Ways Investors Gain 'Political Intelligence' Facing Public Scrutiny

By Jia Lynn Yang, Tom Hamburger and Dina El Boghdady, The Washington Post

10 May 13

ith their boss playing a busy role in the push to overhaul the country's immigration laws, staffers for Sen. Marco Rubio (R-Fla.) still have found time to talk with an unlikely interest group: Wall Street analysts.

Investors are interested in the bill because of a handful of provisions that could hurt the profit margins - and stock prices - of outsourcing companies that require a large volume of short-term visas to bring foreign workers to the United States.

In recent days, Enrique Gonzalez, an immigration lawyer who in January became Rubio's immigration policy counsel, has answered questions about the bill over the phone with a financial analyst, according to the senator's spokesman. Another staffer met last week with an analyst from the investment bank Barclays Capital, who quickly revised his assessment of the bill's potential cost to a major outsourcing firm.

A number of current and former congressional staffers said talking with investors and research analysts is common, akin to answering questions from lobbyists and reporters about intricate pieces of legislation. In March, a top staffer for Sen. Orrin G. Hatch (R-Utah) spent half an hour talking to investors on a private conference call about health-care policy.

But the ways investors acquire "political intelligence" are facing public scrutiny since federal investigators issued subpoenas last month in a case in which a Washington brokerage advised clients about a Medicare funding decision before the administration announced it, triggering a surge in health-care stock trading.

Such information is often distributed to narrow audiences, whether in an analyst report that's given to clients and those with special subscriptions or, as in the call with Hatch's staffer, information in a private call given straight to big investors such as hedge funds.

The Barclays analyst, for instance, issued a report to investors titled "Meetings in Washington Provide Incremental Insights on Immigration Bill." The analyst described "key takeaways" from his sessions with not only Rubio's staff but also the offices of Sen. Charles E. Schumer (D-N.Y.), another sponsor of the bill, as well as Rep. Joaquin Castro (D-Tex.) and other House staffers.

Most notably, the analyst said he gained a "new understanding" of the scope of regulations that would apply to outsourcing firms - that he was mistaken about the bill, and that the impact would not be as negative as had been anticipated. He thought that the market, too, misunderstood the bill, and that the market's pricing "overstates the negative impact of the legislation for the first several years."

Congressional staffers argue that the information is accessible to the public. A Barclays spokesperson said its published reports are distributed to clients and are available to the media upon request. And in the case of the immigration bill, there is no evidence that improper trading has resulted from these meetings or calls.

"Our office's policy is to be as transparent and open as possible when people ask us questions about issues we're working on," said Alex Conant, a spokesman for Rubio. "Our staff have had dozens of meetings and calls in recent weeks with dozens of individuals and groups to discuss immigration reform. We welcome people's input, and work hard to answer questions about the legislation."

Schumer's and Castro's offices said they did not discuss the scope of the measure's outsourcing provisions with the Barclays analyst.

Analysts' increasing eagerness to get the latest information from Capitol Hill reflects the financial world's growing fixation on the wide swath of actions in Washington that can move markets - from the immigration bill to Medicare rate-setting to the decision to approve or block the Keystone XL pipeline.

For example, in the weeks before and after the immigration bill was introduced last month, stocks for the New Jersey-based outsourcing firm Cognizant dropped about 21 percent, in part because of the perception that new restrictions would hurt its business.

Mining information in Washington and then trading on it has fostered a bustling political intelligence industry of lawyers, lobbyists and boutique firms. They have a striking level of access to both Democratic and Republican lawmakers, often gathering insight that outstrips what's available to ordinary investors.

Unlike many government agencies that have strict rules about how information is shared, the Hill has a more freewheeling culture in which lawmakers and their staffs view the open exchange of information as being part of the political tradition of the legislative branch.

Legal experts said no one appeared to be breaking the law in the meetings whose details have surfaced. Laws dictate that sensitive information must be material and nonpublic to qualify as "insider."

"Merely talking to an analyst doesn't mean insider-trading liability," said Erik Gerding, a professor at the University of Colorado Law School. "I think a prosecutor would have a hard time bringing a case."

But ethics experts said potential problems exist.

Having congressional officials disclose potentially market-moving information to the investment community amounts to "legally protected favoritism," said Richard Painter, who was a chief ethics lawyer for the White House under President George W. Bush. In most cases, neither the disclosure nor the trading violates securities law, Painter said. But the practice is problematic, and contradicts federal rules imposed on publicly traded companies.

For more than a decade, the Securities and Exchange Commission has required officials at public companies to distribute important information broadly to the public, and avoid feeding it to a select group that could trade on it ahead of other investors.

"In the corporate world, if you tell one analyst or one investor, you have to tell everybody," Painter said. "There's no reason the same restrictions shouldn't apply to government officials."

Legislation is so complex and in flux that even among analysts there can be disagreement about how it can hurt the bottom lines of different firms, making access to politically connected individuals all the more valuable.

This certainly holds true for the immigration bill, a sprawling piece of legislation with hundreds of amendments.

Ron Hira, a public policy professor at the Rochester Institute of Technology, has been following the debate on H1-B short-term visas, and he said that most of what he read in the Barclays report was familiar and had been publicly reported.

But he said that some language regarding the scope of new regulations on H1-Bs is still open to interpretation and that the perspective of a top legislative aide such as Gonzalez would be important to know. Rubio's office declined to make Gonzalez available for comment.

A spokesperson for Castro, a freshman, said the congressman's staff does not have a habit of meeting with investors or investment analysts. However, a member of his staff said that Castro is passionately interested in immigration issues and that his legislative staff talks with most anyone on that topic. Castro is not directly involved in writing or negotiating immigration legislation, the staffer said.

Schumer spokesman Brian Fallon said the New York senator requires his staff to answer questions about the bill he sponsored "whether they come from other Senate offices, New York constituents and companies or the media."

Others on Capitol Hill are worried about the level of contact between staffers and Wall Street.

Rep. Louise Slaughter (D-N.Y.) said she has become so concerned about congressional staff providing sensitive information to a small group of beneficiaries that she is exploring legislative remedies, including restrictions on future employment for Hill staffers, such as the "revolving-door restrictions" that now apply to the executive branch.

"We believe that the sensitive information we are privileged to have as part of our federal jobs ought not be provided in a way that benefits one small class of person," she said.

Jonathan R. Macey, a professor at Yale Law School, said the image of Wall Street getting special access undermines confidence in government and the markets.

"It certainly creates the terrible impression that this is an insider game, and if Wall Street doesn't control Washington already, then they're pretty darn close," he said.