Rise in stock ownership among lawmakers brings ethics concerns

November 23, 2009

When Sen. Max Baucus (D-Mont.) this summer proposed a $4 billion tax on medical-device firms to help offset the cost of health-care reforms, an unusual mix of lawmakers joined in a chorus of protest.

Sen. John F. Kerry (D-Mass.), a liberal from the Northeast, warned that the tax could undermine companies developing “new technology that saves lives and money.”

Rep. F. James Sensenbrenner (R-Wis.), a conservative from the Midwest, cautioned that the tax would “harm our districts’ economies, impede innovation and ultimately deny access to lifesaving medical devices.”

Because their politics rarely align, the shared opposition underlined something else Kerry and Sensenbrenner have in common: millions of dollars of family wealth invested over the years in the companies that make medical devices.

This juxtaposition of investments and policy has become more common as stock ownership has soared on Capitol Hill over the past two decades. The investments increasingly put lawmakers in the position of voting or advocating on matters that could affect their personal wealth, whether the lawmakers realize it or not.

That issue has become more acute over the past year. Congress has intervened in unprecedented ways into the private sector, allocating billions of dollars for stimulus projects, federal bailouts and health-care reform.

Kerry and Sensenbrenner are wealthy men, and under congressional ethics rules are entitled to invest in the stock market as other Americans can. Medical-device investments are a relatively small part of their large portfolios, and both men say through spokeswomen that their positions on the tax were driven by concerns about their constituents and the health of the industry, not by their families’ investments.

But growing investments on Capitol Hill, such as those in the medical-device industry, raise questions about appearances of conflict. Even if lawmakers have done nothing wrong, ethics specialists said, such apparent conflicts are troubling because it is often impossible to know whether the lawmaker is acting in the interest of citizens or their own portfolios. On Wall Street and in federal agencies, the suggestion of a conflict is often the basis for an investigation.

The uncertainty created about lawmakers’ motivation undermines confidence in Congress and the political process, the specialists say. More than half of all lawmakers own stock. In the House, the number of lawmakers trading stock jumped from 91 in 2001 to 259 today, according to academic researchers and the nonprofit Center for Responsive Politics. That includes 68 lawmakers who, as of the beginning of 2008, individually owned more than $100,000 in stock, not including mutual funds.

Some of the most popular stocks in Congress are also widely held across the country, including General Electric, Microsoft, Bank of America, Procter & Gamble and other blue-chip names. Some of these companies are also government contractors or bailout recipients. Top industries include oil and gas, electronics and health-care products. In the medical-device field alone, 108 lawmakers collectively own $6 million to $14 million worth of stock.

The rise in congressional investing has come at a time when longstanding ethics rules leave it almost entirely to the lawmakers themselves to decide whether investments pose a conflict. Although Congress has imposed numerous strict conflict-of-interest rules on federal agencies and private business, the rules it has set for itself are far more permissive.

The congressional financial disclosure system, an annual form filled out and policed by members of Congress, is supposed to help keep lawmakers honest and reassure the public by making stock holdings transparent. But the reporting is delayed, information is limited and the paper forms prevent the computer analysis of trading that is commonplace elsewhere.

Some lawmakers and ethics specialists say a more effective system could easily be achieved through digital reporting and rules requiring more precision.

“It is time for Congress to take a fresh look at the financial conflict-of-interest rules, and how they should be enforced -- starting with a thorough overhaul of the disclosure process,” said Harvard University government professor Dennis F. Thompson, author of “Ethics in Congress.” “Stronger regulation of financial conflicts is necessary not so much to prevent quid pro quo deals, but to check the erosion of trust in government,” he said.

Successful investors

Lawmakers are more than just ardent investors: They’re unusually successful ones, according to two statistical studies done several years ago by a group of academic researchers.

After examining trading data contained in financial disclosure forms from 1985 to 2001, the researchers found that congressional portfolios have regularly outperformed those of average Americans over the years. The report said a “portfolio that mimics the purchases of House members beats the market by 55 basis points per month.”

The researchers, whose findings were presented at a congressional hearing in July, said the statistics suggest that those unusual returns must be based on lawmakers’ access to “government and important social contacts.”

“No one else has this kind of success, not even mutual fund or hedge fund managers,” said Georgia State University professor Alan J. Ziobrowski, one of the researchers. “It’s no accident.”

Congress has generally maintained a hands-off approach to congressional investing. House ethics rules, for instance, say lawmakers do not have to take action to avoid financial conflicts that might arise as a result of a vote, as long as they are “a member of a class” of investors in an industry, and not one of a few investors in -- or owners of -- a business that would be directly effected by the legislation.

Though the House and Senate each has an ethics committee, they have operated largely behind closed doors, and outside groups call them ineffective. The inadvertent release of documents this fall showed that the House ethics committee was weighing allegations against a few dozen lawmakers, none involving conflicts with stock holdings.

Last year, the House created the Office of Congressional Ethics to serve as a nonpartisan, independent review board. The office has been aggressive, according to publicly released documents. But the House ethics committee has suggested the board of pushing too hard on some matters, according to documents and interviews.

Both houses of Congress have ethics codes. But little attention is devoted to investments in the 444-page House Ethics Manual. Regarding financial interests and voting, the manual cites a precedent from 1907 in support of a permissive approach. In the rules, a lawmaker’s responsibility to vote and represent constituents generally trumps questions about financial conflicts.

“Voting on matters before the House is among the most fundamental of a Member’s representational duties, and historical precedent has taken the position that there is no authority to deprive a Member of the right to vote on the House floor,” the manual states.

