What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing today we're doing a video about insider trading when somebody buys or sells a stock based on material, non-public information. This is considered insider trading and is illegal. For example, a corporate insider might have knowledge of a new acquisition agreement before it's disclosed to the public. If he or she buys shares of the company that is about to be acquired, they can make a profit as the stock will go up.

When the deal is announced, there are stiff criminal penalties for this type of trading, as it constitutes unfairly extracting profits from other market participants. We generally think of insider trading as happening in corporate boardrooms or hedge funds, but these are not the only people who have access to valuable insider information through private congressional hearings and intelligence briefings. Many us congressmen and senators hear insider information on a regular basis. For example, a member of congress may be privy to new regulations that will have a significant impact on specific companies.

They can potentially leverage this information to buy or sell that company's stock right before the regulations are publicly announced. In 2004, four university professors tracked the performance of disclosed stock trades by u.s senators between 1993 and 1998.. They published their findings in the journal of financial and quantitative analysis stocks that senators bought significantly outperformed the market, while stock centers sold significantly underperformed. We've included a link to the article in the description below this chart shows the abnormal returns of senators stockholdings in the year preceding the purchase.

The stock behaves pretty much normally, but after the senator buys a stock, it massively outperforms the market. The authors call this an abnormal return. After the stock has enjoyed a good run. The senator eventually sells after the sale, the stock no longer has abnormal returns.

Basically, it seems, like u.s senators, know exactly when to buy and want to sell individual stocks during abnormally high investment returns. When combining the outperformance of the stocks they buy and the underperformance of the stocks they sell, they beat the market by 12 per year. This is performance any hedge fund would be jealous of it could be the case that members of congress are stock market geniuses and make their returns through legitimate research. But the authors claim that this result clearly supports the notion that members of the senate trade, with substantial information advantage over ordinary investors to combat this problem.

President barack obama signed into law the stock act of 2012.. It outlaws the use of non-public information for private profit, including insider trading by members of congress or other governmental employees under the law, members of congress are required to report all the stock trades of themselves and their close family members within 45 days. This seemed like a simple enough solution that should have solved the problem, but it appears that laws are made to be broken during the early days of the coronavirus pandemic, multiple members of congress made highly suspicious stock trades, which appear to be motivated by insider information in Early 2020, the pandemic was just beginning to spread, and investors were still trying to grapple with how significant it would end up being many members of congress, attended private hearings or were given reports revealing the severity of the virus. They had better knowledge of the rapidly unfolding situation than the general public on august 12, 2021.

It was reported that kentucky senator rand paul possibly violated the stock act by failing to disclose his wife's purchase of pharmaceutical company gilead stock in february of 2020. rand paul's, wife, kelly, paul, purchased, shares of gilead sciences on february 26th. The closing price on that day was. Seventy four dollars and seventy cents, the total cost basis for the purchase, was between one thousand and fifteen thousand dollars.

Gilead was developing the rem desophere drug to combat the covet-19 disease. At the time, it was viewed as one of the few stocks, which would actually benefit from the pandemic. Rand paul says that he filled out the relevant forms to disclose the trade but forgot to hit submit within the 45 day window. He finally remembered to disclose it now, 16 months later, it's unclear if she made the trade based on insider information as gilead's from the severe development was publicly known at the time.

The gilead trade was the only individual stock trade, either rand, paul or his wife made in the 10 years that he's been in the u.s senate. It looks quite suspicious that she made her first and only stock purchase in the early days of the pandemic. If this was a case of insider trading, it was a complete failure. Gilead has massively underperformed the s.

P 500, since kelly paul's purchase its current price of 71.16 is about 5 below her cost basis, and she is still bag holding the position. Even if the trade was profitable, its small size of one thousand to fifteen thousand dollars makes it hardly worthwhile rand paul's salary, as a senator, is one hundred seventy four thousand dollars per year, even if gilead doubled, the gains would have been less than 10 of their Household income, the rand paul case is peculiar and it's unclear whether or not it was an innocent mistake, but there are other cases of congressional insider trading that look a lot worse. Richard burr is a republican senator from north carolina, who chaired the powerful senate intelligence committee. In early 2020, in february of 2020, he was given access to a classified intelligence report which warned of the severe dangers the emerging virus posed to the u.s on february 13th.

He personally made 33 sell orders where he liquidated between 630 000 and 1.7 million dollars of stocks. This represented a significant portion of his net worth the holdings he sold included hotel socks that later saw their business operations severely impaired by the travel restrictions. Unlike kelly, paul senator burr's timing was impeccable. He sold right before the s p, 500 tank by more than 30 percent.

This allowed him to avoid hundreds of thousands of dollars worth of losses that most ordinary investors would have suffered. After the fact he vigorously denied that he made the trades based on insider knowledge. He said he relied solely on publicly available news reports regarding the development of the pandemic. Specifically, he closely followed cnbc's reporting to inform his trading decisions.

In hindsight, it's easy to say you saw the virus coming based on how infectious it was, but at the time of burst stock sales there were only 15 confirmed, coveted cases in the u.s. Many people thought the fears were overblown and trump's recently imposed. Travel restrictions would prevent further cases from being imported. In fact, on february 7th less than one week before his stock sales, bird co-authored a fox news op-ed, which said the government was well prepared to fight the virus.

He said that the united states is better prepared than ever before to face emerging public health threats, like the coronavirus in large part. Due to the work of the senate health committee congress and the trump administration. Investors were so complacent that the markets were still at all-time highs according to burr. His investing acumen was so great that he could foresee the coveted crash, all the hedge funds and other sophisticated investors who had access to the same publicly available information just weren't as smart as him.

That's how he was able to dump his stocks before anyone else. Of course, you're free to make your own opinions about this, but, what's undeniably true, is that richard burr read classified reports about the virus that were not publicly available. Once you read a report, you can't unread it at the time of making his traits. He had full knowledge of the classified intel by may of 2020.

His trading scandal was widely reported in the media and became an existential threat to his political career under intense public pressure. He stepped down as chairman of the senate intelligence committee and his cell phone was seized by the fbi as part of a criminal investigation. After an almost year-long investigation, the department of justice said they wouldn't pursue criminal charges against the senator without any written evidence. It's almost impossible to prove that he used the insider information as a basis for his stock sales.

Interestingly, richard burr was one of only three senators in 2012 who voted against the stock act, which explicitly banned insider trading at the time he called it a waste of taxpayer, time and money. Now that we know about congressional insider trading, the important question is whether we can make any money from this. The sec publishes all reported senate stock transactions on their website. We've included a link in the description below, however, because they have a 45-day window to disclose their transactions.

Some of the price movement may have already happened before we can see it on the website. According to the study we mentioned at the beginning of the video, the stocks that senators buy tend to outperform for at least a year after they are purchased, so there could potentially still be gains to be made by copying them. Take this study with a grain of salt because it looked at transactions made between 1993 and 1998. This was before the stock act was passed.

The tendency of senate stock picks to outperform may have declined since then. Alright, guys that wraps it up for this video. What do you think about congressional insider trading? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.