So Much For Wanting to Be President

By unloading some stock this year, Senate Republican leader Bill Frist may pay a high price: He has drawn a Securities Exchange Commission investigation that could damage his burgeoning presidential aspirations.

Consumer groups are rattling the cage, demanding an investigation into the Tennessee lawmaker’s sale of shares in the for-profit hospital chain HCA just before the release of a disappointing second-quarter report sent the stock price reeling.

Aside from the potential harm to Frist’s own ambitions _ he is widely expected to seek the presidency in 2008 _ the controversy could bruise GOP candidates in the 2006 midterm congressional elections, especially when it’s coupled with Wednesday’s indictment of House Republican leader Tom DeLay in a campaign-finance scheme.

The value of Frist’s stock at the time of the sale remains unclear. Earlier this year, he reported blind trusts with holdings worth between $7 million and $35 million. Watchdogs suspect insider trading _ meaning Frist would have received information not available to the public that presented him with an opportunity to sell the stock and avoid a loss. HCA was founded in 1968 by Frist’s father, Thomas, and brother, Thomas Jr., the former company chairman and now a member of the board of directors.

Insider-trading claims are notoriously difficult to prove because they generally involve one-on-one communications with no paper trail. Mark LoPresti, an analyst for Thomson Financial in New York, noted that SEC investigators frequently sift through data ranging from phone records to e-mail exchanges only to come up empty.

In this instance, Frist insists he was not privy to insider information and that he simply was seeking to divest HCA stock to avoid the appearance of a conflict of interest on health-care issues.

“I had no information about HCA or its performance that was not publicly available when I directed the trustees to sell the stock,” he said Monday in his only public statement on the matter.

That hasn’t stopped various groups from prevailing on any number of governmental entities to conduct a thorough investigation. The Foundation for Taxpayer and Consumer Rights, a watchdog group based in Santa Monica, Calif., has written the SEC demanding that the investigatory body subpoena the lawmaker’s personal records.

“Given the close relationship between Senator Frist and Thomas Frist, it is imperative that their communications concerning the sale of Senator Frist’s HCA stock be investigated fully, including use of your subpoena power to acquire phone and financial records, board meeting minutes, and other pertinent records to verify the veracity of the assertions by the subjects of the investigation,” two foundation officers wrote in a letter to Linda Thomsen, the commission’s director of enforcement.

Another watchdog group, Citizens for Responsibility and Ethics in Washington, filed a complaint Monday with the Senate Select Committee on Ethics, maintaining that Frist violated Senate rules by engaging in apparent insider trading and then trying to cover it up.

“Not only has Senator Frist likely engaged in illegal activity, he has also been attempting to cover up his actions by suddenly finding a conflict of interest that he never before recognized,” said Melanie Sloan, the group’s executive director.

That complaint, and others like it, likely will go unconsidered by the Senate ethics panel. Under rules currently in place, only a member of Congress can press an official claim against a fellow member. That is a rare occurrence, meaning the heavy lifting will be conducted by the SEC and the U.S. attorney’s office in the Southern District of New York, which also is seeking documents.

Those pressing for an investigation cite the suspicious timing of the sale. On June 13, Frist ordered the trustee managing his assets to unload the stock, a task accomplished by July 1. Less than two weeks later, on July 13, HCA revealed its disappointing second-quarter earnings report that forced the stock price to drop from $58.40 a share to $45.90 a share by the end of last week. Frist, therefore, achieved a substantial savings by selling when he did.

Frist had consistently rejected calls during his tenure as Senate Republican leader to sell the stock, maintaining that placing his holdings in a blind trust was sufficient. The Foundation for Taxpayer and Consumer Rights on three separate occasions filed ethics complaints against Frist, asserting that holding the stock while engaging in issues like Medicare and medical-malpractice reform presented a clear conflict of interest.

Why Frist chose this moment to sell his holdings after rejecting earlier entreaties is unclear, unless he considered the HCA question a burden to his possible 2008 presidential campaign. Groups like Citizens for Responsibility and Ethics in Washington maintain that the timing is evidence that Frist was tipped off about the poor second quarter _ insider trading, illegal under SEC rules. But defenders maintain that Frist had a good reason to sell the stock whether or not he had insider information.

SEC filings show that from January through June, HCA management sold about 2.3 million shares of stock worth $112 million _ a heavy transaction period _ with much of the trading coming in May and June before the disappointing second-quarter report. Analysts maintain that anyone paying attention to that selling spree could have detected black clouds on the horizon and decided to make a move.

Ironically, Frist may be in position to mount a successful defense against the charges even if he obtained insider material about HCA’s financial report. The 11th U.S. Circuit Court of Appeals in Atlanta in 1998 held that a stockholder who obtains inside information and sells his shares can challenge charges of insider trading by establishing that he intended to sell the stock anyway and paid no heed to the leaked information.

In that complex case, which involved several defendants and claims of corporate fraud, the court held that “when an insider trades while in possession of material nonpublic information, a strong inference arises that such information was used by the insider in trading. The insider can attempt to rebut the inference by adducing evidence that there was no causal connection between the information and the trade _ i.e., that the information was not used.”

Frist already has laid the groundwork for such a defense if necessary. In his Monday statement, Frist said he initially asked his staff in April _ long before reports of the company’s problems emerged _ to determine whether Senate rules allowed him to direct the trustees of his blind trust to sell any remaining HCA stock.

After determining such a procedure was permissible, Frist said his staff, with outside counsel and help from the Senate ethics committee staff, drafted a letter to trustees seeking the sale.

“After obtaining pre-approval by mid-June from the Senate ethics committee, I issued a letter directing my trustees to sell any remaining HCA stock in my family’s trust,” he said.

One question that may require further explanation is Frist’s consistent claims since arriving in Washington in 1995 that he didn’t know if his blind trust held HCA stock. Records filed with the secretary of the Senate dating back to at least 2001 established that his trust held HCA stock. Frist received a copy of these reports.

Yet, in a television interview in January 2003, when asked about his HCA stock, Frist said, “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.”

Documents filed with the secretary of the Senate establish that, two weeks before Frist’s television comments, the trustee wrote to Frist to inform him that HCA stock had been contributed to the trust.

(Contact Bill Straub at StraubB(at)