In the same paragraph, however, the manual cites another principle: “Members may not use their congressional position for personal financial benefit.”

Lawmakers can ask the ethics committees for written guidance on specific matters.

Thompson, the Harvard government professor, said Congress should not allow its traditions to block establishing ethics rules that address the current reality of lawmakers’ personal finances.

“The problem is not that any individual member may be corrupt -- I assume most are honest,” Thompson said. “The problem is structural.”

A growing industry

Since the 1990s, the medical-device industry has been a favorite among aggressive investors. Fueled by a mix of technological advances, venture capital investments and regulatory changes, the industry grew rapidly.

Successful devices include everything from the most simple -- tongue depressors and bedpans -- to high-tech stents, heart valves and hip-joint replacements.

Industry revenue in the United States doubled over a decade to about $140 billion in 2008, according to Venkat Rajan, a medical industry analyst at Frost & Sullivan. At the same time, the Standard & Poor’s health-care equipment index, which includes stocks of medical device companies, increased nearly three times the rate of the broader stock market.

The price of Medtronic, a stock owned by several lawmakers, rose from $7 in 1995 to $50 early last year. As with other companies, the stock price has dropped to about $40 because of economic turmoil and questions about the impact of health-care reform.

“It was a go-go time,” Jan Wald, senior medical technology analyst at Noble Financial Group.

Wald said the industry received a boost in 1997, when Congress approved the FDA Modernization Act, which streamlined the device approval process at the Food and Drug Administration.

The law followed years of industry lobbying. It created a fast-track approval process for many devices.

A co-sponsor of the law was Rep. Fred Upton (R-Mich.), who the previous year had sponsored legislation making it easier for medical-device companies to export their products.

Upton had invested in the medical-device industry before he sponsored those pieces of legislation. He owned stock in Stryker, a medical company based in his district. In the beginning, he held a relatively small amount in two trusts that in 1995 were valued at $2,000 to $30,000, documents show. Over the years, his investment grew, reaching between $350,000 and $750,000. His holdings dropped last year to below $500,000.

“Fred is a proud supporter of Stryker, a locally grown company that has defied the poor business climate in Michigan and developed into a global leader in the medical community,” Upton spokesman Sean Bonyun said. Stryker accounts “for over 1,600 good-paying jobs in [southwest] Michigan at a time when our state’s unemployment hovers at 15 percent.”

In a statement, Bonyun said that Upton’s transactions are “a matter of public record and his finances are properly disclosed on an annual basis under the watchful eye” of the ethics committee.

About two dozen lawmakers have frequently invested in a constellation of medical-device companies, including industry leaders such as Abbott, Baxter, GE, Johnson & Johnson, Medtronic and Stryker. In addition to Kerry, Sensenbrenner and Upton, lawmakers with significant holdings include Sen. Dianne Feinstein (D-Calif.), Rep. Jane Harman (D-Calif.), Rep. Rodney Frelingthuysen (R-N.J.) and Sheldon Whitehouse (D-R.I.).

The lawmakers’ holdings became a backdrop to the health-care debate in September when Baucus, chairman of the Senate Finance Committee, recommended the tax on medical devices as a way of raising about $40 billion over a decade. (After intense lobbying by the industry, Senate Democrats reduced the proposed tax to $20 billion.)

The response was swift -- and not only from lawmakers invested in the industry. Senators, representatives and governors in California, Indiana, Minnesota, Massachusetts and other states signed letters to congressional leaders.

The Capitol Hill investors also had their say. For example, in addition to releasing a statement, Kerry was among dozens of lawmakers who signed on to one of the letters.

“With such a large number of firms manufacturing as many as 80,000 unique medical device technologies, a one-size fits all excise tax could have significant ramifications for an industry,” the letter said.

For his part, Upton joined other House members who signed the letter that Sensenbrenner wrote. “We urge you to consider the importance of these life-saving technologies as health reform is considered,” said the letter addressed to House Speaker Nancy Pelosi (D-Calif.).

Kerry and Sensenbrenner said their investments in such companies -- a relatively small proportion of their families’ overall holdings -- played no role in their opposition to the proposed tax. They said they are looking out for the economic interests of their states, both of which have become bastions of the medical device industry, along with the well-being of Americans.

Through a spokeswoman, Kerry, whose net worth for 2008 was listed as $159 million to $259 million, said that virtually all of the medical-device holdings are in trusts controlled by his wife or in family trusts that he inherited. Spokeswoman Jodi B. Seth said the inherited holdings “are managed by a trustee who is a member of a private wealth-management firm.”

“It’s ridiculous to suggest that inherited trusts that he doesn’t control would affect one iota the progressive values John Kerry has fought for his whole life,” Seth said in a statement.

A Sensenbrenner spokeswoman said in a statement that he “has never voted for a tax increase in 30 years, and he’s not about to start now. And he certainly wouldn’t start by supporting a tax increase that would have a negative impact on Wisconsin,” including thousands of employees of the Wisconsin-based GE Healthcare.

Sensenbrenner, who reports a net worth of $11 million to $15 million, sees no conflict with his GE holdings because he “bases his votes on what is in the best interest of his constituents.”

Graphics editor Karen Yourish and staff researcher Madonna Lebling contributed to this report.

Kimberly Kindy is a government accountability reporter at The Washington Post.
Dan Keating analyzes data for projects, stories, graphics and interactives. He was part of a team that won a Pulitzer at The Miami Herald for exposing vote fraud, and a team that was a Pulitzer finalist the year before for uncovering police fraud.
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