Did Sen. Corker violate SEC rules, Senate ethics by telling investors to short GSEs?

Made questionable remarks on CNBC regarding stocks

[Update 12:25 p.m. ET: Response from Corker's office]

Sen. Bob Corker, R-Tenn. appeared on CNBC Wednesday discussing the issue of conservatorship for the GSEs, and in dismissing a report suggesting the White House is open to ending conservatorship he said investors should short Fannie Mae and Freddie Mac.

Corker said "hedge funds" are spreading false rumors that the White House wants to "re-IPO" Fannie and Freddie.

“People should be short it, because it’s major BS,” Corker said. “It’s just talking your own book.”

He was referring to an Oct. 5 note from the research firm Political Alpha. This note made the rounds in both Washington and Wall Street causing GSE shares to trade-up. The note states:

Multiple sources have confirmed that the White House has reached out to the housing finance community to better understand its options on what to do with the GSEs after conservatorship. 

The Administration is in the very early stages of looking at various options to end the GSEs conservatorship.  This is a major shift in thinking as it would entail ending the GSE profit sweep allowing Fannie and Freddie to begin to retain capital.  While we have been told the Administration is not close to deciding how to proceed, the initial announcement of the White House’s intent would clearly be beneficial to the entire capital structure of the GSEs.

Here’s is the interview with CNBC’s Rick Santelli.

This raises serious questions about whether Corker, who serves on the Banking, Housing and Urban Affairs and is author of a bill, "Jumpstart the GSEs" which is currently languishing in the Senate, violated Senate ethics rules, Securities & Exchange Commission or both.

Corker is also co-author of Corker-Warner, a housing reform bill that failed in the Senate.

“As we’ve seen over the past few years, there are some entities that are doing everything they can to distort the truth and kill efforts to reform our nation’s housing finance system because they benefit from the status quo at the expense of taxpayers,” said Micah Johnson, press secretary for Corker. “It is laughable that some are clinging to a tongue and cheek comment made during an interview in making this baseless charge.”

A spokesperson for the SEC told HousingWire that the agency “declines to comment at this time.”

Senate rules and ethics regarding investments prohibit senators and senate staff from a broad range of what would be considered insider trading and information.

Here are those rules, the link directly above goes to the original source.

Existing Securities Law Prohibits Trading on Information Obtained Through Official Duties.

Securities laws prohibit anyone from misappropriating material, nonpublic information in violation of a duty of trust or confidence owed to the source of the information, such as an employer. Members and staffers could violate a federal anti-fraud regulation of the Securities and Exchange Commission, Rule 10b-5, by purchasing securities based on information obtained in the course of their official duties, or derived from their Senate position, if that information was material and nonpublic and they breached the duty of trust and confidence described above.

Existing Securities Law Prohibits Passing on Inside Information to Others Who Trade.

It is also impermissible to pass on material, nonpublic information to others who may profit themselves or help the “tipper” to profit. Members or staffers who are tippers of material, nonpublic information may be liable if they breached their duty of confidentiality by tipping another individual who then trades, and they receive some resulting direct or indirect personal benefit, be it financial, reputational, or otherwise. For example, a benefit may result when a tipper seeks to make a gift to a trading friend or relative by passing on material, nonpublic information. The Member or staffer must have expected to receive a personal benefit – and cannot have solely made an inadvertent disclosure or shared information in good faith without expecting to receive a personal benefit.

Senate Nondisclosure Rules.

Senate rules prohibit disclosing or misusing confidential information. Senate Rule 29.5 states:

Any Senator, officer, or employee of the Senate, who shall disclose the secret or confidential business or proceedings of the Senate, including the business and proceedings of the committees, subcommittees and offices of the Senate, shall be liable, if a Senator, to suffer expulsion from the body; and if an officer or employee, to [suffer] dismissal from the service of the Senate, and to punishment for contempt.

This rule applies to information obtained in a variety of circumstances, including information received in a closed, nonpublic hearing; information gathered during the confidential stages of a committee investigation; and classified national security information. Members’ personal offices and Senate committees may impose additional, more specific rules on the confidential treatment of certain types of information in their offices.

Deborah Mayer, chief of staff of the Senate Ethics Committee, did not return inquiries for this story by publication time.

If the research from Political Alpha is accurate, it explains why the White House exploring ways to bring the GSEs out of conservatorship, and what the implications could be.

The GSEs were taken under conservatorship in September 2008 in the midst of the housing crash and financial crisis it triggered. Since the implementation of the “third amendment sweep” in August 2012, all profits from Fannie and Freddie are taken by Treasury. To date, Fannie and Freddie have paid back $54 billion more to Treasury than it borrowed.

Some analysts have been suggesting the administration is open to this route or some form of settlement, especially given the ongoing litigation over the issue from shareholders who contend that the sweep is illegal. Corker himself admitted Tuesday that an increasing number of conservative lawmakers in the House and Senate are listening to the arguments made by shareholders that the GSEs should be re-privatized.

“Some of our (right) wingers are migrating over to this third amendment thing because it makes it easy not to do anything,” he said, speaking at the Bipartisan Policy Center.

The Political Alpha note speculates the White House is open to re-privatization in the wake of GSE reform stalling, because it is concerned with the direction a potential GOP president could take housing policy.

“With GSE reform stalled, we’ve been told that the Administration is afraid of what will happen to the affordable housing mandate should a Republican take office in 2017.  Their fear is that a new Republican president could simply wind down the GSEs and kill the affordable housing mandate if the GSEs were to remain in conservatorship,” the note says. “Therefore, the White House wants to better understand its options as it looks to preserve the affordable housing mandate into the next Administration. Moreover, the Administration is also trying to front-run any resolution to the current litigation so they can better control the outcome.”

Calls to the White House press office were also not returned at publication time.

Isaac Boltansky at Compass Point Research & Trading, suggests that this is not outside the realm of possible.

“Our view remains that the policy conversation in D.C. is slowly shifting toward a consideration of reforming and releasing the GSEs from conservatorship but we do not believe administrative action in any form is imminent,” he said. “Instead, our view is that the next iteration of the GSE conversation will focus squarely on the merits of GSE capital retention which is a marker on the road to exiting conservatorship but still miles from the off ramp.”

For the time being, however, adminstrative action against Sen. Corker appears as distant as GSE reform itself.

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