Newsweek article on Frist
The Senate: Doubting a Trust
The SEC is trying to show politics won't play into its scrutiny of a stock sale by Sen. Bill Frist. Easier said than done.
By Charles Gasparino
Oct. 10, 2005 issue - The Securities and Exchange Commission is known as Wall Street's top cop for good reason, boasting a list of past targets that's supposed to show it doesn't play favorites—including celebrities like Martha Stewart, as well as companies run by executives who became vice president (it investigated Halliburton, where Dick Cheney was once CEO). Now the SEC is investigating whether Senate Majority Leader Bill Frist had any insider information when he unloaded shares of HCA Inc., a hospital chain his family helped found, just weeks before the company announced news that made its stock tank.
The SEC seems intent on showing that it can probe Frist, a Republican and potential presidential candidate, without fear or favor. Its chairman, Chris Cox, a presidential appointee and former Republican congressman, recused himself from any involvement in the investigation "to avoid any appearance of impropriety,'' he said in a statement. Meanwhile, the agency's enforcement division is flexing its muscles; the initial probe is now a full investigation, a technical change that gives it power to subpoena phone records and e-mails. The SEC intends to look at e-mails and other communications between Frist and his brother Thomas, an HCA director and the company's former chairman, NEWSWEEK has learned. Through an HCA spokesman, Thomas Frist had no comment, and an aide says the senator denies any wrongdoing. The SEC declined to comment on the investigation.
But all this doesn't mean the process is completely devoid of politics. Even with Cox's recusal, two other Republicans on the SEC's ruling commission could block a recommendation for formal charges against Frist. John Coffee, a securities-law professor at Columbia University, says the practical effect of Cox's recusal is that he can "stay clean and distant'' while letting any suspicions fall on the two Republican commissioners, who can vote together to prevent any proceeding (there are four commissioners besides Cox).
Frist may well have the facts on his side. Attorneys with knowledge of the case say Frist has what appears to be a valid explanation—he apparently indicated in a letter his intention to sell shares in April, long before the earnings announcement in July (a Frist aide says the senator will turn over documentation to the SEC proving this). Insider trading is notoriously difficult to prove—so, barring an e-mail or other document showing he was tipped, the case could evaporate. Still, there is the tricky matter of the "blind trust'' in which the HCA stock was held. A former SEC official, who spoke on the condition of anonymity because he may at some point represent a party in the case, notes that if the trust was indeed blind, as its name suggests, why was Frist directly involved in selling the stock?
Frist understands the value of connections, and his lawyers have plenty. He's retained the firm of Wilmer Cutler Pickering Hale and Dorr, which just hired former SEC enforcement chief Stephen Cutler as an attorney to work on securities issues. Cutler left the SEC last spring, and is barred for the next year from working on the case because of government ethics rules. But one of Frist's lead attorneys is William McLucas, who served as SEC enforcement chief in the 1990s. By all accounts, the investigation is likely to take several months. By the end of it, Frist will likely know as much about insider-trading law as he does about horse-trading inside the Beltway.