Frist's Political Future Darkens Over Questions on Stock Sales

By Laura Litvan and Otis Bilodeau

Sept. 26 (Bloomberg) -- At the start of this year, U.S. Senate Majority Leader Bill Frist was looking at a bright political future. He led his party to an expanded majority in the Senate in November and emerged as a leading Republican hopeful for the 2008 presidential race.

Less than nine months later, that picture appears darker. Frist, 53, now faces inquiries into his stock sales by the Justice Department and Securities and Exchange Commission that threaten to undermine him politically and provide Democrats fresh ammunition with which to question their opponents' ethics.

``If there is really any evidence of insider trading, then he's in very serious trouble, and so is his party,'' said Gary Jacobson, professor of political science at the University of California in San Diego. ``It adds another brick to Democrats' argument that Republicans are corrupt.''

Frist through his spokesmen has denied any wrongdoing in the sale of shares of HCA Inc. held in a blind trust earlier this year, one month before a weak earnings report sparked a drop in the company's stock. Nashville, Tennessee-based HCA, the biggest U.S. hospital chain, was founded by Frist's father and brother.

Frist's HCA stock holdings in one of his blind trusts surged more than 30-fold from 2000 to 2001, according to financial disclosure statements filed with the Senate. By the end of 2001 he reported owning $500,001 to $1 million in HCA shares within an entity called Bowling Avenue Partners, which was part of his blind trust. That holding had been valued at $1,001 to $15,000 at the end of 2000. The leap in valuation could not have been the result of changes in share price; in 2001 HCA shares fell 12.4 percent after gaining 50.3 percent in 2000.

Amy Call, a spokeswoman for Frist, said she couldn't comment about the partnership, or Frist's HCA's holdings in the partnership.

Investigations

Frist may face a Senate investigation over communications he had with the trustees of his assets that suggest he had a greater measure of control than reported over the blind trust. He faces federal investigations into his HCA stock sale, probes that will likely delve into his telephone and e-mail records, legal experts said.

The SEC's new chairman -- former Republican Representative Chris Cox, who was appointed last month by President George W. Bush -- may be reluctant for political reasons to drop the case, even if an initial inquiry turns up no clear sign of illegal insider-trading, according to Donald Langevoort, a former SEC lawyer who teaches at Georgetown University National Law Center in Washington.

`Political Reasons'

``If you drop it, you know you're going to be second- guessed for political reasons, and Chris Cox cannot have political egg on his face early on in his term,'' Langevoort said.

The probes add to the ethical questions hanging over congressional Republicans. House Majority Leader Tom DeLay, a Texas Republican, was admonished three times by the House ethics committee last year and soon faces a new probe into his overseas trips funded by Republican lobbyist Jack Abramoff. Last week, the White House's former top procurement official, David Safavian, was arrested on charges of obstructing justice in a criminal probe of Abramoff.

Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington, said Sept. 24 that her watchdog group will file a complaint with the Senate ethics committee as early as today seeking an examination of the timing of Frist's stock sale.

Exhaustive Probe Possible

Frist spokesman Bob Stevenson confirmed Sept. 23 that the SEC and Justice Department have both launched inquiries into Frist's order to sell all his shares of HCA, and insisted Frist had ``no information that was not available to the public'' when he asked the trustees managing his blind trust assets to divest HCA stocks on June 13. HCA announced it received a subpoena for documents from the U.S. attorney in Manhattan and ``intends to cooperate fully.''

Frist spokeswoman Call said last week that the senator instructed the trustees to sell the HCA shares after outside interest groups repeatedly suggested his stake in the company represented a potential conflict of interest.

HCA was founded in 1968 by Thomas Frist, the senator's father, and by Thomas Frist Jr., the senator's brother, and Jack Massey, the former owner of Kentucky Fried Chicken. Thomas Frist Jr., who stepped down as chairman of the company in 2002, still serves on its board of directors.

Share Price

Senator Frist ordered the trustees to sell his shares on June 13, one month before the company said second-quarter profit would miss earnings estimates. The trustees notified Frist on July 1 that the shares had been sold. When HCA announced lower- than-expected earnings July 13, the stock fell $4.86 to $50.05, the biggest decline in more than two years. During the two-week period when Frist's sale occurred, the shares averaged $57.21, reaching a 52-week high of $58.60 on June 22. The shares closed Sept. 23 at $47.60, up $1.70, in New York Stock Exchange composite trading.

Senate Democrats are already working to capitalize on the Frist probes. On Sept. 23, the home page of the Democratic Senatorial Campaign Committee's Web site was updated with a picture of the majority leader and a list of ``Questions for Frist'' related to the timing of his stock sales.

