What Did Frist Know-- and When?


By Eamon Javers A second government probe into how Senate Majority Leader Bill Frist (R-Tenn.) came to sell stock he held in a blind trust is increasing political pressure on the Tenessee Republican.

The senator disclosed on Sept. 23 that the Office of the U.S. Attorney for the Southern District of New York had contacted him to ask about stock of a Frist family-founded company that he sold from his blind trust a few months ago.

Frist sold the stock this summer just before the company released information that sparked a stock sell-off. The inquiry from the U.S. Attorney's office comes on the heels of questions earlier in the week from the Securities & Exchange Commission about what Frist knew of the inner workings of the Hospital Corporation of America (HCA) - the company founded by his father and brother - when he decided to divest his holdings on June 13.

TIDY GAIN. In July, the company's stock declined by 9% when it disclosed that its second-quarter earnings would fall below expectations due to problems with hospital admissions and uninsured patients. Investigators will want to know whether Frist had any insider information about the upcoming bad news before he decided to sell.

Frist's office says not. "Senator Frist had no information about the company or its performance that was not available to the public when he directed the trustees to sell the HCA stock," says Frist spokesman Bob Stevenson.

The stock, which was at $43.30 when Frist was elected majority leader in 2002, had risen to $55.93 by the day he decided to sell. It closed at $47.60 on Sept. 23. More than $10 million of Frist's initial blind trust was made up of HCA stock early in Frist's Senate career, but Frist's staff say he didn't know how much remained by the time he decided to sell.

HCA says it believes a subpoena request it received from the U.S. Attorney's office is related to the Frist's stock sale. Frist's office says it has not received any subpoenas.

POTENTIALLY LETHAL. If they can not be resolved quickly, the twin investigations could have a dramatic impact on Frist's political career. He has been widely mentioned as a potential Presidential candidate in 2008.

"You might want to read the old clippings about Martha Stewart," says Jan Baran, a Washington ethics attorney at the firm Wiley Rein & Fielding and a former counsel to the Republican National Committee. "This is pretty much boiler-plate securities law." Stewart, the onetime CEO of Martha Stewart Living OmniMedia (MSO), served five months in prison for lying to investigators about her sale of ImClone Systems (IMCL) stock in 2001.

Baran says investigators will want to see everything from Frist's e-mails to his daily schedules and talk to people who could verify his assertion that he wanted to sell the stock as a part of routine financial housecleaning. "The securities issue is potentially lethal for him," Baran says. "He has not yet really explained why he did this at this particular time."

WASHINGTON'S RULES. Frist's spokesman says the majority leader was trying to clear up any impression of impropriety that could spring form his ownership of the health-care stock. "His only objective in selling the stock was to eliminate the appearance of a conflict of interest," says Stevenson.

And that's also the answer to one question many in the nation's capital are asking as the story unfolds: Just how can a senator order the sale of a stock that's held in a "blind" trust?

The answer lies in a unique loophole in the way Senate blind trusts are structured. The trusts -- which must be approved by the Senate Ethics Committee -- allow senators to tell trustees to liquidate whatever may remain of an asset placed in the blind trust if the senator thinks there could be a conflict of interest.

TIME FACTOR. Just what constitutes such a conflict is left up to each senator's discretion. "He's allowed to say, "sell the HCA stock,'" says Frist spokeswoman Amy Call, "But he's not allowed to say, 'sell it by this date.' It could have been another six months before they sold." Call says Frist doesn't know what's in the blind trust, but that the trustees do notify the senator that a stock has been sold if the amount of a stock in the fund dips below $1,000.

So although Frist didn't know how much HCA stock was in the blind trust, he knew there was at least some of the $10 million the trust started out with.

Democrats are already making political hay out of the loophole: "Only in Washington, D.C., controlled by politicians could a politician have direct control over assets in a blind trust," says Josh Earnest, press secretary for the Democratic National Committee. "Maybe we should call it a nearsighted trust."

GLOBAL REACH. And although his aides say he worried about a conflict this summer, Frist has not seen a problem with owning the HCA stock in the past. "I see no conflict of interest as I carry out the nation's business," Frist said of his stock ownership in 1999. And Frist has voted on health-care related issues before the Senate for years while owning the stock. But Call says the senator "has always been concerned about conflicts of interest. It's just a cumulative effect. He's laid out a big agenda for health care."

HCA owns or operates more than 190 hospitals and 91 outpatient surgery centers in 23 states, England, and Switzerland, with 2004 sales of $23.5 billion producing net income of over $1.2 billion. The company and its affiliates employ more than 190,000 people.

Note: Eamon Javers talked on Sept. 27 about Frist's financial dealings on the News Hour with Jim Lehrer, which has made a transcript available.

Javers is a correspondent for BusinessWeek in the Washington bureau


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