Frist's Stock Windfall
Jonah Goldberg writes:
I am no huge fan of Frist's (as a politician. As a man I think he's a pretty admirable guy). My guess is that this stock sale stuff will ultimately fizzle out, mostly because I doubt Frist is so stupid as to do what some allege. But I see nothing wrong with the appropriate agencies investigating Frist's blind-trust stock sale. If anybody sees a good argument why it shouldn't be investigated, I'd be curious to take a look. But as far as I'm concerned, it sounds like the right thing to do in a fairly no-brainer way. If he did something wrong the investigation is obviously warranted. If he didn't, the investigation should clear him. Exoneration is as important a function as conviction.
Well, no doubt we'll have to have an investigation to see if Frist did anything wrong. How plausible is it that he's too smart to have done anything illegal? Well, this bald-faced lying business is pretty dumb on its own:
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 lying about the specifics of HCA ownership is kind of penny-ante, but the broad brush lie here of pretending his assets were in a blind trust when there's obviously nothing blind about a trust whose trustee tells the owner what's in it is truly egregious. Still, will this really damage Frist in the end? I'm reminded of a scene in The Contender when Kermit Newman's looking for dirt on Rep. Runyan and the White House staff brings him an old SEC investigation:
You got stocks? I want something embarrassing. Something sexual! Little boys, midgets, that sort of thing. Cows -- I don't give a god damn!
Anyways, when you consider that the basic Republican Party approach to health care policy is that the GOP passes laws designed to maximize insurance company profits and then the insurance companies make campaign contributions designed to maximize the number of Republicans winning elections, I doubt that any level of personal corruption in the GOP/AHIP nexis could make any substantive difference to the policy process. In one sense, Frist might as well just behave in a corrupt and illegal manner, it's no worse than the perfectly legal stuff his colleagues are doing.
The lying about the specifics of HCA ownership is kind of penny-ante, but the broad brush lie here of pretending his assets were in a blind trust when there's obviously nothing blind about a trust whose trustee tells the owner what's in it is truly egregious.
I'm pretty sure it would be standard for the trust executor to inform the trustee what goes in to the account. If you owned such a trust, and people were depositing assets into it, you'd need to know that, right? For tax purposes if for nothing else. The question here is what happened to the stock after it went in. As long as that part was blind, there should be no problems -- legal problems, that is. It seems a little funky that the executor was telling him about shares he sold though -- Frist can surely subtract, so he would know how many shares are left over after each sale.
But the whole thing is obviously rotten. For how many years did he have those shares, untroubled by any conflicts of interest, only to sell them before a disappointing earnings report is released? I think one thing to look at is HCA's performance with regards to earnings predictions -- that is, has HCA underperformed the predictions by quite a bit in the past? If it did, and Frist hung on to his shares, it would tend to be exculpatory: why would he sell this time, but hold on the other time(s)? If HCA, however, has a long record of meeting or beating its earnings expectations, suddenly misses, and Frist, for the first time in ages, had sold before the bad report, it looks worse for him.
Another issue I have here is, just how active was the executor in managing this account? Had he ever, on his own initiative, sold substantial amounts of HCA stock? If Frist can transfer the shares to the "blind" trust, but the executor never sells them until Frist tells him to, it's obvious that control of the shares has never really left Frist -- and yet, the purpose of the blind trust is to get control of the shares out of Frist's hands. The whole thing looks like a sham to me, from the way it was set up to the timing of Frist's disposal of the shares. If this is business as usual for the way these trusts are handled, then business as usual needs to be changed.
September 24, 2005 2:25 PM | Reply | Permalink
Actual physical incarceration might be the only way to stop them. I wonder if they'll change the Senate Ethics Rules so that a Senator can vote from jail.
September 24, 2005 3:25 PM | Reply | Permalink
If a trust is actually blind, the beneficiary can't order the sale of shares. Period. That's the whole point of an independent executor/trustee. The beneficiary could say, "If there are any shares of X in the trust I think it would be a good idea if you sold them," but without knowing why the beneficiary thinks it would be a good idea, the trustee would be in breach of their fiduciary duty to blindly follow that suggestion. Especially given the enormous selloffs by the rest of the clan, this has an appearance of impropriety to it. (And people like the majority leader of the senate are supposed to avoid the appearance of impropriety.)
Meanwhile, shorter Goldberg: "Sure Al Capone is a gangster, but so are a lot of other guys. Just because the feds have Capone dead to rights on tax evasion, that's no reason to single him out for prosecution."
