WASHINGTON – A congressman gets a discount stock deal and shares it with a powerful colleague, and then talks up the company to others – while working on legislation that could benefit the company.
That’s just what Rep. Chris Collins did.
And now Democrats wonder if the Republican congressman’s’ involvement in an Australian biotech firm amounts to illegal insider trading. They also say President Donald J. Trump’s choice for health secretary, Rep. Tom Price, may be guilty of the same thing, given that he invested in the same company after Collins told him about it.
So far, though, securities experts say there’s no evidence of illegality here.
And congressional ethics experts doubt that his colleagues on the House Ethics Committee will find that he or Price violated any House rules.
Here’s a look at what Collins did, what the law says about what he did, and what House rules might come into play regarding his involvement in that Aussie biotech firm.
Collins’s Aussie investment
Collins and Innate Immunotherapeutics, the Australian firm in the middle of all this, go back a long way. He invested in the firm in 2005, back when Collins was a businessman, buying his way into one small firm after another in hopes of turning them into something bigger and more profitable.
That hasn’t happened with Innate, but now the company thinks it’s on to something big: a new treatment for progressive secondary multiple sclerosis.
Last June 10, the company’s board – which includes Collins – made a move to fund its big idea. And that move culminated in controversy at the U.S. Capitol seven months later. On that date, the board agreed to put forth a “private placement” of more than 10 million shares of new stock.
Private stock sales are nothing unusual, said Cristian Tiu, who chairs the Department of Finance at the University at Buffalo School of Management. Small publicly traded companies sometimes offer stock to longtime investors and others at a discount in private placements in order to raise funds quickly. And that’s just what Innate did here.
Companies can offer a discount because private placements cut out the middle man – any broker who would sell the stock and take a cut, Tiu said. So on a day when Innate’s stock was trading publicly at just over 20 cents a share, the company’s board approved the issuance of more than 10 million shares in a private placement, at 18 cents a share.Chris Collins bought 4 million of the shares, according to company documents.
Price – then the chairman of the House Budget Committee and now Trump’s nominee to be Health and Human Services secretary – invested between $50,001 and $100,000 in that private placement. The Georgia Repulican last week told a Senate committee that he first decided to invest in Innate in 2015 after hearing about the company from Collins.
As Collins and Price boosted their investment in Innate, a bill called the “21st Century Cures Act” was slowly winding its way through Congress. The bill includes provisions that Collins had pushed for that will speed the approval process for clinical trials in the United States.
Those provisions could help Innate. The company document that spells out the private placement said it would use the funds in part “to seek approval from the United States Food and Drug Administration for an Investigational New Drug programme in the United States.”
As all those facts spilled out in the media and at Price’s confirmation hearings in recent weeks, Democrats attacked.
Grilling Price at a confirmation hearing last week, Sen. Patty Murray, D-Wash., said of the Innate stock deals: “I believe it’s inappropriate and we need answers to this regarding whether you and Congressman Collins used your access to non-public information when you bought (stock) at prices that were unavailable to the public.”
A hemisphere away, Innate’s CEO, Simon Wilkinson, wondered what all the fuss was about.
“The placements are not ‘special,’ or ‘exclusive,” or ‘sweetheart,’ or ‘insider,’ or any of the other colourful terms that have been used in some recent U.S. media reporting!” Wilkinson said via email. “They are ‘Private’ because they are not ‘Public’. “
What the law says
Insider trading – buying and selling stocks on the basis of inside information that the public doesn’t have – is illegal. And in a 2012 law called the Stop Trading on Congressional Knowledge (STOCK) Act, Congress made clear that insider trading by federal lawmakers is illegal, too.
Yet there is no proof to date that Collins and Price bought into Innate’s private placement based on insider information either about the company or about the legislation that could help it.
“These two members of Congress are being pilloried with speculation for which there is no clear evidence,” said Jan Baran, a lawyer who represents many House Republicans on campaign finance and ethics matters.
The STOCK Act requires lawmakers to publicly report their stock trades, and both Collins and Price have done that.
And while the law bars lawmakers from taking part in initial public offerings, neither the STOCK Act nor any other federal law bars lawmakers from investing in private placements.
That being the case, Baran added: “I don’t understand what the issue is.”
Meredith McGehee, strategic advisor at the nonpartisan Campaign Legal Center, said the issue is what Collins and Price knew before their investment – and whether the investing public at large didn’t know the same thing.
“Was there an exchange of potential inside information?” she asked. “We don’t know that, but it is a legitimate question.”
Collins maintains that he did nothing wrong.
“There was nothing done that was insider trading or unethical,” Collins told CNN’s Wolf Blitzer this week, noting that he is Innate’s largest investor and thus well-versed in the company when he discussed it with Price.
“I talk about it all the time, just as you would talk about your children,” he added. “Certainly many of the people I’ve talked about it (to), and he was one of the few ... he decided on his own to make an investment.”
While McGehee still would like to know more about what Collins knew at the time of his investment, she acknowledged that suspicions alone don’t make for an insider trading case.
“It’s harder to prove a violation of law than it is a violation of House rules,” she said.
What the rules say
Two House rules could come into play if the House Ethics Committee decides to review the investments that Collins and Price made in that Aussie biotech firm.
First, House and Senate ethics rules have broad prohibitions on the receipt of gifts by members of Congress.
“It is incredibly broad, and intentionally so,” said Donna M. Nagy, executive associate dean and C. Ben Dutton professor at the Indiana University Maurer School of Law.
The rules bar lawmakers from accepting “a gratuity, favor, discount, entertainment, hospitality, loan, forbearance, or other item having monetary value” of more than $50.
Of course, a private stock placement comes at a discount.
“And shares in a private stock offering could be viewed as favors,” said Nagy, an expert in stock ownership among lawmakers.
That’s one reason why Nagy thinks lawmakers should be barred from taking part in private placements. In fact, she proposes going one big step further and banning lawmakers from directly owning stock, just because they inevitably end up voting on bills that affect their holdings.
House rules already include a prohibition on lawmakers using their office for personal gain. And that rule could come into play, too, given that Collins was heavily involved in writing the parts of the 21st Century Cures Act that could benefit Innate.
But several experts interviewed for this story said they did not expect Collins to face disciplinary action under the House rules. They noted that the 21st Century Cures Act stands to benefit all drug manufacturers and not just Innate, which makes it difficult for anyone to argue that Collins’ legislative actions were driven solely by his desire for personal gain.
Asked if Collins might have violated the rule against using his office for personal gain, McGehee, of the Campaign Legal Center, said: “I would not have high expectations that the House Ethics Committee would use that standard. They are so incredibly toothless.”
If that’s the case, the controversy of recent weeks may leave Collins as nothing more than a wealthier man. The value of Innate’s stock has skyrocketed since the private placement, meaning Collins’ $720,000 investment in last summer’s private placement was worth $5.3 million by this week.
Collins could not sell those shares without tanking the stock, given that it is such a small company, said Anthony Ogorek, an Amherst financial planner. But Ogorek said Collins and the other investors really stand to cash in should some giant pharmaceutical firm decide to buy Innate to profit from its new multiple sclerosis drug.
The congressman’s public standing could suffer, though.
“Maybe he’s as honest as the day is long, but this looks like hell,” Ogorek, a Republican, said of Collins’ involvement in Innate. “We send you to Washington for public service, not self-service.”