trading laws, particularly when public figures are involved. [ix] In the end, prosecutors must prove that the defendant acted on material nonpublic information, but in Stewart’s case, the evidence was not sufficient. However, the prosecutors were able to convict her on crimes outside of the original insider claim which is a sad form of entrapment.
Ensuring Public Trust in Political Leadership
For public trust in government to be maintained, it is crucial that elected officials adhere to the highest ethical standards. If government officials like or any other politicians, engage in stock trading based on confidential, non-public information, it creates an appearance of corruption and self-dealing.
To avoid these conflicts of interest, some have suggested that public officials should be barred from trading stocks while in office or that they should be required to place their investments in blind trusts, where they have no knowledge of specific holdings or trading activities.
The potential for insider trading and its corrosive effect on democracy cannot be understated. As such, future regulations may be needed to prevent public figures from engaging in these practices, ensuring that the information they possess does not unduly influence financial markets.
Conclusion
Market manipulation or insider trading remains a serious offense under U.S. law, and individuals who engage in it—whether politicians or corporate executives—can face significant legal consequences. The cases of politicians using insider information for stock trading, especially when it comes to events such as pandemics, have raised important questions about ethical behavior and transparency in government.
While individuals like Martha Stewart have been prosecuted for insider trading, the debate continues about the fairness and consistency of such legal actions. To preserve public trust in both the government and the financial markets, clear and enforceable regulations must be implemented, addressing the potential conflicts of interest that arise from insider information held by public officials.
As a lawyer who has been previously approved as an expert in securities legal arbitration under NASD/FINRA, I can say that many politicians have become rich by utilizing tips and strategies that would be considered the use of “non-public material information”, and thus would be convicted of insider training under normal circumstances and put in jail and disgorged of any profits form illegal acts.
Until the federal prosecutors decide to charge politicians who have made millions illicitly, elected officials in DC may be able to trade on any actionable information they receive. [x]
Puffing, Hyperbole and Supportive Statements by President Trump or USA Leaders
It is important to note that positive supportive statements by the US President or his administration even if exaggerated, do not constitute market manipulation under U.S. law. Rule 10b-5 of the Securities Exchange Act of 1934 prohibits making false or misleading statements about material informationwith the intent to deceive investors.
Hyperbole, by nature, involves exaggerated claims not meant to deceive but to emphasize a point. As long as the statements are not based on materially false information or intended to mislead investors, they typically do not meet the legal definition of market manipulation. Courts have consistently held that subjective opinions, even if expressed in an exaggerated manner, do not constitute actionable fraud unless they are proven to be based on materially false facts or an intent to deceive.
Courts have consistently held that subjective opinions, even if expressed in an exaggerated manner, do not constitute actionable fraud unless they are proven to be based on materially false facts or an intent to deceive (Basic Inc. v. Levinson, 485 U.S. 224, 1988). Therefore, such statements or Constitutionally protected opinions, unless accompanied by demonstrably false fraudulent intent or misrepresentations, would not fall under the purview of market manipulation.
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Commissioner George Mentz JD MBA CILS CWM® is the first in the USA to rank as a Top 50 Influencer & Thought Leader in: Management, PM, HR, FinTech, Wealth Management, and B2B according to Onalytica.com and Thinkers360.com. George Mentz JD MBA CILS is a CWM Chartered Wealth Manager ®, global speaker - educator, tax-economist, international lawyer and CEO of the GAFM Global Academy of Finance & Management ®. The GAFM is a EU accredited graduate body that trains and certifies professionals in 150+ nations under standards of the: US Dept of Education, ACBSP, ISO 21001, ISO 991, ISO 29993, QAHE, ECLBS, and ISO 29990 standards. Mentz is also an award-winning author and award winning graduate law professor of wealth management of one of the top 30 ranked law schools in the USA.Mentzenborg is just a term of art to describe the theory and process by George Mentz JD MBA ChE. CWM is for Chartered Wealth Manager ® and ChE Chartered Economist ® is a credential for economics professionals
[i] Stock Market News for Jan 24, 2020 - Chinese authorities are putting efforts to prevent a vast pandemic by locking down nearly 18 million people.
[ii] Senate Health Committee Announces Briefi... | Senate Committee on Health, Education, Labor and Pensions
[iii] World financial markets rocked by China coronavirus | Stock markets | The Guardian
[iv] Chinese traders dump stocks from Wuhan amid coronavirus outbreak Jan 23 2000
[v] Wuhan Virus Lockdown Casts Cloud Over Industry & Tech Hub - Bloomberg Jan 23 2020
[vi] 20 Reasons Why Legacy Media Became so Deceptive | Newsmax.com
[vii] United States COVID - Coronavirus Statistics - Worldometer
[viii] Fiduciary Duties of Securities Brokers.pdf
[ix] Was Martha Stewart Guilty Of Insider Trading? A New Doc Explains Charges
[x] disgorgement | Wex | US Law | LII / Legal Information Institute
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