September 24, 2005 4:16 PM | Reply | Permalink
Your jail comment made me think that it would be interesting to compare with the Rosentenkowski example. Some quick google links (I found the last one especially interesting, the complaining about media giving him a break in 1994. Nothing new under the sun on that front.):
September 24, 2005 4:27 PM | Reply | Permalink
If a trust is actually blind, the beneficiary can't order the sale of shares. Period.
It depends on what the definition of "blind" is. In my (limited) experience, trust agreements can be unique, and in this case, Congress wrote its own. I've found a 1994 rule for the Senate, with the trust agreement, but I don't know if it's been superseded by anything since. When I get a few minutes of uninterrupted free time, I'm going to look a little harder, and read through this.
It is important to understand though that Congress has made their own rules in this instance, and just how they made those rules is likely to determine Frist's fate. My guess is, he's going to skate. And if the 1994 rules are the ones still in effect, then Democrats would have written them. It's still a potential reform issue, but it would have been so much better if the republicans had written these rules.
September 24, 2005 4:38 PM | Reply | Permalink
I'm sure that Russert, Matthews, Fox News, and all of the MSM will give this the same attention they did to Hillary's stock trades, aren't you?
September 24, 2005 6:59 PM | Reply | Permalink
What I don't understand is how the Rethugs are letting the Justice Department get out of control. This is weird, or just payback for Frist's failures.
September 24, 2005 7:22 PM | Reply | Permalink
Here are the relevant parts from the trust agreement:
(iii) the trustee shall promptly notify the reporting individual and his supervising ethics office when
the holdings of any particular asset transferred to the trust by any interested party are disposed of
or when the value of such holding is less than $1,000;(iv) the trust tax return shall be prepared by the trustee or his designee, and such return and any
information relating thereto (other than the trust income summarized in appropriate categories
necessary to complete an interested party's tax return), shall not be disclosed to any interested
party;
(v) an interested party shall not receive any report on the holdings and sources of income of the
trust, except a report at the end of each calendar quarter with respect to the total cash value of the
interest of the interested party in the trust or the net income or loss of the trust or any reports
necessary to enable the interested party to complete an individual tax return required by law or to
provide the information required by subsection (a)(1) of this section, but such report shall not
identify any asset or holding; (vi) except for communications which solely consist of requests for
distributions of cash or other unspecified assets of the trust, there shall be no direct or indirect
communication between the trustee and an interested party with respect to the trust unless such
communication is in writing and unless it relates only
(I) to the general financial interest and needs of the interested party (including, but' not limited
to, an interest in maximizing income or long-term capital gain),
(II) to the notification of the trustee of a law or regulation subsequently applicable to the
reporting individual which prohibits the interested party from holding an asset, which notification
directs that the asset not be held by the trust, or
(III) to directions 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 assumption of duties by the reporting individual (but
nothing herein shall require any such direction), and
(vii) the interested parties shall make no effort to obtain information with respect to the
holdings of the trust, including obtaining a copy of any trust tax return filed or any information
relating thereto except as otherwise provided in this subsection.
It looks absolutely silly. Whenever the trustee sells something, he has to notify the beneficiary. So the beneficiary, Frist in this case, would know exactly how many shares of HCA he held, as long as he had a 6 year old's ability to do arithmetic. Some blind trust.
September 24, 2005 7:25 PM | Reply | Permalink
Huh? Not from the excerpt that Matt pulled. Maybe there's more after the jump, but this is pretty unfair.
September 24, 2005 8:19 PM | Reply | Permalink
The trustee is a money manager, right? So are the managers of mutual funds, pension funds and other institutions. If Frist's manager got out while those other instituionalholders got burned, then it's probably because Frist's manager had some helpful information. That wouldn't be proof, but it's reason to suspect.
September 24, 2005 10:27 PM | Reply | Permalink
Good republicans stick to 10 commandments which say nothing about the insider trading, conflict of interest etc. Almost all crooks in recent years professed utmost piety, so I guess that this is the prevailing interpretation.
September 24, 2005 11:13 PM | Reply | Permalink
Bob, my theory is that many of the pros, and possibly some people within the administration, have realized that things have gone too far. The legal/judicial system is correcting the failures of the political/ electoral system. This is a normal check-and-balance, but we shouldn't have to rely on it so often. When Bush II, Reagan, and Nixon were all re-elected twice, democracy failed.
September 25, 2005 4:56 AM | Reply | Permalink
Yeah, that certainly is strange. And it would seem to be specifically prohibited by the terms of the Trust instrument -- at least, assuming Senator Frist's Trust instrument is substantially similar to the model approved by the Senate Ethics Committee (see here). See Article Fourth and Sixth for the only communications that the Trustt may make to the Grantor.
