When Tennessee native son William H. “Bill” Frist assumed the mantle of U.S. Senate majority leader in January, the national buzz was almost uniformly positive. Press accounts characterized Frist as a smart, diligent man with a squeaky-clean background. He was described as a gifted doctor, possessed of a strong body of knowledge about health care. With strong ties to the president, he was seen as a man who might be able to unify the often fractious Senate. Some observersincluding the Nashville Scenesuggested he would be a likely candidate for president in 2008.
What dissension there was about Frist centered on his wealth and where it came from. Frist’s father co-founded Hospital Corp. of America (HCA), the nation’s largest hospital chain and what published reports estimate is the 90th largest company in the U.S. Frist’s older brother, Thomas F. Frist Jr., not only helped his father start HCA but was also the firm’s longtime chairman and CEO. Last year, Forbes estimated Thomas Frist’s fortuneconcentrated in HCA stockat $1.7 billion. As for the senator, he, too, has owned stock in the company for years, even though the amount has rarely been known.
Some critics have worried that Bill Frist’s ties to his family’s company make it difficult for the 51-year-old senator to be an unbiased player in health care reform. The issue is whether he has a conflict of interest because of his strong ties to, and ownership in, HCA, which operates more than 200 hospitals. Frist’s response to this line of inquiry has been consistent: My stocks are in a blind trust. My HCA stock is out of my direct control. I have no idea how much the stock is worth. I have no idea how much of it I own. Thus, I have no conflict.
Frist’s line of reasoning has often been repeated by various media outlets. He aired similar remarks in a Jan. 26 Washington Post story titled “Frist’s Health Care Votes Reflect Roots.” According to the Post, Frist says today that he “no longer knows how much the (HCA) stock is worth.”
Actually, as this story will discuss later, that’s technically accurate but entirely misleading. But for now, the question certainly bears asking: How much HCA stock does Frist’s blind trust hold today?
Frist declined to discuss his HCA holdings with the Scene and no methodology exists to estimate such a figure perfectly. But using public filings, press reports, the blind trust itself and a procedure that replicates how Forbes arrives at that magazine’s list of the 400 richest Americans, the value of Frist’s HCA portfolio can be reasonably estimated.
The Scene estimates Frist’s HCA stock at year-end 2002 was worth somewhere between $2 million and $12 million, a rather broad range. Were the Scene held at gunpoint and forced to put forth one estimate, it would be $7 million.
Importantly, Frist’s ownership of HCA stock has declined over the years. In 1994, Frist divulged to the public that his HCA holdings were worth more than $13 million. Six years later, when his current trust was created at year-end 2000, the Scene was able to estimate that Frist’s holdings in HCA were worth between $8 million and $17 million. Over this time period, from 1994 to 2000, the adjusted share price of HCA had steadily risen. More importantly, Frist’s trustee sold millions of dollars in HCA stock during those years, according to public filings.
The pattern of sales continues. In fact, Frist’s office confirmed to the Scene the specifics of additional multimillion- dollar stock sales in 2001 and 2002. To critics who have worried that the senator’s ownership of HCA tarnishes his ability to lead the health care policy debate, this means Frist is becoming increasingly less open to attack.
As for the total value of Frist’s portfoliothat being the value of stocks, bonds and cash in his trustthe Scene estimates it being in the $17 million to $21 million range. Such a fortune makes our senator one of the nation’s richest legislators.
Other estimates are also in this range. The Washington, D.C.-based Roll Call last year ranked Frist as the 14th wealthiest member of Congress and estimated his worth at $20 million. Consistent with that analysis, Frist himself valued his total net worth at between $5 million and $25 million on his 2002 annual financial disclosure statement that will be released publicly later this week by the Secretary of the Senate.
Perhaps just as interesting as what the Senate’s highest elected official is worth is just how that wealth is managed. The Nashville Scene recently examined Frist’s blind trust, which the senator’s Washington, D.C., press office provided to this newspaper. It’s the first time any news organization has taken an exhaustive look at the document. This newspaper recruited an eight-member, bipartisan, unpaid panel of experts in trusts from around the country to analyze it.
Frist himself declined to comment on the panel’s findings or to discuss the trust at all. What we discovered is that Frist’s “blind” trust isn’t really blind at all, though he hasn’t broken any rules. Moreover, Frist’s ownership of HCA stock isn’t considered a conflict of interest according to Senate rules. But then, according to those rules, almost nothing qualifies as a conflict of interest.
Bill Frist was elected to the U.S. Senate in 1994 amid a crushing Republican landslide nationwide. He defeated incumbent Sen. Jim Sasser who, ironically, was considered a favorite to become Senate majority leader in 1995.
