SEC Starts Investigation of Possible Insider Trading by Senator Frist

Senator William Frist (R-TN) has fallen a long way in the eyes of this journal. Perhaps, it was naďveté here to think a surgeon might actually be a man of reason and reflection. The latest in the fall of Tennessee’s Slick Willie is a Securities and Exchange Commission investigation into possible insider trading by the Senator earlier this year. At best, his story is unconvincing.

Like a great many American politicians, Senator Frist is a millionaire and is invested in equities. Like many of his compatriots in politics, he has placed his assets into a blind trust. As the very useful Investopedia.com defines it, a blind trust is “A trust in which the executors have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust.” The site goes on to say “Blind trusts are generally used when a trustor wishes to keep the beneficiary unaware of the specific assets in the trust, such as to avoid conflict of interest between the beneficiary and the investments.” As a legislator, he does have the ability to change the rules by which businesses play, and therefore, there could be an appearance of undue influence.

So far, so good. But it seems that earlier this year, Senator Frist instructed the trustees to sell stock in HCA, a hospital company founded by his father and brother. On Monday, the senator said, “Because of these continuing questions, and looking ahead at my final years in the Senate and what might come next [a White House bid], I have for some time wanted to eliminate even the possibility of an appearance of a conflict by totally divesting of any HCA stock in my family's trust.”

This is also fine except that he instructed his trustees to sell, along with a lot of insiders, his HCA stock two weeks before a serious earnings warning on July 13 sent the stock down 7.9% in a single day – how very Martha Stewart-esque. And of course, he plain lied in a January 2003 interview when he said, “As far as I know, I own no HCA stock . . . It is illegal right now for me to know what the composition of those trusts are. So I have no idea.” He couldn’t very well instruct trustees to sell right before a major downturn if he didn’t know he owned it, and a December 2002 letter obtained by the Washington Post from the trustees told the senator that HCA stock between $515,000 and $1.5 million in value had gone into a blind trust.

The Senate Ethics Committee, it must be noted, has blessed all of this every time the senator has sought their advice. However, SEC Chairman Christopher Cox, a former congressman, has recused himself from the investigation, and the US Attorney for the Southern of New York (where the stock was sold) is also looking into the matter. The senator is in some trouble so long as this goes on – and it will.


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