Indicted Rep. Chris Collins shows why members of Congress should not trade stocks

  • Rep. Chris Collins, a prominent backer of President Donald Trump in Congress, has been indicted on allegations of insider trading, along with his son and his son’s fiancée’s father.
  • Collins is on the board of an Australian pharmaceutical company. The US Securities and Exchange Commission alleges that he tipped his son about a failed clinical trial and that the son and associates saved $750,000 by trading on the tip.
  • This is a really stupid thing to allegedly have done.
  • Why are members of Congress even allowed to trade stocks or sit on corporate boards? So they can pull this nonsense and get indicted?

Every time I read a criminal complaint about insider trading, my first thought is: How did they possibly think they were going to get away with this?

Of course, when there is a criminal complaint, that often means you are well on your way to not getting away with it.

Perhaps insider traders seem like morons who should have known what was coming to them because what we see in the news are cases with charges, which are the dumbest, most obvious cases of insider trading. There may be a lot of situations where criminals are being slightly more careful and getting away with it.

Or maybe not! The Financial Industry Regulatory Authority would like you to know it has algorithms to detect this sort of thing. I certainly recommend against insider trading, careless or otherwise.

Anyway: Rep. Chris Collins, a New York Republican who gave President Donald Trump his first congressional endorsement, has been indicted on allegations of insider trading in a case with an extremely obvious, how-were-you-dumb-enough-to-try-this fact pattern.

Get a load of this

Here’s what’s laid out in complaints from the US Securities and Exchange Commission and the US Attorney’s Office for the Southern District of New York (Collins has pleaded not guilty):

  • Collins sits on the board of Innate Immunotherapeutics, an Australian biopharmaceutical company in which he is also the largest shareholder.
  • On June 22, 2017, Collins learned that Innate’s main drug had failed clinical trials, a grave outcome for Innate’s financial condition.
  • Literally seconds after learning this news, Collins contacted his son, Cameron, who at the time owned 2% of Innate.
  • Over the following four days, Cameron Collins and several other associates of the Collinses proceeded to liquidate their positions in Innate before the public announcement of the drug failure on June 26, after which the stock fell 92%. They saved approximately $750,000 by selling before the announcement.
  • Innate is not an especially large company. As a result, per the SEC: “The sales by Cameron Collins, his girlfriend, and her parents, including Stephen Zarsky, made up more than 53% of the stock’s trading volume [on June 23] and exceeded Innate’s 15-day average trading volume by more than 1,454%.”

Perhaps it is sometimes possible to trade on insider information and have those trades go unnoticed amid a sea of non-insider trades. But if the nonpublic information you’re trading on is likely to tank the stock price by more than 90%, and your trades are going to make up about 15 times the stock’s typical daily trading volume, and your close associate sits on the company’s board of directors, it is probably not best to assume your trades will get lost in the shuffle.

This leads me to a question.

Is Chris Collins an idiot?

If the purpose of the seven calls in six minutes between Collins and his son that came immediately after Collins learned about the clinical-trial failure was, as alleged, to tip his son so he and other associates of theirs could sell, why would Collins have thought he would get away with that?

Was it because the trading wasn’t on his own account and he thought the SEC wouldn’t be able to draw a link between him and [checks notes] his son – even though Collins was already the focus of a congressional ethics investigation related to Innate?

Was it because he thought he and his son could just talk the FBI into the idea that the sales were unrelated to the clinical-trial news? Oops, now Collins and his associates have also been indicted on allegations they lied to the FBI.

Collins’ public defense against these charges has focused on a fact prosecutors do not dispute: Even as his associates were selling, he did not liquidate his own, much larger stake in Innate. That might seem like a tiny bit of prudence in a sea of recklessness – among other matters, Collins would have had to publicly disclose the dates and amounts of his sales under rules pertaining specifically to members of Congress.

But as the SEC complaint says, it’s possible Collins didn’t sell because he literally couldn’t. Unlike his son, he had not completed paperwork to transfer his stock to the US, where one could trade it on the over-the-counter market. His stock was stuck in Australia, where trading of Innate on the Australian Securities Exchange had been halted – because of the impending announcement of the clinical-trial failure.

OpenSecrets estimated, based on disclosure forms, that Collins’ net worth was nearly $70 million as of 2015. I realize $750,000 is kind of a lot of money even if you have $70 million, but is it really worth risking the destruction of your career and, you know, prison in order to help your friends save that kind of money?

I wouldn’t think so. But I do have a theory: One might develop an unhealthy attitude toward law-breaking and risk if one had previous success in enriching oneself through such an attitude.

Members of Congress should not trade stocks

Last January, I wrote that members of Congress should not trade stocks. I meant that as a policy proposal – that members of Congress should be prohibited from trading stocks – but the Collins incident provides a reason to take it also as investing advice.

As the liberal-leaning group Citizens for Responsibility and Ethics in Washington has pointed out, at least five sitting Republican members of the House bought stock in Innate in 2017. We don’t know exactly why they bought shares in an obscure Australian pharmaceutical company, though former Rep. Tom Price, who went on to become Trump’s secretary of health and human services, said he did so after learning about the company from Collins.

Most of those members’ investments have presumably performed quite poorly, as they did not have Price’s luck of needing to divest themselves of Innate shares to take a Cabinet position.

Wednesday’s complaints give no cause to believe Collins tipped any of his colleagues that Innate’s stock was about to plummet in June 2017. Bloomberg reports Rep. John Culberson of Texas filed disclosure paperwork saying he sold his shares on June 12, 2017 – that is, ten days before Rep. Collins learned of the failed trial – while the other four investing members sold after the public announcement or still hold their shares.

Collins’ links to Innate Immunotherapeutics had drawn negative attention before because of Collins’ role overseeing drug companies as a member of the House Energy and Commerce Committee. But even favorable legislative action is not enough to make a pharmaceutical company valuable if its main drug doesn’t work.

So maybe we can now say that a rule forcing members of Congress not to engage in individual stock trading wouldn’t just be in the public interest – it may even be for those members’ own good, helping them stay out of junky pharmaceutical stocks their colleagues give them “hot tips” about, and helping them stay out of prison.

And I can add another proposal: Members of Congress shouldn’t be allowed to serve on the boards of publicly traded companies. The SEC is seeking to apply this rule to Collins specifically, on insider-trading grounds, but a blanket ban would prevent some conflicts of interest and also some embarrassing scandals like this one.