By Scott Higham, Kimberly Kindy and Dan Keating
Washington Post Staff Writers
Sunday, December 19, 2010; A01
Gordon R. England's appointment to a top Pentagon post in 2006 came at a high price. The Senate committee overseeing his confirmation demanded that he give up lucrative stocks and options he held in companies that do business with the military.
England said he took a big hit on his taxes and lost out on more than $1 million in potential profits that year when he divested himself of interests in companies that included General Dynamics.
If he had been a senator, he would not have had to sell anything.
The Senate Armed Services Committee prohibits its staff and presidential appointees requiring Senate confirmation from owning stocks or bonds in 48,096 companies that have Defense Department contracts. But the senators who sit on the influential panel are allowed to own any assets they want.
And they have owned millions in interests in these firms.
The committee's prohibition is designed to prevent high-ranking Pentagon officials from using inside information to enrich themselves or members of their immediate family.
But panel members have access to much of the same inside information, because they receive classified briefings from high-ranking defense officials about policy, contracts and plans for combat strategies and weapons systems.
"I think Congress should live by the rules they impose on other people," said England, who served as deputy defense secretary under George W. Bush until 2009. He said he willingly divested in order to serve his country. "I am frankly surprised they are allowed to have these investments. Every member of this committee has tremendous influence over every major contract at the Pentagon."
The prohibition is representative of how members of Congress set strict rules on investing for others in sensitive posts in the corporate world and government while allowing themselves to manage their finances however they please.
Congressional experts say that such a prohibition on lawmakers would deter good candidates for office and that politicians would grow out of touch with their constituents by not sharing in the ebbs and flows of the market. Financial disclosure is supposed to bring transparency to congressional investing.
"There's no question that it's a double standard, but there is another element here," said G. Calvin Mackenzie, a Colby College professor who is an expert on presidential appointees and the confirmation process. "Senators have to stand for reelection. If their constituents think they are lining their own pockets, they could be challenged."
Nineteen of the 28 senators on the Senate Armed Services Committee held assets in companies that do business with the Pentagon between 2004 and last year, according to an analysis of financial disclosure forms by The Washington Post. Those holdings were worth a total of $3.8 million to $10.2 million.
The committee's Democrats held $1.3 million to $5 million during their tenure; Republicans held $2.3 million to $4.9 million. Under congressional rules, lawmakers are required to report assets only in broad ranges on financial disclosure forms.
Ethics laws allow senators to hold stocks in industries they oversee. They also may push and vote for programs that could improve the bottom lines of companies in which they own stock. They are precluded, however, from taking official actions that could boost their personal wealth if they are the sole beneficiaries.
Most of the senators who have holdings in Pentagon vendors told The Post that they see no reason why they should have to divest. Only Sen. Joseph I. Lieberman (I-Conn.), who owned as much as $315,000 in the banned stocks, said he supports extending the prohibition to members of the Armed Services Committee.
Several members - including Sens. Mark Begich (D-Alaska), Jeff Bingaman (D-N.M.) and Christopher A. Coons (D-Del.) - said they sold some of the stocks on the prohibition list this year for financial reasons, but the disclosures for 2010 will not become public until the end of next year, along with those of the rest of Congress.
The Post analysis found that Sen. John McCain (Ariz.), the panel's ranking Republican; Sen. Kay R. Hagan (D-N.C.); and James M. Inhofe (R-Okla.), along with their family members, have had the largest amount of money invested in companies with military contracts dating to 2004.
Nine lawmakers either did not have holdings in the companies or are newly appointed to the panel.
Eight senators and their family members held assets in the nation's top defense contractors, including General Electric, Northrop Grumman and United Technologies. Those assets were worth as much as $1 million.
The senators and their families also had assets in commonly held stocks that the committee prohibits because the firms do more than $25,000 in business with the Pentagon. Those companies include Microsoft, Pfizer and Exxon Mobil.
The Post requested interviews with and submitted questions about the divestment policy to the 19 senators with prohibited holdings. None agreed to an interview, although some responded in writing.
"I think the premise of the story is seriously flawed, and we will decline comment," said Gail Gitcho, the communications director for Sen. Scott Brown (R-Mass.).
"Senator McCain has always maintained strict adherence to all Senate ethics rules, including the rules covering disclosure of finances by members of the United States Senate," said his spokeswoman, Brooke Buchanan, noting that most of the assets are held by the senator's wife, Cindy McCain, a scion of one of the largest Anheuser-Busch distributorships.
Will Jenkins, a spokesman for Sen. James Webb (D-Va.), said: "Senator Webb has been careful to comply with all Senate ethics rules in order to avoid any conflict of interest. Likewise, when he served in the Pentagon, he adhered to the conflict of interest requirements of the Department of Defense."
The Senate ethics manual maintains that the financial-disclosure process is a sufficient safeguard against conflicts of interest and that requiring senators to divest is not needed. "Members should not be expected to fully strip themselves of worldly goods," the manual says.
Some defense industry analysts said that leeway sends a mixed message.
"The message is: 'It's okay to be fuzzy on the edges,' " said Winslow T. Wheeler, a former national security analyst for several U.S. senators who runs a military reform project at the Center for Defense Information.
Gordon Adams, who oversaw military spending as a top official at the Office of Management and Budget in the 1990s, said committee members and staffers have virtually unfettered access to the highest-ranking officials at the Pentagon, which, with an annual budget of nearly $700 billion, is the largest part of the government.
"You get a great deal of information about the Pentagon's intentions for the future," said Adams, a foreign policy professor at American University. "As a member, you have vastly more information than the average Wall Street adviser or investor."
While no committee members have been accused of trading on inside information, the appearance of conflicts is hard to avoid.
