Barry Temkin, Left, and Mitchell Markarian, Right.

On March 19, 2020, National Public Radio broke the news of a series of suspicious stock trades by U.S. Senator Richard Burr of North Carolina, the chair of the Senate Intelligence Committee and a member of the Health and Welfare Committee. On May 14, Burr resigned his chairmanship of the Intelligence Committee, following an FBI raid in which Burr's cellphone and other records were seized.

Burr's suspicious stock trades followed confidential briefings on the Coronavirus in the Senate Intelligence and Health Committees. According to the Wall Street Journal, Burr learned confidential, non-public information at a closed-door briefing on Jan. 24 to the Senate Health Committee by top federal public health officials, including Dr. Anthony Fauci of the National Institute of Allergies and Infectious Diseases.

On Feb. 13, as media reports of the oncoming Coronavirus were beginning to gain traction, Burr sold between $628,000 and $1.7 million in stocks in 33 transactions on a single day, including six-figure positions in hotel and airline stocks likely to be negatively affected by the pandemic. See, Justice Department Looking Into Senator's Stock Sell-Off, https://www.npr.org/2020/03/31/824958381/justice-department-looking-into-senators-stock-selloff.

On Feb. 19, 2020, the Standard & Poor 500 Index reached an all-time high, at 3386. Few U.S. political leaders were publicly voicing alarm about the Coronavirus, which was then raging in China and Italy. At the time, the United States had only 15 confirmed cases of COVID19, a number that would ultimately swell to over 1.7 million. President Donald Trump predicted that the virus was likely to disappear, "like a miracle."

In a private luncheon on Feb. 27, Senator Burr confided to a group of high-end donors that the Coronavirus "is much more aggressive in its transmission than anything that we have seen in recent history." While making reassuring public statements to the contrary, Burr was privately warning donors that the growing pandemic might force school and business closures and bring most travel to a halt.

On Feb. 25, Dr. Nancy Messonier, the director of the National Center for Immunization and Respiratory Diseases, publicly stated that the virus was likely to spread in the U.S., announcing that, "It's not so much a question of if this will happen anymore but rather more a question of exactly when this will happen and how many people in this country will have severe illness." (https://www.cnn.com/2020/02/25/health/coronavirus-us-american-cases/index.html)

The markets plunged. On Feb. 28—two weeks after Burr's multiple stock sales—the S & P 500 fell over 10 percent, from its high of 3,386 to 2,954. The Dow Jones Industrial Average lost over one third of its value in three weeks, dropping from a high of nearly 30,000 in February to a low, on March 23, of just over 18,000.

Regulation of Trading Under the STOCK Act

The question arises whether Senator Burr was trading on publicly available information, or rather upon inside information that he obtained by virtue of his membership in the Senate Intelligence and Health and Welfare Committees. The distinction is important, as members of Congress are precluded from trading based on non-public information that they gain by virtue of their congressional service.

In 2012, Congress passed the Stop Trading on Congressional Knowledge Act, predictably abbreviated as the STOCK Act, which amends the Securities Exchange Act of 1934 to prohibit trading on non-public information for personal benefit by members of Congress, their staffers, federal judges and executive branch employees.

Covered government employees and congress members are deemed under the statute to hold a position of trust, and may not use "any nonpublic information derived from the individual's position…or gained from performance of the individual's duties, for personal benefit." See STOCK Act, 15 USC Section 78u-1(g). Violations of the STOCK Act are subject to both criminal and civil enforcement. Of relevance here, the STOCK Act also requires Members of Congress and the executive branch periodically to publicly file and disclose their securities and futures trades, and prohibits them from receiving special access to initial public stock offerings.

Comparison With Prior Law

The STOCK Act is significant, because under prior law, insider trading enforcement actions were limited to corporate insiders and others (including lawyers) owing fiduciary duties to the issuers of publicly-traded securities, and other parties to securities transactions. For example, in Chiarella v. United States, a printer's insider trading conviction was reversed because, as an employee of a financial printing house, he did not owe a fiduciary duty to the securities issuer or merger partner. Chiarella v. United States, 445 U.S. 222 (1980).

