A Stitch in Haste

Over at my greedy Swiss bank employer, I'm what's known as a "Permanent Insider." That means that I have access to the list of securities issuers about which my firm possesses "material nonpublic information," commonly known as "inside information." I often don't even know what the information actually is, just that the firm possesses it. I am said to sit "above the Information Barrier," once known as "striding the Chinese Wall."

Unsurprisingly, my firm (and regulators) would be very upset if I used this information to my own advantage by trading securities on these confidential lists. The practice is expressly forbidden under any circumstances.

What's more, I'm significantly constrained in all securities transactions, even for companies about which the firm has no inside information. If I want to engage in even a harmless, innocent stock trade, I need no less than four different approvals, from my immediate supervisor to the head of the investment banking division.

As you can imagine, I don't trade much.

Which is why the reports of Senate Majority Frist selling $112 million worth of stock in the company his family founded, Hospital Corporation of America ("HCA"), is an unambiguous scandal.

Let's be very clear about this: It is totally irrelevant whether Frist actually had any material nonpublic information about HCA's earnings. This is not "Martha Stewart — The Sequel." Any transaction, regardless of whether it was based on inside information, is flagrantly unethical.

A blind trust should be exactly that — blind. Any member of Congress, indeed any Congressional staffer, should be expressly prohibited from any and all private securities transactions.

This proscription becomes even more imperative with the leadership. The influence of Congressional leaders, including committee chairs, is so extreme as to make the need for a trading barrier similar to what we Wall Street insiders face self-apparent. Or so one would think.

Frist is now claiming that he ordered the stock sale to "avoid the appearance of a conflict." Huh? The whole point of a blind trust is to provide that "appearance of impropriety" insulation — piercing the blind trust by ordering the HCA sale was the quickest way to create the appearance of a conflict. Frist, and his advisers, are either liars or idiots.

The time to sell your holdings is when you first enter politics. If you have to do it at a loss, then too bad so sad — stay out of politics if you don't like it. Either that, or have your trustee work around the constraint while you remain in the dark. There are many ways to do this — build up the portfolio around the concentrated holding, or utilize a controlled, fixed periodic liquidation like corporate insiders do (called a "10b5-1 trading plan").

Politicians, bureaucrats and the legions of minions who prop them up claim to be driven by the desire to be "public servants." If greed and power-lust are not their goals, then what's the big deal about trading restrictions? Why can't blind mean blind?

And if they insist on managing their own finances rather than using blind trusts, fine. Let them do what we do on Wall Street — buy mutual funds or Treasury bonds while avoiding direct ownership of stocks, options or corporate bonds, which can create potential conflicts.

Meanwhile, the SEC and federal prosecutors have launched an investigation of HCA and subpoenaed their records relating to Frist. Good, but I want to repeat and emphasize that I am not saying that Frist engaged in insider trading — I would hope he's too smart for that (on the other hand...). My point is that even an innocent breach of the blind trust was inappropriate and should not have been allowed. Blind should mean blind.

Apparently the stock sale itself, absent any potential insider trading, is allowed by Senate rules. If so, then the Senate rules are a ass. The Senate has been described as a "Millionaires' Club." That doesn't mean it has to be a "Petty, Selfish, Greedy Millionaires' Club."

Congressional ethics rules must be amended to prevent any and all trading in corporate securities and derivatives by all Members of Congress and their senior staff. Similar prohibitions should of course extend to all senior members of government, at both the federal and state level.

It's a small price to pay for the privilege of being a "public servant."

Other thoughts at De Novo, In Dicta, FaerieWizard.

The Securities and Exchange Commission has announced that its Chairman, Christopher Cox, will recuse himself from the regulatory agency's investigation into the sale of $112 million of stock by the supposedly "blind trust" of Senate Majority Leader Bill Frist:

"Because of my service in the congressional leadership for the last 10 years, I have recused myself in this matter," he said.
...
"The purpose of the recusal is to avoid any appearance of impropriety in the commission's consideration of this case," said Cox...

