A Story That Isn’t Getting More Interesting: SEC Reveals It Talked to Hedge Funds in House Ways & Means Case
In 2012, Congress enacted legislation to require its members and staff to keep confidential any information that could move stock prices. The SEC has been investigating certain members and staff of the House Ways and Means Committee over the disclosure of new reimbursement formulae to a lobbyist who, in turn, furnished the tidbit to a brokerage firm that in turn turned the information over to its hedge fund clients. The House Ways and Means Committee is fighting the subpoenas in federal district court. Just as the Executive branch fights Congressional subpoenas on the grounds of executive privilege, the House is trying to fend off the SEC’s subpoena as a violation of their branches right to keep internal deliberations private.
The investigation is fairly complicated since the confidential information passed through a series of intermediaries before reaching hedge funds that allegedly moved market prices by trading on the information. The matter received press attention yesterday because the SEC revealed that it has interviewed 25 major hedge funds in an effort to see who relied on the confidential information furnished by Height Securities. In due course, the SEC may even disclose the identities of the firms that traded on the information. So what?
Unless these hedge funds had direct contact with the House Ways and Means Committee, it’s hard to imagine that they have any culpability in this case. While the information may have been confidential when it leaked, it would be very difficult to prove that the hedge fund traders who acted on the information had the requisite knowledge about the nature of the information. In other words, the conduit through the lobbyist and brokerage firm probably sanitized the leak.
In my view, the identity of the hedge funds is largely irrelevant. In order to make their case, the SEC had to trace the leak into the market. It is hardly surprising that hedge funds received the information from Height Securities and traded on it. We ought to stay focused on the core issue in this case. If Congress is able to fend off the SEC’s subpoena, the 2012 statute will be toothless. While it will still be illegal for Congress to reveal confidential market-moving information, the law will be unenforceable.