The question of Frist’s HCA stock ownership in that campaign was a huge issue in what was an extraordinarily nasty race. Some Democrats seized upon his ownership of HCA stock as something evil and sinister. In the end, political analysts would agree that voters didn’t seem to mind too terribly. After all, he won.
Frist first put his assets into a blind trust in 1995. Frist upgraded to a newerand somewhat blinderform of blind trust five years later. Why the new trust?
At the time he created his first trust, Frist’s portfolio included so-called “non-public securities.” More than likely, these were private partnerships and the like. Federal laws say such securities cannot be put into a so-called “qualified blind trust”the type of high-end trust that Frist now has. Once these securities were sold, Frist spokesman Smith says that the “more stringent” form of trust was created “as soon as practical.”
Interestingly, panelists say that Frist may have gotten another benefitmost likely unintentionalfrom discarding his former trust and creating a new one. At year-end 2000, he was given the opportunity to take a look at what specific assets were placed into his blind trustincluding the exact size of his HCA holding. Whenever one blind trust is discarded in favor of a newer one, panelists say the blind trust ceases to be blind during the changeover period.
But there is another way Frist knows about activity in his blind trust. Every year when he files his annual financial disclosure statement to the Office of the Secretary of the Senate, he must divulge the amount of income the blind trust generates. This would provide him a very good indication of how wellor poorlyhis investments are doing.
“I’m a Republican myself and don’t want to put too much blame on Bill Frist,” says Peter P. Weidenbruch, Ralph H. Dwan Professor of Taxation at Georgetown University Law Center in Washington, D.C. “But if he’s been professing his total ignorance of what’s in his trust, it would seem he hasn’t quite been truthful.”
Joel Bronstein, a veteran trusts and estates attorney based in Florida, says, “It’s a blind trust that isn’t all that blind.”
The original 1995 blind trust was created at Frist’s insistence, his staffers say. It’s worth noting that Frist, then a first-term senator, was advised at that time by the Senate Ethics Committee’s staff director that he didn’t have to worry about a conflict of interest and therefore didn’t need a blind trust. To many, this fact seems astonishing. How could someone owning millions worth of stock in the nation’s largest hospital company and voting on legislation that could benefit that company not have a conflict?
Basically, there’s a serious difference of opinion between what most people think would constitute a conflict of interest for an elected official and what the U.S. Senate considers a conflict. The federal laws that govern conflicts of interest are written in such a technical fashion that virtually nobody has a conflict of interestever. For example, take the hypothetical case of a pig farmer who also happens to be a U.S. senator. Suppose the senator introduces a bill that steeply raises price supports for pig farmers. The farmer works tirelessly for the bill and it passes. The benefits to his farm are enormous.
According to Senate rules, this senator has no conflict. Why? Because his backing of the bill would also have a broad, general impact on the senator’s state or the entire nation. As long as that’s the case, then the fact that the pig bill also would be financially beneficial to the senator is irrelevant.
In any case, Nashville attorney Mark Tipps, who was Frist’s chief of staff from 1995 to 1996, says that Frist nevertheless went well beyond the call of duty in creating the trust. “Frist did something extra of his initiative that he was not required to do,” Tipps says. “He did so despite being advised against its necessity by the Senate’s top authority on conflicts of interests.”
When Frist created his blind trust, he did so according to the provisions of the Ethics in Government Act. That act says that a “qualified blind trust” must satisfy several requirements:
♦ The trustee, who is the individual charged with managing the assets of the trust, must be independent;
♦ There can be no restrictions on disposing of the trust’s assets;
♦ Communication between the trustee and the politician must be limited;
♦ And the trust must be approved by the Senate’s Ethics Committee.
The Ethics in Government Act was passed in the post-Watergate reform era. Ever since, blind trusts have been considered a way to “ameliorate potential conflicts of interest,” according to The Fitzroy Dearborn Encyclopedia of Banking & Finance. “An underlying concept is that if a government official does not know the identity of his or her financial interests, his or her official actions should not be subject to collateral attack by questions of conflict of interest or the appearance of such a conflict.”
Another wealthy Tennessee politician, Gov. Ned McWherter, placed his assets in a blind trust when he was governor from 1987 to 1995. Democrat Phil Bredesen, elected governor last November, placed his considerable assets in a blind trust last January.
All blind trusts that are created for U.S. senators must be filed with the Secretary of the Senate, but only after the Ethics Committee has vetted them. On Dec. 28, 2000, the Senate Ethics Committee wrote Frist that it had approved his current trust document.