Here's the interesting thing: before Cox ran for Congress, he was a long-time Wall Street lawyer — a venture capital specialist with Latham & Watkins.

Funny how we Wall Streeters "just get it" when it comes to conflicts of interest and the appearance of impropriety, while people hailing from "nobler" professions such as medicine apparently don't.

Remind me again how we Wall Streeters are all greedy, unethical parasites?

Senate Majority Leader Bill Frist is defending his well-timed sale of HCA stock on the grounds that it was meant to prevent future conflicts of interest should he run for president in 2008:

"The complaints and questions have persisted," Frist said yesterday. "Because of these continuing questions, and looking ahead at my final years in the Senate and what might come next, I have for some time wanted to eliminate even the possibility of an appearance of a conflict by totally divesting of any HCA stock in my family's trust."
...
"In April, I asked my staff to determine if Senate rules and relevant laws would allow me to direct the trustees to sell any remaining HCA stock. In May, my staff worked with outside counsel and with the Senate ethics committee staff to draft a written communication to the trustees. After obtaining pre-approval by mid-June from the Senate ethics committee, I issued a letter directing my trustees to sell any remaining HCA stock in my family's trust."

This is all well and good, and I still see no reason to jump to conclusions about whether Frist had material nonpublic information about HCA's earnings. But it fails to address the systemic deficiencies in the Senate's ethics rules that this incident has exposed:

--How can a "blind trust" allow for directed transactions, under any circumstances? How can "blind" not mean blind?

--Why is it a conflict for Frist to hold equities in a blind trust as president, or as a presidential candidate, but not "merely" as Senate majority leader? Why is it a "potential conflict" for Frist to own HCA stock in 2005, 2006 or 2007 but not in 2004 or 2003 or December 2002, when he was elected majority leader?

--If the goal of the sale was merely to remove potential conflicts, then why not structure a slow, steady sale of the stock over time, comparable to the 10b5-1 trading plans now available to corporate insiders so they can avoid timing conflicts?

--Why should members of Congress be allowed to trade corporate securities at all? Wouldn't the best way to avoid conflicts be to freeze all trading activity during their time in office, or limit them to conflict-free investments such as mutual funds and government bonds, as much of Wall Street does?

I say again: If Frist played by the rules, then the rules are a ass.

More thoughts at PoliBlog.

Senatorial stock gymnastics appear to be bipartisan:

Democratic gubernatorial candidate Sen. Jon Corzine [D-NJ] no longer holds shares in Goldman Sachs, his former employer, according to his campaign.

The disclosure regarding Corzine's finances came Tuesday after two lawyers alleged the senator had potential conflicts of interest because the Wall Street firm does business with the state.

In response to media inquiries about the allegations, Corzine spokesman Tom Shea said the senator had directed the trustees of his blind trust to immediately divest Goldman Sachs shares from his portfolio.

The campaign then learned, Shea said, that Corzine's trust had already been divested of the stock.

When that was done is not certain, but it may have been earlier this year, because such a sale was not listed on Corzine's 2004 tax returns.

Okay fine, Corzine seems to have avoided the "good market timing equals bad political timing" conundrum that Senate Majority Leader Bill Frist fell into. But the underlying dysfunctionality of the whole Congressional stock-trading framework is no less befuddling in Corzine's case:

--Why shouldn't he have been required to fully divest his Goldman Sachs holdings before taking office in the Senate in the first place?

--Alternatively, why doesn't "blind" truly mean blind in the case of Congressional "blind trusts"? What exactly is the logic of allowing senators to give sell orders to (what claims to be) a "blind trust" simply because the investment was owned beforehand? How is this exception to the rules not a potential conflict of interest different from any other buy or sell order?

--As another alternative, why can't members of Congress who face potential investment conflicts be limited instead to "auto-pilot" divestments, comparable to 10b5-1 trading plans for corporate insiders, under which a fixed quantity of the security is sold each month or each quarter regardless of price or corporate news?

