California congressman brad sherman chaired the hearing. The subcommittee will come to order. Without objection, the chair is authorized to declare a recess at any time. The full committee not on the subcommittee are authorized to participate in todays hearing. Members are reminded to keep their video function on at all times. Members are reminded that they are responsible for muting and unmuting themselves and to mute themselves after theyre finished speaking. Consistent with the regulations accompanying the resolution, the staff will mute members and witnesses as appropriate when not recognized in order to avoid inadvertent background noise. Members are reminded that all house rules relating to order and decorum apply to this hearing. This hearing is entitled Insider Trading and stock option grants, an examination of correspondent integrity in the covid19 pandemic. We know that we have votes on the floor. We will not have any further delays of this hearing in order to allow members to vote. Members should go vote and return and while we all have our part of the alphabet to vote in, im sure there can be some accommodation made. If its your turn to ask questions, you can vote with others not of your same alphabet alphabetic characterization. When im voting, mr. Meeks has agreed to serve as chair until my return. Ill recognize myself for five minutes for an opening statement. Our Capital Market system is unique in history up until about 150 years ago every Business Enterprise was made up of people who knew each other, who were family members, who had personal trust and a business could only be as large as a group of people could finance and put together and Investment Opportunities were limited to those that you happen to be able to know. You wouldnt trust your money with some enterprise of strangers, and of course you didnt have liquidity since you could sell your investment pretty much only to somebody else who knew those. And so at that point, people could rely on personal trust. Today investors turn their money over to anonymous insiders, Corporate Boards, executives who theyve never met. And they know that the insiders have far more information, attention and power. And they they dont have the buyings of a personal trust. They rely on law to make sure that the insiders are treating the investors fairly. Ill continue. We had a little technical problem there. We now apply that system to the covid pandemic in which nearly 200,000 americans have lost their lives and in which many firms affected by this pandemic are having sudden increases or decreases in their value. Many pharmaceutical firms, for example, even the suggestion of involvement of federal programs can cause shares to shoot up in value. Following this sort of announcement, kodak and others saw their stock prices rise by over 400 . With this trend in mind, the fcc has remind companies that in this pandemic, they should not only abide by law but practice, quote, good corporate hygiene. Chair clayton has reiterated these views in a recent letter regarding todays hearing and will be made part of the record without objection. Admonishments are not laws and regulations. Admonishments will not deter the truly greedy. We have to design our laws and regulations to govern those who cannot be governed by mere admonishments. For example, while taxpayers have invested 3. 1 billion in federal contracts with moderna to develop a vaccine since april, executives at these firms have sold over 60 million in their companys stock. We need to know that they were not taking advantage of any inside information that perhaps their stock had gone up too high. Of greater concern is activity of kodak with the announcement of a government loan that raised insider trader concern. In particular, we have a concern there on Stock Options and their grant dates. When all Equity Compensation needs to be improved by shareholders. When Shareholders Approve a plan that says that Stock Options will be granted with a stock option exercise price equal to fair market value on option grant date, they believe that executives who get these Stock Options will live by that. If instead the fair market value doesnt reflect non Material Information, Insider Information thats going to be announced the next day, or the next week, then shareholders have been duped into approving Equity Compensation that does not reflect real market value. I want to thank the insiders at kodak who have added insult to injury. They granted Stock Options at what they knew to be an unfairly low price. Then they spent a lot of shareholder money on a Corporate Law firm to tell them it was legal. If any major firm can say this is legal, it shouldnt be. And so we have to deal with the issues of what is called spring loading where Shareholders Approve a Compensation Plan based on fair market value. It has to be fair market value with the market in when the market has knowledge of the material transactions that the insiders know about. So i look forward to exploring this with our witnesses. And we will now hear from the Ranking Member for four minutes for his opening statement. Thank you, mr. Chairman. Its famously been said, the definition of insanity is doing the same thing over and over again and expecting different results. Here we are once again holding a hearing on an issue we already had