I wonder why ABC didn't ask the Trustee of Frist's Trust why he sent those letters?
You got stocks? I want something embarrassing. Something sexual!
Perhaps Matthew should get in touch with Senator Schumer and inform him that illegally obtaining the credit reports of Republican nominees doesn't fit this definition...
September 25, 2005 8:25 AM | Reply | Permalink
I want to see prosecutors and the media go after Frist as heavy-handedly as they went after Martha Stewart. As the money and political ramifications at stake were much greater in Frist's case, anything other than a full fledged prosecution and equal media coverage would not only indicate favoritism/cronyism, but also sexism. If the media were not sexist, it would be asking Frist if he knows how to crochet himself a green poncho and make lemonade out of lemons, and it would be discussing how Frist would look in an electronic anklet.
September 25, 2005 9:30 AM | Reply | Permalink
On the subject of insider-trading in general, I do remember a fascinating WSJ piece years ago by George Gilder -- or I think it was by him -- arguing that anti-insider-trading laws violate free speech rights (they bar free citizens from telling others truthful information). I don't bring this up because I endorse that view or seek to absolve Frist. Rather, I mention it simply because I always thought it was an interesting and unconventional complaint and a good example of how we censor all sorts of speech but don't call it censorship if we approve of it. This, I recognize, is one of my perennial complaints/observations.
Which is just idiotic. Insider trading laws regulate actions based on information, not the information itself. And his source, which he can even bother to check is George Gilder. Yes, that George Gilder.
September 25, 2005 10:37 AM | Reply | Permalink
Actually, no. Insider trading law criminalizes tipping (that is, communicating inside information to someone) just as much as it criminalizes trading on inside info. I take it that Goldberg was refering to tipping here.
September 25, 2005 10:54 AM | Reply | Permalink
Well, this bald-faced lying business is pretty dumb on its own:
As it was when, after Schiavo's autopsy, he flatly denied that he had ever made a diagnosis in the case.
I see no reason to give him the benefit of the doubt. In my book, he is an established liar.
September 25, 2005 11:05 AM | Reply | Permalink
Between January 05 and June 05, HCA sold $900 milliom in new shares. The share price went from $40 at 12/05 to $58 at 6/05.
$58 is a record high for HCA.
If Frist knew something about HCA that buyers of the $900m of new shares did not know, he has a problem.
For years, Frist held on to HCA as it went up and down. He must have known that the stock would never again reach $58.
Remember, HCA is not known for integrity. It had to re-pay something like a billion dollars in Medicare overbillings and is being monitored for 8 years by the Medicare inspector general.
The IRS has a $500m claim for back taxes against HCA. A ruling is expected shortly
The increase in revenue in the first quarter mostly came from increased prices that may not sustainable. Plus HCA claimed that income would have been higher except for discounts it was now giving to uninsured patients. HCA, however, never gave an actual dollar comparison of prices between 04 and 05.
The increase in income came from a decrease in the bad provision. HCA claimed that it did a two year "hindsight" study and found that uninsured patients were paying more of their bills. Sounds like a lot of crap.
HCA also reduced a professional liability reserve to generate income. Another accounting gimmick.
Keep the Frist insider trading issue in mind even if it gets dropped for now. I think HCA might have big problems that come to light six months from now.
September 25, 2005 10:01 PM | Reply | Permalink
Except that nothing prevents you from disclosing insider information to the whole market. It's only selective disclosure that's banned. Now you could argue that's a restraint of free speech, but you'd be pretty stupid to do so. After all, the great libertarian slogan is "The answer to bad speech is more speech, not less." And free markets depend crucially on the public availability of accurate information. So being forced to diclose all information publicly rather than privately would seem to be a very libertarian solution to the problem of insider trading.
September 26, 2005 7:33 AM | Reply | Permalink
Actually, it's weirdly these sorts of little things that do politicians in. Rememebr when Rostenkowski got sent up the creek for stealing stamps? The kind of broad corruption that politicians usually engage in is often murky and complicated (such as the idea that Abramhoff was basically running a meta-slush fund for the vast right-wing conspiracy).
Alternately, something comparatively petty and comparatively simple, like a little blind-trust cheating, can be enough to unravel a career. Nixon didn't get pilloried for secretly bombing Cambodia, he got sent up for ordering a little destructive (and totally pointless) snooping.
September 26, 2005 2:19 PM | Reply | Permalink