Mendes Hershman Winner Abstract: “Creating an Effective Vaccine to Prevent Insider Trading in Congress: Laws Needed to Fix Deficiencies in Stock Corporation Law”

The Mendes Hershman Student Writing Contest is a highly regarded legal writing competition that promotes and rewards law students for their outstanding 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 highly regarded former chairman of the commercial law section, Mendes Hershman (1974-1975), gives his name to this legacy. Check out the roundup of 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”) changed the business, financial performance and market outlook for the vast majority of companies and industries in virtually 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 gave up their shares – just days before the market collapsed. The senators faced severe slurs and allegations of possible insider trading, so the overarching question was whether these senators had actually broken insider trading laws.

Prior to 2012, the traditional insider trading laws probably did not apply to Congress. However, in 2012, Congress passed the Stop Trading on Congressional Knowledge Act (“STOCK Act”), which specifically prohibits members of the Congress from trading in tangible, nonpublic information they gathered on Capitol Hill. The STOCK Act sought to clarify whether members of Congress are subject to insider trading bans. 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. In fact, the STOCK Act has some shortcomings that make it difficult to successfully prosecute insider trading in Congress, and the coronavirus controversy has 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. In this respect, high-profile stock deals during the worst pandemic in the country and the accompanying economic crisis should provide sufficient impetus for a new Congress to discuss the issue of insider trading in Congress again and to take appropriate measures.

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