Our senior senator, William Frist, has now hit the ethics trifecta. With the announcement last week that both he and his family's company, the health-care giant, HCA, are under investigation by the U.S. Justice Department and the S.E.C., for possible insider trading in connection with his sale of HCA stock (more about that later), the good Senator has now arrived at “third time is a charm” territory insofar as investigations are concerned. He is now in a neck and neck race with his counterpart in the House, Tom Delay, to see who can rack up the most investigations.

Remember HCA? That's the Nashville-based health care giant started by Frist's family that in 2000 and 2003 agreed to pay what was, at the time, the largest government fraud settlement in history, nearly $2 billion in civil and criminal fines and penalties, to settle allegations of medicare fraud.

As a part of the settlement of fraud charges, HCA agreed to enter into a comprehensive “corporate integrity agreement” with the federal government, which applies to its business practices and conduct, and which applies to all officers, directors and employees of the company. Included in that “CIA” is a provision governing “insider trading and securities trading,” which states:

Securities law and HCA policy prohibit individuals from trading in the marketable securities of a publicly held organization or influencing others to trade in such securities on the basis of non-public, material information. These restrictions are meant to ensure the general public has complete and timely information on which to base investment decisions.

More about that, later.

While the presses hum with information, suspicion and innuendo about Frist's propitiously (one might even say, serendipitously) timed sale of his HCA stock just a month before the market was let in on the secret about the dramatic downturn in the company's revenues, (after which the price of the stock plummeted), less attention has been paid to the fact that investigations are being conducted into other aspects of Frist's conduct. One of those investigations is being conducted by the Federal Election Commission as a result of the complaint filed last June by a liberal advocacy and litigation group, Citizens for Responsibility and Ethics in Government (how 'bout that for a double oxymoron)against Frist and his 2000 campaign committee for their failure to report, according to the complaint (as required by federal election law) a $1.44 million loan he had his '94 and '00 campaigns take out to repay him, personally, for loans he had previously made to his campaigns.

The complaint doesn't say what was used for collateral (certainly not HCA stock), but it does refer to the fact that he invested $1 million in surplus campaign funds (in anticipation of his '08 presidential run) in a mutual fund managed by Charles Schwab which promptly proceeded to hemorrhage money in an up market, apparently because, in the opinion of some, it wasn't properly diversified. The FEC has the ability to impose a variety of sanctions for violations of the act it administers, or to make no adverse findings, but its 3/3 Republican/Democrat composition has stalemated it, and it has been criticized for being glacially slow disposing of its cases. (NOTE: In a report released on September 26th, 2005, Citizens for Responsibility and Ethics in Government issued a report titled “Beyond Delay, The 13 Most Corrupt Members of Congress,” naming Frist among those 13).

Next is the investigation, not widely reported, of Frist in his capacity as a physician by the Tennessee Division of Health Related Boards Investigations in connection with the remarks he made on the floor of the U.S. Senate on March 17, 2005, regarding Terry Schiavo (those authorities will neither confirm nor deny the existence of their investigations).

In case you've forgotten that episode, Frist said:“I close this evening speaking more as a physician than as a U.S. Senator...persistent vegetative state, which is what the [Schiavo] court has ruled, I say that I question it, and I question it based on a review of the video footage which I spent an hour or so looking at last night in my office here in the Capitol. And that footage, to me, depicted something very different than persistent vegetative state.” He made other remarks during that speech on the Senate floor which were questionable, both about the history of the case and about the medical standards for the diagnosis of PSV.

Frist's remarks raised a storm of controversy, both politically and medically. Doctors are only supposed to express diagnoses when they have a professional basis to do so (i.e., when they've examined a patient, and reviewed their medical records, neither of which Frist had done with respect to Schiavo), and when they are qualified by training and experience to do so (in this case, by being board-certified in a neurological specialty, which Frist was not).

In expressing his Senate armchair opinion, Frist was also calling into question the diagnoses rendered by competent court-appointed specialists who had examined both her and her records and concluded that Ms. Schiavo was indeed in a PVS. The medical profession does't like it when doctors impugn each other, or for that matter, when they express off-the-cuff opinions that contradict studied diagnoses. The expression of that disfavor is the Tennessee Medical Practices Act which prohibits “unprofessional, dishonorable or unethical conduct.” The result was complaints filed not just by lowly lay people, but by physicians as well with with the medical board's investigative body.

To add insult to injury, the results of the Schiavo autopsy showed that not only was she undoubtedly in a PVS when she was alive, but that her brain had shrunk to less than half its normal size, and thus could not have supported brain activity anywhere close to what Frist described. Schiavo's autopsy report indicates that her brain was even smaller than was Karen Ann Quinlan's (the prior cause celebre for the competing right to life/die camps) when she died. You'd think that would have caused Frist to apologize (or at least retract) his remarks on the Senate floor, but instead Frist dealt with the autopsy findings by trying to deny his prior statements. Pat Robertson undoubtedly learned how to deny his very public call for the assassination of Hugo Chavez from watching Frist's post-autopsy behavior.

The investigation of Frist for “insider trading” is a bit more complicated, and unlike campaign finance and medical practice laws, is something I actually know something about, having participated in insider trading investigations when I was a young buck at the S.E.C.'s enforcement division in Washington. A couple clarifications first. There is no such thing as “inside information,” or “insider trading,” sexy as they may sound. The term that applies here is “material non-public information,” and it is a term that has only recently been explicitly defined in federal statutory law, having been written previously into the securities laws by what some might consider “activist” courts.