--Finally, would it be so onerous to limit politicians to trading in conflict-free investments such as mutual funds and government bonds?

It makes no sense whatsoever that our seniormost politicians have less restrictions on trading than do corporate or Wall Street insiders. They certainly face the same, if not greater, potential conflicts of interest.

They are, most of them, already too power hungry to be trusted. Must they also be allowed every opportunity to satisfy their petty greed as well?

More thoughts from PoliBlog.

The original question regarding Senate Majority Leader Bill Frist's holdings and transactions in the stock of the company his family founded, HCA, was how he could know the holdings of, and order transactions in, an allegedly "blind" trust.

Now comes word that Frist not only controlled HCA stock in the blind trust, but also had even more stock in a trust created solely for the purpose of holding HCA stock:

In that case, the HCA stock was accumulated by a family investment partnership started by the senator's late parents and later overseen by his brother, Thomas Frist. The brother served as president of the partnership's management company and as a top officer of HCA. Sen. Frist holds no position with the company.

The senator's share of the partnership was placed in a Tennessee blind trust between 1998 and 2002 that was separate from those governed by Senate ethics rules. Frist reported Bowling Avenue Partners, made up mostly of non-public HCA stock, earned him $265,495 in dividends and other income over the four years.

So now we've come full circle. Frist first maintained that it was "no big deal" to own huge swaths of stock at the same time he was controlling legislative processes, policies and agendas that directly affected the value of the stock.

Then he claimed that it was "no big deal" because the stock had been placed in a blind trust.

Then he claimed that of course "blind" doesn't really blind, but it was still all okay because those (sorta kinda) blind trusts were within Senate rules -- in the same sense that the New Orleans levees were (sorta kinda) up to government standards.

Then it turns out that much of his holdings weren't even in those (sorta kinda) blind trusts anyway. But it was still okay because the Senate rules actually didn't allow that stock to be put in the (sorta kinda) blind trusts anyway.

And -- passing Go and collecting $265,495 -- Frist then ends up right where he started: asserting that controlling the Senate while having a direct equity stake in the outcome of health care policy is "no big deal."

Why is it "no big deal"? For the same reason we're told that Harriet Miers is "no big deal" -- "um, just trust us."

I would have preferred to trust the trust funds. Go figure.

Senate Majority Leader Bill "AIDS from Tears" Frist was nice enough to set up an AIDS-based charity in 2003.

Which, of course, benefited people with AIDS — among other people:

World of Hope gave $3 million it raised to charitable AIDS causes, such as Africare and evangelical Christian groups with ties to Republicans — Franklin Graham's Samaritan Purse and the Rev. Luis Cortes' Esperanza USA, for example.

The rest of the money [$1.4 million] went to overhead. That included $456,125 in consulting fees to two firms run by Frist's longtime political fundraiser, Linus Catignani. One is jointly run by Linda Bond, the wife of Sen. Christopher "Kit" Bond, R-Mo.

The charity also hired the law firm of [Frist's lawyer's] wife, Jill Holtzman Vogel, and Frist's Tennessee accountant, Deborah Kolarich.

I'm not an expert on charitable giving, but a 32% overhead rate seems excessive to me to say the least. Then again, this is Bill "She's Not Vegetative" Frist, so "excessive" is par for the course.

I guess it's simply well-settled now that the standard of Congressional ethics — especially by leaders like Bill "What Insider Treading?" Frist — is no longer "avoid even the appearance of impropriety" but rather "don't stop until the indictment is handed down."

The fundamental difference between libertarians and governmentalists is that libertarians reject the prevalence (and perhaps even the existence) of true "public servants" among politicians and bureaucrats. We see mostly the power-hungry and the corrupt.

Which is the same as saying: We read the newspapers.

More thoughts at PoliBlog, LLP, Moderate Voice.