a hearing on. Theyve been passed by the representatives. So i ask the committee, why are we spending precious time and resources on bills that have passed the house of representatives nine months ago just because we keep having hearings on bills that have already passed doesnt mean that the senate is going to take them up. Dont get me wrong, Insider Trading is not only wrong, its illegal. And not only does it hurt the integrity of our Capital Markets, but it hurts our main Street Investors as well as mr. And mrs. 401 k and we agree that Insider Trading must be punished to the fullest extent. The subcommittee should not be used as a name and shame games for companies for wrongdoing and, yes, the facts surrounding one company at first certainly appear to be suspicious and need to be fully investigated. Thats not our job. The securities and Exchange Commission is tasked with ensuring market integrity and under the act of 1934, the sec has the power to bring Enforcement Actions in instances of Insider Trading. During 2019, the commission brought 862 Enforcement Actions to hold individuals, issuers, Financial Institutions and others accountable, sending a message to market participants. Last years results speak for themselves. 862 Enforcement Actions obtained judgments and orders totaling more than 4. 3 in penalties, obtained 600 bars or suspensions against market participants, suspended trading in the securities of 271 issuers and returned nearly 1. 2 billion to harmed investors. So instead of playing judge, jury and executioner in the court of public opinion, the committee should be focused on the solutions that support job creators of all sizes, particularly our hardhit Small Businesses. It would reduce regulatory costs and burdens and improve and expand access for investors to better put their money to work and create more Investment Opportunities for investors. Im not just going to curse the political darkness. Im going to try to light a policy candle here and here is a partial list of what we should be discussing and working on today. Hr4860, crowd funding amendments act introduced by the Ranking Member. We have my legislation, hr609, the Small Businesses sales and brokers simplification act. Something weve dealt with for four congresses and a row. Helping angels lead our startups, the main street growth act, alleviating stress test burdens to help investors act, modernizing disclosures for investors act introduced by the Ranking Member, another one of my bills, improving Investment Research for small and emerging issuers act, helping startups continue to grow act, regulation a plus improvement act introduced by the somebody ranking, i could go on and on. But the list is exhaustive and weve got much more to do. But instead of Holding Hearings on legislation that the house has already acted on, lets move forward on Bipartisan Solutions that deliver the results the American People deserve from the Financial Services committee. We know that there are problems. We need to address those problems. This isnt going to do it, unfortunately. I would point out that one part of this hearing is on my bill to deal with spring loading which has not been considered by this committee let alone the full house and bans a practice that i think will discover both wrongful and unfortunately legal. And so we do have a strong purpose to have this subcommittee hearing. I now recognize the Ranking Member, the gentleman from north carolina, for one minute. Look, Insider Trading is wrong. We can all agree on that. The sec i think we can all agree, is doing a really good job to pursue bad actors. What we should be spending our time on as my friend just said, we should be spending time on identifying solutions to strengthen our economy, strengthen our economic recovery and help our workers come back, come back safely to the workforce after the virus, after we get testing and treatment going, and today i introduce a bill to do just that. The gig worker Equity Compensation act. Today an increasing share of our workforce does not want to be bound by traditional constraints such as an office or set hours or traditional employer employee relationships. These workers are critical in our technologically driven world. It allows them to share in the same economic benefits of owning the businesses theyre helping to improve. So todays hear should be focused on that type of solution not just a rearfacing set of issues in an election year. Thanks so much. Ill point out that spring loading is legal until this Committee Makes it illegal and its just as long as in regular order, if we wish to debate, the chair can debate. But you should not opine about everyone elses opinion. That is not in good form for the chair. You were not recognized. You did make your points clear. When people question whether this is a legitimate hearing, it is appropriate to spend time responding. Today we welcome the testimony of dr. Jill fish and mr. Gavin martin. Mr. Claypool is a Research Director where he focuses on corporate crime and wrongdoing in the ways in which Corporate Power distorts our democracy. Dr. Fisher is the distinguished professor at business law and codirector of the institute of law and economics at the university of pennsylvania law school. Mr. Franco is chair of the government investigations and securities enforcement