Paul Pelosi's $5 Million Option Win Is Not What It Seems


Paul Pelosi, the husband of U.S. House Speaker Nancy Pelosi, exercised call options on 4,000 shares of Alphabet Inc. stock on June 18, worth a little more than $10 million at the time. The move, disclosed in a financial disclosure signed by Nancy Pelosi on July 2, netted him a gain of $4.8 million at the time and triggered suspicions of potential insider trading as the exercise came a week before a House panel considered anti-trust legislation to break up big tech companies, including Alphabet.

The first point to note is the option exercise was a non-event. The options expired on June 18 and Paul Pelosi had to exercise them. If he had done nothing, his broker would have automatically exercised them for him. The options allowed him to purchase Alphabet stock for less than half its market price, and it would have been financial insanity to let them expire unexercised. Both before and after the exercise, Paul Pelosi had essentially identical market exposure.

The one alternative would have been to sell the options. They would have fetched around $5.2 million, which is the difference between the $10 million value of 4,000 shares of Alphabet stock and the $4.8 million required to exercise the options. That had basically the same economic profit as exercising, but would have removed Paul Pelosi’s exposure to Alphabet stock, which could be considered potentially suspicious if speaker Nancy Pelosi knew the House panel would take action significantly adverse to Alphabet. However, the House panel did nothing unexpected and Alphabet stock has only risen since June 18.

The relevant decision Paul Pelosi made was at the end of February 2020, when disclosure forms showed he entered into the trade. That’s also when pandemic fears pushed down the price of big tech companies. Many people at the time felt that the declines were unwarranted, both because it exaggerated the damage Covid-19 would do to the economy, and because, if anything, tech companies would likely benefit from a lockdown and other public health measures. The first assumption proved to be incorrect, but the second assumption was borne out. Paul Pelosi apparently shared that view, and bought one to one-and-a-half year at-the-money (that means the exercise price was near the market price of the stock at the time) call options on large tech companies.

A red flag for insider trading is buying short-term out-of-the-money (that is, options with exercise prices far above in the case of calls, or far below in the case of puts, the market price of stock) options, just before a major news event. Paul Pelosi bought long-term (in the options world, anything over a year is considered long-term) at-the-money options, apparently based on an investment thesis about the pandemic, and long ongoing news story with no special non-public information that might have been known to Nancy Pelosi. In fact, other government officials were criticized for selling stocks — the opposite of Paul Pelosi’s trade — around the same time.

There is nothing suspicious about this trade, and even if you assume Nancy Pelosi passes information to her husband — something she denies — there’s no plausible information anyone could have had in February 2020 that would have made this a no-risk trade.

There is an argument to be made that top government officials and their immediate families should be prohibited from owning individual stocks or options to stocks. It’s entirely possible to build a good portfolio using diversified public mutual funds. That’s what most of the public must rely upon, so I don’t think it’s unfair to make people who seek high office do the same. Another option is to require any assets be placed in blind trusts. 

These rules would be a hardship for people like Nancy Pelosi with spouses who are professional investors, but perhaps the gain in public trust would be worth that loss. As a practical matter, it is impossible for any high official not to have material non-public information, and it is impossible to ensure there is no inadvertent transmission within immediate families — to say nothing of deliberate cheating.

So either we accept some leakage and trust to the discipline and honor of officials and their families to minimize it, and also accept suspicion about virtually every trade, or we make life difficult for people and couples who combine financial and government careers.

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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