The Securities and Exchange Commission and the Department of Justice are investigating Senate Majority Leader Bill Frist’s sale of all his stock in HCA Inc. -- a hospital chain his family helped found -- shortly before a disappointing earnings report triggered a drop in its value, Frist’s office said Friday.
The SEC and Justice Department declined to comment on the focus of the investigation. But Nashville-based HCA said in a statement that federal prosecutors had issued a subpoena Thursday night seeking “the production of documents,” that the company believes “relates to the sale of HCA stock” by Frist.
Frist’s spokesman, Bob Stevenson, denied any wrongdoing by the Tennessee Republican.
“Sen. Frist had no information about the company or its performance that was not available to the public when he directed ... trustees to sell the HCA stock,” Stevenson said in a statement. “His only objective in selling the stock was to eliminate the appearance of a conflict of interest.”
Still, the investigations pose a political embarrassment to the Senate’s most powerful Republican, widely viewed as a potential presidential candidate in 2008.
“There may not be anything there, but perception is always stronger than reality” in politics, said Marshall Wittmann, a former aide to Sen. John McCain (R-Ariz.) and now an analyst with the centrist Democratic Leadership Council.
Frist created a blind trust containing his HCA stock in 1999, although Senate rules do not require senators to put their stock holdings in such trusts, Stevenson said.
A blind trust gives control of the assets to a trustee who provides no details about transactions, only about total value and income earned.
In financial disclosures filed this year, Frist estimated the worth of his several blind trusts at $7 million to $35 million.
Congressional Quarterly disclosed Monday that Frist had ordered all of his HCA stocks sold from one trust in June. Stevenson said the article and other media reports prompted the SEC and Justice Department investigations.
Two sources who are close to Frist and who declined to be named said the majority leader decided to sell his shares to eliminate any appearance of conflict of interest in his financial portfolio as he positioned himself for a possible run for the presidency.
On June 13, Frist told the trustee to sell his HCA shares and those owned by his wife and his children, a step allowed under Senate ethics rules. Stevenson said that the trustee decided when to sell the stocks, and that Frist had no way of knowing how much was sold, or what was earned on the sale.
HCA shares hit a high this year of $58.22 on June 22. After the company announced that its second-quarter earnings would fall below analysts’ expectations, the price fell to $49.90 on July 13.
The Foundation for Taxpayer and Consumer Rights, a watchdog group based in Santa Monica, filed a complaint last year to the Senate Ethics Committee about Frist’s ownership of HCA stock. The group said that because Frist deals with legislation that could enrich the company, he should not own its stock.
The committee dismissed the complaint, saying there was no conflict under Senate rules.
On Friday, the group sent a letter to House and Senate leaders, demanding an independent inquiry into Frist’s sale of the stocks this year.
“For years, we have urged the senator to recuse himself from legislative matters that would financially benefit HCA because of his extensive holdings in that company,” the group said. “And for years Frist resisted, arguing that no conflict existed. His sudden change of heart is difficult to believe, and his newfound ethical concern may in fact cover up a much greater breach of trust.”
But Jacob S. Frenkel, a former SEC enforcement attorney and federal prosecutor now in private practice in Washington, said nothing revealed so far would indicate to him that there had been wrongdoing.
He cautioned, however, that if Frist had special knowledge that HCA was about to release an unexpectedly weak earnings report, “that is fair game for the SEC to inquire about.”
Insider trading cases can be difficult to prove, said Mark LoPresti, who analyzes such transactions for Thompson Financial, a New York financial data provider. Prosecutors must sift through mounds of telephone records, calendars, e-mails and trading records to try to make a connection between a trade and private advantage.
LoPresti said that SEC reports showed members of HCA’s board of directors and others with close connections to the company sold about 3.2 million shares, worth about $165 million, between January and June of this year. About 25 people, LoPresti said, participated in the stock sale during that period.
“For some insiders, increasingly larger sales occurred in May and June,” LoPresti said. “What does stick out is the amount of profits they were protecting.”
HCA was founded in 1968 by Frist’s father, Thomas; the senator’s brother, Thomas Jr.; and Jack Massey, former owner of Kentucky Fried Chicken. Thomas Frist Jr. remains on the company’s board of directors and is a major shareholder.
Democrats have repeatedly charged that the Republican-controlled Congress is ethically lax, and have vowed to make ethics an issue in next year’s congressional campaigns. But Democratic Minority Leader Harry Reid (D-Nev.) declined to comment on the Frist stock-sale investigations Friday.
Democratic National Committee Chairman Howard Dean showed no such restraint.
Frist’s record, Dean said in a statement, showed that he “spends most of his time looking out for his own financial interests and for Republican big business cronies.”
He said the administration “and their SEC and Justice Department officials must fully and vigorously investigate Frist’s suspicious stock trade and fulfill their role as financial watchdog for the American people.”
Frist, a heart surgeon who months ago said he would not seek re-election in 2006, has found himself at the center of several political controversies this year.
In the spring, he led the GOP effort to keep Terri Schiavo, the brain-damaged Florida woman, alive on a respirator over the objections of her husband. Frist was criticized for statements, based on review of a videotape, that questioned Schiavo’s doctors’ dire assessments.
Although conservatives praised Frist for trying to help Schiavo, they later criticized him for failing to force a showdown on Senate filibusters of President Bush’s judicial appointees.
Most recently, Frist angered religious conservatives when he endorsed embryonic stem cell research, which advocates say holds the promise of producing treatments for an array of diseases. Religious conservatives oppose the experimental procedure because it requires the destruction of embryos.