For example, several senators had a financial interest in a company engaged in a pitched fight over funding for the continued development of an alternative engine for the Joint Strike Fighter, also known as the F-35 Lightning II Program. Pratt & Whitney had won the original contract, but members of Congress have been using anonymous and untraceable earmarks to fund a second engine built by a partnership led by General Electric. Proponents of the GE engine say it could lower costs and increase the jet's readiness.
President Obama and Defense Secretary Robert M. Gates wanted to end the funding to GE and its partner, Rolls-Royce, and Obama threatened to veto the defense bill over the matter.
On June 26, 2009, the Armed Services Committee voted 12 to 10 to continue development of the alternative engine.
Three senators on the committee held GE stocks or bonds during the voting on the engines. None had a financial stake in Pratt & Whitney. Webb, Hagan and Sen. Claire McCaskill (D-Mo.) voted for the extension. Webb held as much as $65,000 in GE assets; McCaskill held 100,000. It is unclear from disclosure forms how much GE stock Hagan held at the time.
A spokeswoman for Hagan said that the GE stocks are in her husband's family trust and that the senator will not directly benefit from them. She also said Hagan supports the GE engine because it will bring jobs to her state.
A spokeswoman for McCaskill said the senator's GE holdings are in bonds, not stocks, that her husband's financial adviser manages her assets and that she has since reversed her position on the alternative engine. The committee requires its staff members and presidential appointees to divest of their bonds in addition to their stocks. Webb did not respond to a question about his GE holdings.
"It's a problem," said Nick Schwellenbach, director of investigations for the Project on Government Oversight, a nonpartisan government watchdog group. "They will come back and say that it's ludicrous that I would think of my stocks, that they only think about the nation's interests and that of their constituents.
"The problem is, we can't know."A unique prohibition
The Armed Services Committee's prohibition on presidential appointees holding assets in contractors that do business with their agencies is unique on Capitol Hill. The panel's ban dates back decades. As the size and influence of the "military industrial complex" grew in the 1950s and 1960s, so did concerns about conflicts and the possibility that presidential appointees could benefit from inside Defense Department information.
Early on, senators on the panel recognized the growing potential for conflicts.
"The procurement budgets were becoming so large and so complex," said Arnold Punaro, who joined the committee staff in 1973 and served as its director for 13 years before stepping down in 1997. "Executive branch people know what's going to be in these budgets, and in theory, they could be trading in those stocks."
Although the prohibition has never been applied to members of the committee, senators on the panel have raised the question of the fairness of exempting themselves while requiring others to divest.
During a closed-door hearing held before the 1961 confirmations of Defense Secretary Robert S. McNamara and other presidential appointees, some committee members said it was time to address the differing standards.
"We have got to go the whole way and put the same rules on ourselves that we put on these people in the government," said Sen. Stuart Symington (D-Mo.), according to a transcript of the hearing.
"I want to concur in that thoroughly," said Sen. Strom Thurmond (S.C.), who was then a Democrat.
Other senators on the panel objected.
"When you pass a law like that, you will have the greatest mass resignation that the world has ever seen," said Sen. Prescott Bush (R-Conn.), whose son and grandson were both president. "For heaven's sake, if you want to bring together a lot of people that do not have any touch with reality in this country to make the laws, God help the United States, in my judgment."
The matter never came to a vote, and the exemption continued.'Very painful'
John J. Young Jr., an assistant secretary of the Navy and then undersecretary of defense acquisitions under President George W. Bush, said he was perplexed by the senators' reluctance to apply the same standard to themselves. "It's clearly a double standard," he said.
When Bush named him to the Pentagon on July 1, 2001, Young's stocks were just beginning to bounce back from the dot-com bust. The committee gave him 90 days to sell. After terrorists struck Sept. 11 that year, Young's portfolio plummeted. He pleaded with the committee to let him keep his stocks until the market stabilized and then sell.
"I begged them to give me more time until things could rally," he said. "They wouldn't budge."
Former defense secretary William J. Perry said the senators are making a mistake. He and other appointees made financial sacrifices, he said, and he asks why the senators shouldn't do the same.
When President Jimmy Carter nominated Perry to be undersecretary of defense for research and engineering in 1977, the committee told him to sell all the stock he owned in a firm he founded, Electromagnetic Systems Laboratory.
At first, Perry balked. He asked whether he could put the stocks in a blind trust. But he said the committee chairman, Sen. John C. Stennis (D-Miss.), ordered him to sell or withdraw his name. Soon after Perry sold, TRW bought Electromagnetic Systems Laboratory, and the stock price tripled.
Perry said he missed out on more than $1 million in profits.
In 1993, Perry took another financial hit when President Bill Clinton asked him to become deputy defense secretary. Perry had joined the boards of several companies, including SAIC and United Technologies, and he had received lucrative stock options, which he was forced to surrender.
He lost out on $5 million to $6 million, he said.
"That was very painful," said Perry, who went on to become defense secretary from 1994 to 1997. "But I do not disagree with the importance of doing this. The potential for corruption is very high. It helps to keep our government clean."
England, the former deputy defense secretary, said that even though he was willing to sell his holdings, he found it difficult to recruit talented job candidates who would do the same.
"People aren't going to give away their stock options that they have worked a lifetime to accumulate," he said. "I had dozens of people turn me down."
England also said that the policy should be limited to assets in defense industries.
"We weren't allowed to buy Coca-Cola stock because military guys drink Coke, and we couldn't have stock in cereal companies because military guys eat cereal," he said. "That seems a far stretch."
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Staff researcher Lucy Shackelford and graphics editor Karen Yourish contributed to this report.