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September 26, 2005

More on Bill Frist and His Stock Timing Troubles

Senate Majority Leader Bill Frist is in hot water for selling off stock in the company his family built, Hospital Corporation of America, the nation's largest private chain.

The short story is that Frist contacted his blind trust fund manager, ordering the sale at a rather curious moment: just after an unusually high volume of selling by HCA exec’s and just before the stock took a tumble on a bad earnings announcement. (The long story is here.)

The SEC and the U.S. Attorney are now investigating him for “insider trading.”

Frist's explanation for the sale is that he was just trying to avoid an ‘appearance of conflict.’

There’s truth in this. As a Senator, he could rule on medical legislation directly impacting HCA’s value – that’s why it went into a blind trust. But the problem is that he’s had that conflict since he entered the Senate in 1995 (and when he first created the blind trust). But, the whole issue with insider trading is timing. Why was it suddenly such a conflict? Why such a conflict just before the stock took it’s biggest tumble in two years?

Tigerhawk, kicking ass on this issue (with charts even), offers a defense for Frist, pointing out smart investors regularly watch a company’s executive's personal selling and buying of their company's stock. Such sales must be reported regularly, and because exec’s are closest to the company, they are usually a good bellweather of future stock price. If they buy, you buy. If they sell… Frist was just being a smart investor.

Another, more politically minded explanation for the timing is now emerging:

Frist has a fairly clean reputation around Washington. Privately, operatives in both parties said they would be surprised to learn that he deliberately violated the law. Analysts and observers said it was likely Frist stirred up this controversy only because he was trying to clean up his financial holdings before he ran for president. "If I were a political adviser and I was thinking that he's preparing himself for a possible run for president, I would tell him, 'Sure, get rid of the stock. It's just not worth the headache in a presidential campaign,' " said Jan Baran, a Republican ethics lawyer."

Well, there you go. Makes sense to me. Did you really think Bill Frist was so stupid as to do something he'd so obviously get caught at(well actually, people do get greedy sometimes. Greedy begets stupid….) Of course not.
Bill just needs to explain this, and if subpoenas don’t turn up phone records of some HCA executive calling him in the middle of the night, just before the sale, why he’s probably gonna be okay. Okay everyone, move along.

Not so fast.


Potentially violating securities law is only part of Frist’s trouble. There’s also Senate Ethics Rules for how your supposed to handle blind trusts.

The issue isn’t that Frist can never tell his trust manager to sell off a specific asset, but the rules restrict when you can so direct:

[D]irections to the trustee to sell all of an asset initially placed in the trust by an interested party which in the determination of the reporting individual creates a conflict of interest or the appearance thereof due to the subsequent assumptions of duties by the reporting individual.

‘Due to subsequent assumptions of duties.’ Frist can’t tell his manager to sell because ‘I’d like to avoid any headaches when I run for president.’

Really, wanting to be president isn’t an assumption of duties. Nor can he somehow rely on his ascenscion to Senate Majority Leader. While a new duty, he made the move back in 2002, not June 2005, when he ordered the sale.

Is this ticky tacky stuff? I’m not so sure. It’s an ethics rule afterall. But even if you think so, there’s more.

What about his communication with the trust fund manager and knowledge of the trust’s contents? It’s not really such a ‘blind’ trust if you know what’s in there. I’m not really sure what the Senate Ethics Rules are regarding communications between the trust manager and the trustee are, but there seems to be trouble here too.

Bloomberg today:

The Associated Press reported this weekend that Frist and his trustees had repeated contacts about his stock holdings. Documents on file with the Senate show the trustees for his family trusts wrote him nearly two dozen times between 2001 and July 2005, the AP reported. The AP said the documents list assets going into the account and assets sold, in some cases with dollar ranges for investment values….

Wertheimer [president of the Washington-based watchdog group Democracy 21] said the letters from the trustees appear to have gone beyond the scope of the types of communications that are allowed by Senate ethics rules.

Again, I don’t know the Senate Rules. Maybe the communications were a violation. Don’t know.

[Kinda an Update: The NyTimes comes in this morning, noting that Frist has a 'qualified' blind trust:

So the laws provide for the creation of special "qualified blind trusts" like Mr. Frist's that are exempt from public disclosure. The laws strictly limit communications between the trustee and the beneficiary, but they also mandate disclosure of the original holdings and notification to the beneficiary whenever an original asset is sold.

And the rules give beneficiaries like Mr. Frist, Republican of Tennessee and the Senate majority leader, the power to order the sale of all of a stock or other asset at any time in the name of eliminating a potential conflict.

H/t Tom MacGuire. ]

I expect the internet will soon be filling this information vacuum. But even if they weren’t ethics violations, Frist appears to have been less than forthcoming about his knowledge of his trust funds contents.

AP (reg)

Frist, asked in a television interview in January 2003 whether he should sell his HCA stock, responded: "Well, I think really for our viewers it should be understood that I put this into a blind trust. So as far as I know, I own no HCA stock" Frist, referring to his trust and those of his family, also said in the interview, "I have no control. It is illegal right now for me to know what the composition of those trusts are. So I have no idea."

Documents filed with the Senate showed that just two weeks before those comments, the trustee of the senator's trust, M. Kirk Scobey Jr., wrote to Frist that HCA stock was contributed to the trust. It was valued at $15,000 and $50,000.

The documents filed by the trustees of Frist's blind trusts were obtained by The Associated Press on Friday.

On Nov. 20, 2002, Scobey [his trust fund manager] wrote Frist that 14,781 shares of HCA were sold, along with three other investments. The same day, Scobey wrote that four other investments were sold, none of them HCA stock.

This, I think, may be big trouble for him. The media’s gonna be filled with “Frist, insider trading?” stories for a a couple of days. They’re gonna get their hands on that 2003 interview and people are gonna see Frist make those “I know nothing about owning HCA’ claims again and again.

And frankly, they just look like lies. Besides the letter notification just before they were made, how can you buy the ‘As far as I know, I own no HCA stock’ bit when the whole insider trading thing is about him contacting his manager and directing it be sold? Even if there wasn’t a security law violation, that’s what people are gonna remember, especially if there’s video of that statement.

Blind trusts exist for several reasons.

To protect the public? Sure. We’re assured our Senator isn’t voting on legislation with his own greedy interests at heart. Also, the buyer of the Senator's stock is protected in that the Senator isn't selling them something with the unfair advantage of inside info he gained in the Senate.

But the Senator is protected too. He’s protected in that no one can come back and question the sale or its odd timing should fate conspire against him and coincidentally render the sale's timing or whatever dubious. He's got cover. He can say, "Hey, I don't know nothing. It's all handled by some trust manager somewhere."

Frist blew his own cover here. He took a chance. Even if he had perfectly clean motives for selling his stock, and I suspect he did, his personally ordering the sale left him open to circumstance beyond his control. And it blew up in his face.

How big an explosion? Hard to tell yet. But that TV clip won’t be good. Nor will a Senate ethics investigation.

Frist may well be sitting on a porch with Trent Lott somewhere soon. Remembering what it was like to be Senate Majority Leader. Remembering what it was like to have presidential aspirations.

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posted by Dr. Reo Symes at 12:51 PM

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