Perdue’s Trading Activity Is Less Than It Seems
(Bloomberg Opinion) -- U.S. Senator David Perdue’s finances have come under scrutiny following a New York Times report that the Republican from Georgia made 2,596 stock trades in one term, or almost two every trading day since taking office. There is a reasonable case to be made that federal lawmakers and others in high offices should be prohibited from trading in individual stocks given the range of inside information they are exposed to in their positions and the importance of public trust in government. But in Perdue’s case, a deeper look suggests nothing overtly wrong.
No explicit charge is made by the New York Times, but by mashing together different types of evidence for four unstated charges, the article could leave the casual reader with the impression that Perdue’s trading was ethically dubious, if not illegal. Less seriously, it creates the impression the Stock Act of 2012 that was intended to prevent potential insider trading by members of Congress has failed. Instead, the Stock Act provides the data needed to refute the stealth accusations and would have exposed illicit trading had it existed.
Let’s start with the number of trades: 2,596. The reader is expected to assume that anyone doing that much trading isn’t paying enough attention to Senate work. Perdue could have been checking his phone for quotes when he should have been listening to committee testimony, or studying stock charts when he was supposed to be working on legislation, but there’s no evidence in the numbers to support that suggestion. The number of decisions in this portfolio — as opposed to the number of individual trades — is entirely consistent with a busy professional who devotes only a small fraction of time to overseeing investments.
Consider Apple Inc., whose AAPL ticker symbol shows up first in alphabetical order on a list of equities Perdue traded and is counted in 62 transactions. Perdue acquired what appears to be about $200,000 of Apple shares in 37 transactions from Jan. 27 to April 27 in 2016. Over the next three years, there were 21 transactions that appear to keep the investment at about the $200,000 level—taking profits on price increases and buying back on dips. The position was liquidated in four transactions from April 14 to April 16, 2020.
A Perdue spokesman told the Times that his investment advisers “handle the day-to-day decisions of his portfolio,” but assuming Perdue was involved in the Apple decision, the activity suggests that he approved an initial decision to acquire $200,000 worth in small lots, and to maintain that position, plus the 2020 decision to get out of the stock that was part of a general exit from most of his individual stock holdings. That’s two decisions in six years, not 62.
Wasting time day-trading is the least serious of the four insinuations. The most serious is that Perdue used his official powers to help the companies in which he owned shares. The Times mentions six companies, but doesn’t mention that three had negative stock returns over the holding period: Graphic Packaging Holding Co. fell 10%, FireEye Inc. dropped 30% and Devon Energy Corp. plunged 84%. A fourth, Alliant Energy Corp., was up only 3.2%. If Perdue were throwing favors at these stocks, he wasn’t very good at it.
The chart below shows the price of a fifth company identified in the article, BWX Technologies Inc., from the time it was spun off in July 2015. The period Perdue owned shares, and had committee oversight important to the company, began at the end of 2017. The stock had a mixed track record in the period. Moreover, if Perdue could help the stock, why did he sell it only seven months after buying it?
More generally, almost all Perdue’s trading profits came from buying and holding the same large capitalization stocks most stock investors own, and most stock mutual funds hold. While it’s not possible to determine his precise returns from the available data, we can make an educated guess. I think he made about 8% per year on his stock investments over the six years, perhaps as little as 6% or as much as 10%. The S&P 500 Index was up 10.3% per year, and Perdue’s returns seem highly correlated with the benchmark. So it’s pretty hard to argue he was favoring the companies he owned.
The third insinuation is that Perdue traded on information from committee hearings, with Cardlytics Inc. offered as an example. The article leaves out the reason for suspicion, which is that Perdue sold between $1 million and $5 million worth of the stock on Jan. 23, 2020, according to filings. The stock closed that day at $86.82, falling to $27.72 by the end of March as a result of the pandemic.
The decline in Cardlytics’ stock price gives this insinuation the most support of the four. But there are weaknesses. This particular allegation was investigated by the Justice Department, which did not bring charges. That doesn’t mean the sale was innocent, but it suggests there wasn’t strong evidence of illegality. Another problem is the Cardlytics decline was not out of line with its sector, and there was no specific government news that made it worse. If Perdue knew there would be a pandemic crash, he had other stocks in his portfolio that would have been better candidates for sale.
The last unstated allegation is that Perdue traded on illegal inside information from acquaintances, which is both a serious felony and a form of bribery. The evidence here would be Perdue making well-timed short-term trades. Perdue’s short-term trading — the kind that would be suspiciously profitable if he had illegal inside information — mostly lost money. For example, his biggest return was from Apple, with a gain between 150% and 200% by my estimate. But if he had done no short-term trading, merely bought stock on the first day and sold it on the last, he would have made 207%.
Going down the list, I estimate he saw a return between 70% and 100% in Caesar’s Entertainment Inc., when buy-and-hold would have produced 122%; 75% to 110% in Live Nation Entertainment Inc. versus 514% buy-and-hold; and 50% to 70% in USG Corp. versus 73% buy-and-hold. Next on the list, America’s Car-Mart Inc., could be considered suspicious. I estimate he made between 60% and 80%, versus negative 80% for buy-and-hold. But I figure he made less than $10,000, an unlikely amount to risk both insider trading and bribery charges. Overall, there’s just no evidence of profitable short-term trading looking at the overall portfolio. The few good short-term trades are not suspiciously good, and are outweighed by the bad short-term trades.
The only exception is Cardlytics, for which he really did make a great short-term call. But that is weak for the reasons mentioned above. Perdue’s stock trading does not support serious allegations of wrongdoing, with the limited exception of Cardlytics, for which an investigation was appropriate.
Perdue’s portfolio seems an entirely typical one an experienced businessperson or financial executive of his wealth level would run using a professional adviser. There’s no unusual turnover or short-term trading, and no puzzling strategies or decisions. The results are within legal expectations. The only way to make a scandal out of it is to combine insinuations that support different charges, as if it were all part of some coherent conspiracy, and to ignore the numbers.
Because the official trading reports only give ranges for the amounts and have no prices, I can’t compute exact profits. But I know the range of stock prices on the days of trading. Usually, there’s a period of purchases at a reasonably narrow spread of prices, and a period of sales, also with reasonably narrow spreads. So by making some simplifying assumptions, I can come up with estimates of profit and loss.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is the author of "The Poker Face of Wall Street." He may have a stake in the areas he writes about.
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