practice at dickinson wright. He served as senior counsel for the secs division of enforcement. And mr. Martin is Senior Vice President and general counsel for the society of Corporate Governance where he leads the societys efforts related to governance laws and regulations. Your oral testimony will be limited to five minutes. And i will ask you to respect our rules here by wrapping up your oral testimony. Without objection, your written statements will be made a part of the record. And so we will now recognize our first witness, mr. Claypool. Thank you. Chair sherman, Ranking Member, members, on behalf of more than 500,000 members and supporters of Public Citizen many of whom are investors and hopeful for the Timely Development of safe and affordable covid19 treatments, we welcome this probe into Insider Trading. The reported events are concerning. The chair described the kodak concerns well. Additionally, moderna announced that all participants in the first phase of its covid19 trial who received its vaccine developed some antibodies. This is good news that pushed up the stock to an alltime high of 87. Several executives modified existing or adopted new plans. In the days following the announcement, moderna ceo and other executives and funds controlled by the board sold about 90 million worth of company shares. Remember, its taxpayer money funding 100 of this work to develop a covid19 vaccine, all of it. Now, a study published by a coalition, they found that stock market value for the eight Biotech Companies on the s p 500 grew by 130 billion between january and august. And executives and insiders from three of these Companies Sold at least 370 million in Company Stocks inflated by news of government awards and trial results. Meanwhile, npr is reporting that the number of sec Enforcement Actions has plummeted to its lowest point in decades. Public Citizen Research has documented declines in whitecollar crime enforcement at the fec and across the government. If the agency is following the trump administrations orders to stand down as numerous governmentled policies, then that allow deserves a hearing. As for legislation, we look forward to full house passage of the bill requiring the s. E. C. And cfpb to provide monthly reports. They will wa we applaud the house for approving the Public Citizen endorsed Insider Trading reform bill, establishing a clear law against illegal trading will serve prosecutors well. We also applaud package of the 8k trading gap bill and the 105b1 plan. One promising deterrent is compensation deferral efforts to place a percent of compensation in a pool. Should the later be found to misuse aid of a law or any other misconduct that results in fines, then the pool of senior managers deferred pay would be used to fund the fines. A concept exists in separate bills. Its crucial for congress to condition the trillions of federal aid so it is not diverted into the pockets of pandemic profiteers. We applaud the contributions to the h. E. R. O. S. Act and look forward to working with you as you fashion the next round of recovery and stimulus legislation. I welcome your questions and may draw on Public Citizen experts with withritten responses where relevant. This may be the first time in decades a witness has concluded at well less than five minutes. The witness did not choose to yield his remaining time to me and accordingly, i will recognize the doctor. Doctor, you may be on mute . Do i have it now . Yes. Okay, thank you, sorry. Chairman, Ranking Member, and members of the subcommittee, its an honor to participate in todays hearing. Thank you to chairman sherman for the kind introduction. Just a point of clarification, im just a lowly law professor, not a doctor. Thank you for the promotion. I want to take a few minutes to put the reported events to which chairman sherman and rick referred in a little bit of context. In the past six months as we all know, the Capital Markets have experienced unprecedented levels of volatility and trading activity. I know the chairman has provided this subcommittee in earlier testimony with data on both the high levels of trades and the incredible price swings that weve seen not just in pharmaceutical companies but across a range of industries that have been affected by the pandemic. And these fluctuations create the opportunity for manipulation, for misconduct, selfdealing, theyve drawn considerable media attention. Ive written about securities frauds, s. E. C. Enforcement and Insider Trading and i want to focus in my opening remarks on a review of the regulatory structure and the challenges that the market environment imposes on that regulatory structure. The activities that i understand the subcommittee to be interested in today involved three distinct sets of legal issues, disclosure, instinct, t and Insider Trading. So the first issue is disclosure integrity. Some stories weve heard say issuers have made inaccurate or overly optimistic disclosures to drive up their stock prices. This can be for various reasons, ranging for enabling insiders to sell and make a lot of money, increasing the value of Stock Options, or facilitating the issuers access to the Capital Markets. Let me be clear, existing securities regulation requires disclosures to be accurate. False and misleading statements, those that are made with an effort to dis