When Frist recruited a team to both createand managehis blind trust, he didn’t turn to strangers. Instead, a review of the documents shows that he relied on people very close to home.
The trust was drafted by James C. Gooch, a highly respected trusts and estates lawyer and a partner at Bass Berry & Sims, the prominent and venerable Nashville law firm. (Frist’s brother-in-law, H. Lee Barfield II, is also a partner at the firm.) The trustee is Kirk Scobey Jr., the well-respected president of Nashville-based Equitable Trust Co. His specific obligations are outlined in the trust document.
Among other things, the trust stipulates that Frist can fire Scobey at any time, for any reason. “This is fairly typical language for such trusts,” explains Michel G. Kaplan, a trusts attorney with Sherrard & Roe in Nashville. Still, panelists note that such a provision reduces the ability of the trustee to make truly independent decisions.
Scobey’s boss at Equitable is William H. Cammack, the firm’s chairman. In fact, Gooch, Cammack and Scobey are all solid members of genteel West Nashville culture, the same culture that produced and nurtured Bill Frist. Many of Nashville’s wealthiest and oldest families use Gooch to write their trusts, and turn to Equitable to manage them. They do so for good reason. Gooch and Equitable Trust both have impeccable reputations. And unlike many other trust firms, all of Equitable’s talent is based here in Nashville.
Reading the current blind trust leaves little mystery as to its original assets. It says, simply, that it is “concentrated in the stock of HCA.” How much HCA stock went into the trust? The trust doesn’t say.
In one section of the trust, the trustee is told he doesn’t necessarily have to diversify the trust’s assets. This runs contrary to most such agreements, which generally presume the trustees will work diligently to diversify investments. In Tennessee and elsewhere, a trust officer who doesn’t diversify can be successfully sued if a big holding loses its value.
Panelists say that this provision may have been inserted because Frist wanted the trustee to hold onto some portion of his HCA stock. One piece of evidence suggests this may be true: A full five years after his first blind trust was established, Frist still appeared to own at least $8 million in HCA stock. “One way to read this is that Frist is actually saying in this provision, 'Hey, I want to retain control of my HCA stock,’ ” theorizes Pamela D. Bridgewater, professor of law at American University’s Washington College of Law in Washington, D.C.
Gooch says this simply wasn’t the case. He says that, to the best of his memory, this provision was inserted into the trust at Scobey’s suggestion. “That provision,” Gooch says, “was designed to provide the trustee with flexibility to deal with the large HCA asset, and so the trustee wouldn’t have to worry about the timing of his duty to diversify the portfolio.”
Panelists agree that diversity is important to quality trust management. “With the senator, even if he loves his HCA stock, if he diversified his holdings, he would begin to eliminate a tremendous amount of downside risk,” explains Roger C. Gibson, president of Gibson Capital Management in Pittsburgh. Presumably, this means the smart investment decision for Scobey, the trustee, would be to sell large amounts of the HCA stock and use the proceeds to build a more balanced investment portfolio.
And, to his credit, that is exactly what Scobey appears to have been doing for some time. Frist spokesman Smith confirmed for the first time last week that the blind trust has reported total capital gains in excess of $6.5 million in 2001 and 2002. (Capital gains is the amount of profit that takes place when a security is sold.) Given that the tax rate on capital gains is 20 percent, it follows that diversification has triggered some $1.3 million in additional federal taxes for Frist in those last two years alone. And because when the trust was established it had no other significant asset than HCA, these large capital gains could only have been triggered by the sale of some of Frist’s HCA stock.
Because Frist’s HCA stock has been owned by his family for years and over time the HCA share price has risen consistently, panelists are confident that the stock had been obtained at a low price, or at a low “basis,” to use tax terms. This would make it virtually impossible for Scobey to have sold any of Frist’s stock without incurring significant capital gains.
This is hardly a new strategy. The trustee sold several large blocs of Frist’s HCA stock in the mid- and late-1990s. Interestingly, Frist knew of these sales, or at least had access to information that these sales took place. How? The income from these sales of HCA stock was reported on Frist’s annual financial disclosure statements that he filed with the Secretary of the Senate.
“Given the annual reporting of capital gains, it’s kind of a crock for Frist to say he doesn’t know what he owns because it’s in a blind trust,” says Charlie Gofen, a portfolio manager at Gofen and Glossberg, a Chicago-based investment counseling firm.
These sales notwithstanding, Frist’s trusts have clearly consisted of enormous HCA holdings for much of the time he has been a senator. Another example: Frist knewor had access to information allowing him to knowthat the trustee transferred three more allotments of HCA stock to the blind trust in 2001 and 2002. More than $750,000 in HCA stock was transferred into the blind trust during that time period from the estate of his late parents. And Frist has certainly known for muchif not allof his senate tenure that HCA has been his largest single asset.
