Senate Majority Leader Frist sold all of the stock in his family’s hospital corporation about two weeks before it issued a disappointing earnings report and the price fell dramatically. This news has given rise to a great outcry, mostly by leftist bloggers. But before reaching any conclusions as to misconduct or guilt, it’s always useful to know something about the area of law in question, not to mention the facts.
Professor Bainbridge is an expert in this area. He notes that unless Senator Frist had “material nonpublic information” about the hospital corporation at the time he ordered the sale, there is no legal problem. He further observes that unless Frist lacks “the common sense God gave gravel” he would not have allowed himself to possess such information. In this regard, TigerHawk points out that what Frist undoubtedly did know at the time of the sale is what everyone else paying attention knew — company management was selling off the stock is large quantities. Indeed, TigerHawk finds that Frist did not sell his stock during the big sell-off, and that the average investor had the opportunity to sell shares based on knowledge of the sell-off before Frist ordered his sale.
Bainbridge goes on to argue that, even if Frist had material nonpublic information about his corporation at the time he ordered the sale, the legal issue would hardly be open-and-shut. Frist could still argue that he did not make the trade based on the information, but rather because he wanted to divest himself of the stock in order to clear the decks for his presidential run. According to Bainbridge, the issue of whether that defense is available to First is unsettled. I doubt that Frist wants to be the test case.
Absent evidence that Frist had material non-public knowledge about his corporation, I see no reason why Frist should resign or even step aside temporarily pending any investigation.
UPDATE: Captain Ed says that a second legal issue arises because Senator Frist knew he possessed stock in his family’s hospital company, HCA. It’s my understanding that Frist was entitled to know that he owned the stock, but not how much of it he owned. There doesn’t seem to be any evidence that Frist knew how much HCA stock he owned, so I’m not sure there’s any legal issue here. However, I will await word from Professor Bainbridge, or someone else who actually knows the law in this area, before reaching any conclusions.
Ed also suggests there may be evidence that Frist lied in January 2003 about what he knew about the contents of the blind trust. The claim here is that although Frist said he didn’t know whether he owned HCA stock, in fact he had recently received a letter indicating that his trust had purchased some. A claim that Frist lied in this regard strikes me as quite premature. First, as Ed acknowledges, we don’t know whether the alleged letter is authentic or for that matter whether he had seen it or had it in mind. Second, as I understand it, the trustee could have sold the stock at any time without notifying Frist. If the trustee had that power, then Frist could not have known for sure whether he held HCA stock at the time he made his statement. (Again, my comments here are subject to revision based on information from folks who know this area of law).
If it can be shown that Senator Frist lied then, of course, he should step down. But Frist has a solid record of integrity and a strong record as a humanitarian. I wouldn’t want to suggest that he may have lied about this matter until there is more clarity about the issue than I, at least, have right now
JOHN adds: It has been reported that Hillary Clinton’s blind trust shorted health care stocks just before she announced Hillarycare some years ago. I wasn’t able to tell whether this was correct or not with a quick Google search last night. Does anyone know the details?
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