According to the Supreme Court, unlike a corporate officer or director, Chiarella did not enjoy a relationship of trust and confidence with either party to the merger. Rather, "a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation." 445 U. S. 222, 228 (1980).

Similarly, in Dirks v. SEC, a financial analyst who was investigating an issuer's financial improprieties did not owe a fiduciary duty to the issuer, and was under no obligation to abstain from trading in the securities, or disclosing the information to others. Dirks v. SEC, 463 U.S. 646 (1983). The Supreme Court affirmed the conviction of a lawyer in US v. O'Hagan because of the law firm's fiduciary duty to its client, a bidder which was making a tender offer for a target company. U.S. v O'Hagan, 521 U.S. 646 (1997).

Case Against Congressman Collins

It is the rare case in which a member of Congress is an officer or director of a publicly traded corporation, or otherwise owes a fiduciary duty to a securities issuer. Such a rare case was presented in the recent criminal prosecution of U.S. Congressman Christopher Collins of Buffalo, New York, who pleaded guilty in 2019 to tipping off his son to confidential information that a biotechnology company's new therapy for multiple sclerosis had failed a critical clinical trial, prompting his son to sell over 1 million shares in the company, which subsequently lost over 90% of its value. (See, Ex-Rep. Chris Collins Pleads Guilty to Insider Trading Charges, https://www.nytimes.com/2019/10/01/nyregion/chris-collins-guilty-congress.html.)

Representative Collins was a director of the company, Innate Immunotherapeutic, and thereby was a fiduciary to it. Collins learned of the failed clinical trial in an email from the company's CEO, in his capacity as a director, and not as a member of Congress. He was charged with violating the 1934 Securities Exchange Act, wire fraud statutes, and lying to the Federal Bureau of Investigation—not for violating the STOCK Act.

Did Burr Trade on Public or Private Information?

Senator Burr, unlike Representative Collins, was not an officer or director of the issuers whose stock he sold in February. Thus, his liability, if any, would necessarily turn on whether he traded based on confidential information that he learned in his capacity as a U.S. Senator. The question is whether Burr had access to and traded upon non-public information from Dr. Fauci and other federal scientists about the risks of the impending COVID-19 pandemic.

If the information in the closed door briefing was publicly released at or about the same time, that would militate against liability. Senator Burr has tweeted that he did not trade on non-public information, but rather, "closely followed CNBC's daily health and science reporting out of its Asia bureaus at that time" and relied "solely on public news reports." (Why Burr's Stock Sales Are Easier to Condemn than Prosecute, https://www.politico.com/news/magazine/2020/03/23/richard-burr-stocks-trading-coronavirus-prosecute-142976) If, on the other hand, he traded on confidential information which remained behind closed doors, then Burr would be more likely to face exposure.

Conclusion

The outcome of the investigation into Senator Burr's trading may depend on the nature and timing of the confidential briefings and public disclosures about COVID-19, as compared to the nature and timing of Senator Burr's trades. Evidence that Senator Burr relied upon both public and non-public information to make his stock trading decisions could muddy the waters of a potential criminal proceeding, with its attendant legal standard of proof beyond a reasonable doubt. But the Securities and Exchange Commission would encounter only a civil burden of proof, which could be more readily proven. And, in any event, Senator Burr faces a Senate ethics investigation, and bipartisan criticism for the optics of publicly urging calm while privately dumping large quantities of his stock portfolio.

Barry Temkin is a partner at Mound Cotton Wollan & Greengrass LLP, and an adjunct professor at Fordham University School of Law. Mitchell S. Markarian is an attorney in New York, and a claims examiner for Financial Institutions at OneBeacon Insurance Group. The views expressed here are those of the authors and not those of OneBeacon, Fordham University or Mound Cotton. Alan Vinegrad, partner at Covington & Burling, provided assistance in the preparation of this article.