“I see nothing sinister in this,” reports Phillip A. Baumann, a veteran trusts attorney in Tampa. “With people who have a lot of low-basis stock in their family business, they often want to hold onto a fair amount of it.”
The work that Scobey does for Fristbuying shares and overseeing the portfolio in the trustcomes at a bargain basement price. According to documents on file with the Secretary of the Senate, Frist is charged less than Equitable Trust Co.’s going rate to manage his assets. The firm waved its $5,000 minimum annual fee for Frist, and it also whittled its management fee for large accounts down from .3 of 1 percent to .22 of 1 percent. Such deals are not unusual when assets are significant. For his part, Scobey declined comment.
Our experts agree that Frist and his attorney acted entirely properly in drafting his qualified blind trust. The language of the trust clearly follows the letter of the law of the Ethics in Government Act. As well, panelists were impressed that Scobey has moved to diversify the holdings beyond HCA.
This has given Frist the best of both worlds. In his private financial dealings for most of his tenure in the U.S. Senate, Frist appears to have held onto largeif decreasingamounts of his HCA stock. At the same time, in his public life, he has been able to tell curious reporters from The New York Times and The Washington Post that his assets are in a blind trust. “I see nothing wrong with how this trust was set up, and I’m not surprised by it,” reports Mark L. Ascher, Sylvan Lang Professor in the Law of Trusts at University of Texas School of Law in Austin, and a self-described Republican. “In all aspects of law, there are areas where form prevails over substance, and a certain amount of window dressing goes on.”
The Bush White House has made no secret of the fact that Bill Frist is the administration’s point man on health care issues. And how these debates play out will clearly affect the fortunes of HCA.
Still, aside and apart from the technicalities in the blind trust, there is no evidencenot even a whiff of evidencethat Frist has ever tried to influence legislation to benefit his investment portfolio. Even a cursory look at his voting record indicates that Frist has voted both forand againstbills that would benefit HCA and other health care providers.
There is no better evidence that Frist’s legislative record is beyond reproachas far as HCA goes, anywaythan his vote for the 1997 Budget Act. That act significantly cut the rate of reimbursement provided to hospitals by Medicare and thus cost HCA hospitals untold millions of dollars in revenues. Frist also supported the Republican version of the Patient’s Bill of Rights Act, while the Democrat’s proposal would have been far better for HCA’s balance sheet. (This is the same HCA that last year agreed to a $740 million settlement with the federal government in the largest health care fraud case in U.S. history.)
“I sat opposite Bill Frist and helped him make decisions on health care issues on many occasions,” recalls former chief of staff Tipps. “His decisions were always driven by three factors: access, affordability and quality of care.”
On the other hand, some liberal congressmen haven’t always been persuaded. U.S. Rep. Harold Ford, a Democrat from Memphis, asked the Senate Ethics Committee in 1999 whether Frist’s HCA holdings should preclude his participation in drafting health care legislation. (The committee told Ford in no uncertain terms that Frist had no conflict of interest.) But for some critics, the issue lingers.
That said, HCA contends it bends over backward not to take advantage politically of its relationship with the Frist family. HCA policy today specifically forbids employees from meeting with Bill Frist for political purposes. “We never contact Frist for purposes of lobbying and whatnot,” explains Nashville-based HCA spokesman Jeff Prescott. “HCA knows nothing about Frist’s blind trust. We know the trust exists, but that’s about it.”
Still, there’s no denying HCA has a very sizable interest in the actions Frist ultimately takes regarding health care. “HCA absolutely cares what happens on Capitol Hill,” explains Washington Analysis’ Ira Loss, a health care analyst who follows the effects of government laws and regulations for institutional investors on Wall Street. “A significant portion of HCA’s business is tied to Medicare. That’s one of many reasons why HCA has a pretty active voice on Capitol Hill. As well, not much can get done now in terms of legislation without Frist agreeing to it. He’s the one who can engineer the deals.”
The overwhelming message from our panelists is that as Sen. Frist has gone about responding to his critics, he would have been more honest had his public statements about his trust sounded more like this: “Yes, I put my assets into one blind trust and then another. But those trusts aren’t really all that blind. If I stopped and thought about itwhich I don’tit’s true that I know for certain that I still own a fair amount of HCA stock, or at least I did last year. To be brutally honest, I have known for most of the time that I’ve been a senator that I’ve had a big, big stake in HCA. Still, I’m an honest guy and would never take actions on Capitol Hill to try to goose my portfolio.”
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