The theory is that the market operates best (and most fairly) on a playing field that isn't tilted by the use of significant information that only the privileged few manage to obtain. Those privileged few are defined as persons who, by reason of having a fiduciary relationship (i.e., trust and confidence) to a company or its stockholders, have special access to information that isn't available to the rest of us. The list of positions that have such a fiduciary relationship is long, but given his large position in the company's stock, and his special relationship with the company, its founders and directors, that list obviously would include him. And, of course, as in the Martha Stewart case, a person can become an “temporary” insider, or a “tippee” of such information, as happened in her case when her broker got wind of non-public information about the stock of a company, which she traded on just before the information became public, and the company's stock tanked. However, Martha didn't go to jail because she traded on that information; she went to jail because she lied to government investigators about it, and as she might put it, that's not a good thing. It's also an object lesson for anyone caught in the net of an insider trading investigation.

Certainly, one of the defenses to the charge that Frist traded on the basis of inside information is that he had a separate, independent reason for wanting to sell the stock (i.e., to eliminate conflict of interest charges in anticipation of his '08 run). It may be too late for that, though, since the record shows that he's been neck-deep in health care issues since his election in '94, including the Medicare drug prescription benefit (which he voted for), the drug re-importation bill (which he voted against) and a bill allowing patients to sue HMO's (which he voted against), all of which benefited HCA.

It's hard to imagine a hospital chain benefiting more from anything than it will from the Medicare drug program which, in its eminent wisdom, the Republican Congress prohibited from negotiating lower drug prices. He has also been in the forefront of attempts to limit medical malpractice liability, a significant cost to a hospital chain (indeed, according to its annual report, HCA paid out $268 million and reserved $1.2 billion in 2004 for such claims---almost as much as its total net profit for that year), and of particular interest to HCA which owns one of the largest medical malpractice insurers in the country. And, let's not forget his membership on the health care subcommittee of the Senate finance Committee and the many accomplishments in the health care arena touted by the senator on his own web site. All in all, Frist may be more than a day late and a few dollars short of being able to use the conflict of interest issue as an explanation for the timing of his stock sale.

The other defense the law makes available to Frist is instructing “another person” to sell his stock, and here is where the issue of the relationship between Frist and the trustee of his “blind” trust comes in. Published stories trumpet the informational porousness of the trust, indicating he had more knowledge, and more control over the decisions of the trust, than a truly “blind” trust would allow, and raising questions about whether he violated Senate ethics rules in the way the trust was handled. One expert called it a seeing-eye trust.

Frist, and HCA, can now look forward to having government investigators crawling all over them (like they did during the earlier medicare fraud investigations), poring over every imaginable record (and many unimaginable ones---credit card receipts, for example, have been helpful in some insider trading cases)in minute detail, taking depositions (complete with perjury and 5th Amendment warnings)of potentially hundreds of people privy to information about the events that led up to the sale of Frist's stock, all in order to determine, in the manner that another senior senator from Tennessee once famously asked, “what did they know and when did he know it?” While many are jumping the gun by expressing skepticism that Frist could be so foolish as to exploit his insider status in this way, let me assure the reader that the annals of “insider trading” cases are full of people who thought, either in spite of their prominence (or because of it) that they could get away with it.

Insider trading investigations aren't something prominent Republicans are unfamiliar with. President Bush was investigated for insider trading when, in 1990, he sold the stock of a company (Harken Energy Corp.) shortly before it announced a dramatic loss. The SEC found no wrongdoing on that occasion, and may well do the same this time around, but having been there, I can tell you it won't be because of who they're investigating.

Another potential, but as yet publicly undisclosed problem, both for Frist and for HCA, is the “CIA” I mentioned earlier, and its policy on insider trading. If Frist violated the statutory ban on “insider” trading, he, and by association, the company may have also violated the CIA, which would give rise to all kinds of other potential punitive measures under the terms of settlement of the fraud charges, over and above anything available under the statute. And then, of course, there will be the inevitable class action lawsuits, alleging that Frist's conduct harmed investors who weren't privy to the same information at the same time as Frist was when he engineered his sale. (Now, if only Frist can get the Senate to act on “tort reform” before that happens!)

Added to his stem-cell flip-flop on woes, it seems likely, to say the least, that these investigations won't have a salutary effect on the senator's candidacy for the '08 presidential nomination.


The S.E.C. this week authorized the issuance of a formal order of investigation in the Frist matter, turning it from an “informal inquiry,” into a full-blown look-see, with attorneys, accountants, market surveillance analysts and other S.E.C. staff members now being authorized to issue subpoenas and take sworn testimony. This was a significant step since an informal inquiry carries none of the compulsive powers with it, and is just a preliminary examination of the circumstances surrounding a possible securities law violation. However, once the staff is satisfied that there may be a fire underneath all the smoke, they can ask the Commission for authority to ratchet up the investigation, and if one of the five commissioners is satisfied, based on the presentation made by the staff, that the investigation should go to the next step, it does.

Many informal inquiries never become formal investigations, and many formal investigations never become court cases, but the fact that an all-out investigation will now take place can't be very comforting to Senator Frist. And, given the fact that investigations in insider trading cases can be lengthy (Martha Stewart's took nearly two years), the senator, as TV detectives used to say, should probably not think about leaving town anytime soon.



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