If Cox and the SEC's commissioners authorize a formal probe, investigators may issue subpoenas for documents and compel witnesses to testify. ``Demanding the full set of evidence is very intrusive and intimidating,'' Langevoort said.

John Nester, an SEC spokesman in Washington, declined to comment yesterday on the Frist probe.

Raising the Stakes

At the same time, the fact that the U.S. attorney in Manhattan has entered the case raises the stakes for Frist. Unlike the SEC, which may impose only civil sanctions, U.S. attorneys are federal prosecutors with the authority to bring criminal charges.

Investigators from the SEC and U.S. attorney's office are going to want to know why Frist decided to tackle this potential conflict in June, after holding the HCA shares for years, according to David Becker, a former SEC general counsel now in private practice at Cleary Gottlieb Steen & Hamilton in Washington.

``What made it important for him to resolve this now?'' Becker said. ``Were there new conflicts or were there new reasons why he wanted to deal with this now as opposed to some time ago?''

The investigations come after a year in which Frist has suffered a series of missteps and has had trouble holding his party together, despite a 55-seat majority. The Republican Congress has failed to enact an overhaul of Social Security, Bush's top domestic priority.

Schiavo Case

Frist had his expertise as a physician called into question when he told senators this year that his review of video images suggested Terri Schiavo, a brain-damaged Florida woman, was ``not somebody in a persistent vegetative state'' and ``certainly seems to respond to visual stimuli.'' After a court battle over whether to keep her alive ended with her death, an autopsy found she had been blind and had a severely atrophied brain.

In late June, Frist failed for a third time to end Democrats' efforts to block the nomination of John Bolton to be U.S. ambassador to the United Nations. Bolton is now serving on an interim basis under a recess appointment from Bush.

Frist also wound up on the sidelines as Republicans and Democrats struck a deal in May to clear the way for the confirmation of some judicial nominees. The agreement ended Frist's effort to eliminate the ability of Democrats to use a filibuster, a tactic to block votes, on federal court nominees.

``The general perception is that he's not a terribly effective majority leader at this point,'' said Bruce Oppenheimer, a political scientist at Vanderbilt University in Nashville, Tennessee.

Senate Action

Still, Frist has pushed through the Senate this year some key measures, including a six-year highway construction bill, a trade pact with Central American nations, an overhaul of bankruptcy law and a measure to curtail class-action lawsuits against companies. This week, the Senate is expected to complete the confirmation of John Roberts to be Supreme Court chief justice.

The probes threaten to overshadow a presidential bid, said Jennifer Duffy, Senate editor of the Cook Political Report. ``This is a big problem for Frist,'' Duffy said.

Vanderbilt's Oppenheimer said Democrats would probably find fodder in Frist's willingness to work on key legislation affecting HCA and other health-care companies, despite his stock ownership and his family's connections to the company. Frist helped push through the Senate legislation creating a Medicare prescription drug benefit for seniors, among other measures, since becoming majority leader.

``He's always had that problem -- are you really avoiding a conflict of interest if your family has an interest?'' Oppenheimer said.

Ethics Rules

The Senate ethics committee allows lawmakers to direct the trustees of blind trusts to sell all of the shares of a company. Lawmakers may do so if they determine that holding the stock either creates a conflict of interest or the appearance of one, ``due to the subsequent assumption of duties'' by the lawmaker.

Fred Wertheimer, president of the Washington-based watchdog group Democracy 21, said the Senate ethics committee should examine whether Frist could utilize the exemption since he assumed his majority leader job three years ago.

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.

Frist spokeswoman Call said the senator's only communications with the trustee were over matters where disclosure is required by federal law or ethics rules.

Information on Assets

``Except in these very limited instances, Senator Frist does not receive information related to the disposition of his assets under the control of the trustee,'' she said.

Wertheimer 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.

The value of HCA stock in Frist's trusts at the end of 2000 was between $5 million and $25 million, according to a disclosure he filed with the Senate ethics committee when he established the accounts.

Frist's stock market timing may have been good when he sold shares in HCA, though his campaign committee has a different track record: it has lost more money on the stock market in the last six years than that of any of his 534 colleagues on Capitol Hill.

Frist's Senate 2000 campaign lost over $432,000 from its investments in stocks over the past five years, according to a disclosure to the Federal Election Commission filed in July. The Frist campaign, which has an account with Charles Schwab Corp., suffered most of those losses before 2003.

To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net.

Last Updated: September 26, 2005 00:02 EDT

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