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Are US Senators Engaged in Insider Trading?


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Enter senators, and returns go sky-high

November 8, 2005

By Katherine Griffiths

New York - Wall Street stars who make millions by beating the stock market had better beware. A new group has emerged whose returns are sky-high, yet their salaries are a small portion of compensation paid to investment bankers.

They are US senators who, when they are not doing their day job running the country, are rather talented at investing. Senators beat the stock market annually by 12 percent on average, the first comprehensive study of share trading by members of the US's upper house has found.

That is an impressive performance, as fund managers are thought to have the Midas touch if they regularly outperform by about 3 percent, and even hedge funds - which charge steep fees for performance - are now on average only 6 percent better than the market.

The academics who conducted the study looked at 6 000 stock transactions made by senators between 1993 and 1998. They noted that the senators did an especially good job of picking up stocks at just the right time - their buys were typically flat before they bought them, but beat the market by 30 percent, on average, in the year after.

However, it seems the senators might have been given a helping hand. Alan Ziobrowski, a professor at Georgia State University, and his colleagues concluded that at least some senators must have been trading "based on information that is unavailable to the public".

The group said the fact that many senators came into contact with senior business people, and were on the inside loop when it came to commercially sensitive legislation, was a distinct advantage.

Ziobrowski's study was completed last year, but it gained new resonance this year after the senate's Republican leader, Bill Frist, got into hot water when it emerged that he had sold shares in the Hospital Corporation of America (HCA), the company founded by his father and brother.

Just two weeks after the shares were sold, HCA announced its earnings would not meet Wall Street expectations, and the company's stock price tumbled almost 9 percentt.

Frist happened to exit at about the top of HCA's share price. He is now the target of an investigation by the Securities and Exchange Commission. He insists he did nothing wrong and that he sold the shares, which were held in a blind trust, to defuse concerns about potential conflicts of interest.

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I'd be very intrested to learn about the SEC rules that govern high ranking government official's transactions in the securities markets. Seems to me they'd all have a pretty substantial conflict of interest. I beleive that the president has to have all of his holdings in a blind trust; it would make sense if all members of Congress and their staffs were forced to engage in similar types of transactional relationships thereby preventing them from directly influencing the markets.

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I wouldn't be surprised if they were, I think I would be tempted too. Heck, if I knew in advance the language of a bill that would require certain businesses or if I knew how was going to get huge lucrative no bid contracts... I bet I could pick a few winners too.

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