The indictment of a New York congressman on insider trading charges, along with his colleagues' holdings in the biotechnology company at the center of the case, highlight how members of Congress face few restrictions on their investments and service on corporate boards, creating the potential for conflicts.
Rep. Chris Collins, a Republican, is the only lawmaker accused by prosecutors of wrongdoing, stemming from his role on Innate Immunotherapeutics's board. The indictment says he tipped his son to negative drug trial results, prompting the son to sell his shares and alert others who did the same. The stock price tanked after the results were made public.
Five other GOP House members bought shares in the Australian biotechnology company in January 2017. That includes John Culberson of Texas, who reported selling his holdings a few weeks before the company was privately informed in June 2017 of the negative results for a drug to treat a form of multiple sclerosis. He said in a statement Wednesday that he didn't have any inside information when he sold.
The other lawmakers -- Mike Conaway of Texas, Doug Lamborn of Colorado, Markwayne Mullin of Oklahoma, and Billy Long of Missouri -- either still hold the stock or didn't sell it in the weeks prior to the public announcement of the negative trial results.
Unlike executive branch officials, who must resign from outside positions and divest assets that could pose conflicts of interest, Congress relies on public disclosure as the main mechanism for keeping lawmakers honest. In the past, that's led to a number of scandals involving investment decisions that resulted in charges of self-enrichment and insider trading.
"There are very few restrictions on members of Congress," said Larry Noble, a former general counsel of the Federal Election Commission, who said members only have to recuse themselves from voting on legislation that specifically benefits a personal investment. "The rationale for it is that almost anything you can do will affect business. It presents real conflicts."
In 2012, Congress tried to address some of the problems by passing the Stock Act, a measure that made it illegal for members of Congress and federal officials to trade on nonpublic information about pending regulatory or legislative decisions. The law also requires them to publicly disclose stock transactions up to 45 days after making them -- in addition to the annual disclosure listing assets and liabilities.
Congress should go further and consider banning lawmakers from serving on boards of public companies and trading individual stocks, said Virginia Canter, chief ethics counsel at Citizens for Responsibility and Ethics in Washington.
"They have an inherent conflict of interest in that their duty as a member of the board is to maximize profit and their duty to the public is to maximize the public good," Canter said.
Even with the additional disclosures, members of Congress face fewer restrictions than those in sensitive positions in the private sector. Wall Street banks typically require employees to disclose all personal investments and get pre-approval for any new purchases and sales. Some firms, including Goldman Sachs and HSBC Holdings, have gone even further, banning certain workers from trading individual stocks.
Collins, one of the biotechnology company's largest shareholders, didn't trade himself and lost millions when the stock plunged, according to the indictment. He was "virtually precluded" from trading his own shares for a number of reasons, including the fact that he was under investigation by the Office of Congressional Ethics for his investment in the company, according to the indictment.
His son Cameron Collins and others who received the tip sold more than 1.78 million shares in the days before the trial results were announced, avoiding losses of $768,000, according to the indictment.
Because biotechnology companies are subject to wild swings in share prices, they have great potential to benefit those willing to trade on inside information. The outcome of clinical trials can send a send a stock soaring or plummeting, offering quick riches or dramatic losses for investors. For that reason, results of the trials are closely guarded.
Innate Immunotherapeutics lost more than 90 percent of its value the day after the company reported that its trial for a multiple sclerosis treatment had failed. The losses followed a more than 10-fold runup in the shares during 2016 as investors bet the company would succeed.
Collins touted the company to at least one fellow lawmaker when the company was soaring. At his confirmation hearing to be secretary of Health and Human Services last year, Tom Price said he invested as part of a discounted stock offering after Collins told him about it. Price, who served in the House prior to his nomination by President Donald Trump, divested his shares in February 2017, according to a disclosure filed with the Office of Government Ethics.
Culberson said he purchased shares in the company after reading an article about it in the New York Times. He sold the shares on June 12, 2017, according to his disclosure paperwork, 10 days before Innate Immunotherapeutics received the results of the clinical trial.
Culberson said in a statement he "did my own research on the internet, bought $13,982 worth of shares, lost $9,194 when I sold them."
Conaway bought between $1,000 and $15,000 of the stock in January 2017, and then an amount in the same range in February, "because it was a promising breakthrough to treat multiple sclerosis, which impacts a close friend of his," said his spokeswoman, Emily Hytha. His office said he sold all of the shares in November 2017 at a loss.
Lamborn purchased shares worth between $15,000 and $50,000 on Jan. 24, 2017, and sold at least a portion of them June 27, 2017, the day it was announced that the company's MS drug had failed the clinical trial. His handwritten disclosure listed the value as "less than $1,000." A spokeswoman said he invested based on his own research.
Lawmakers who invested in Innate but haven't reported selling the shares were Mullin, who bought between $100,000 and $250,000, and Long, who purchased between $15,000 and $50,000. A spokeswoman for Mullin said the congressman invested after hearing Price testify. Long's spokeswoman says he purchased the shares after seeing media reports on the company.
Collins, his son and another defendant pleaded not guilty in a federal court appearance in Manhattan.
"We will answer the charges filed against Congressman Collins in court and will mount a vigorous defense to clear his good name," said Jonathan Barr and Jonathan New, attorneys for Collins. "It is notable that even the government does not allege that Congressman Collins traded a single share of Innate Therapeutics stock. We are confident he will be completely vindicated and exonerated."
Collins, his son and others were sued on a civil claim of insider trading by the Securities and Exchange Commission.
At his confirmation hearing, Price said he never received information that could be considered a stock tip and denied any wrongdoing.
Price isn't named in the indictment of Collins or accused of wrongdoing. A spokesman for Price referred back to his statements regarding the investment during his confirmation hearing in January 2017, in which he said: "Everything I did was ethical, above-board, legal and transparent." The spokesman declined further comment.
Price, who resigned in September 2017 after criticism of his use of private and military planes for travel, accumulated an interest in the company at around 40 cents a share in 2015 and 2016, according to his financial disclosures. By the time he sold the shares in February 2017, they were worth roughly 70 cents each, giving him a profit of more than $150,000, according to ProPublica.