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Opinion Viewpoint

GADFLY

IS FRIST ETHICALLY CHALLENGED

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.

UPDATE

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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Opinion Viewpoint

Hurricane Hucksters

Gas prices used to be fairly stable. It took nine years following the 1970s oil embargo for gas to reach the $1 mark and 25 more years for it to hit $2. But it only took 12 months for the price to top $3.

We’ve had two unprecedented spikes just in the last several weeks, one (not surprisingly) immediately following the passage of the president’s conservation-lite energy bill, when prices spiked by about 40 cents (half of it overnight), and then the whopper, two days after Katrina hit, when the price went up 60 cents, again overnight.

We watched in amazement while gas stations changed the price numbers on their pumps, sometimes twice a day, and wondered how they could change prices on gasoline they had already purchased in anticipation of future price increases.

Big oil, hand in glove with the government and the mainstream media, has spun the propaganda for these spikes to soothe an incensed public and to pacify it into accepting its victimization. We’ve gotten the oil industry’s usual reason for the spikes (supply and demand), coupled with some less usual ones (in deflated dollars, gas is cheaper now than it was 30 years ago). By their credulous acceptance of the oil companies’ propaganda, the mainstream media are reprising their shameful performance during the run-up to the Iraq war.

Here are some things the oil companies (and their media shills) are soft-pedaling that help explain price spikes:

The oil companies have made $250 billion since 2001, enough to rebuild New Orleans (or Iraq, for that matter) and certainly enough to last them for a while without holding us up at the pumps. Katrina’s going to do even better by them. Exxon Mobil, for example, is on the verge of reporting a $10 billion profit just for the current quarter, the largest quarterly profit for any company in history, raising the question whether profiting at the expense of human misery isn’t more like looting than gouging.

With crude oil price increases, how have the oil companies managed to defy the conventional principle that when the cost of manufactured goods increases, profits decline? Why, by manipulating the market, of course. Hey, Enron did it.

The oil companies have been squeezing the supply of gasoline for years. For example, there hasn’t been a refinery built in this country since 1978, and scores of them have been shut down during that same period. An investigation by the Federal Trade Commission in 2001 found that oil companies intentionally withheld gasoline from the market in order to drive prices up, a practice they are continuing today. One oil company executive was quoted by the FTC as saying he “would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin.” And, of course, that’s exactly what’s happened, with the margin on the cost of a gallon of gas having increased by nearly 50 percent in recent years.

Add to this avarice the complete lack of competition in the oil industry, thanks to permissive government policies that have allowed giant oil company mergers (i.e., Exxon and Mobil, Chevron and Texaco). As a result, eight companies control 80 percent or more of the production, refining, and domestic retail market. And guess what? Monopolies aren’t friendly to consumers. So why hasn’t the government done anything about this? Do the words “Cheney’s secret energy task force” mean anything to you?

Could $80 million in political contributions since the 2000 election cycle — 80 percent of it to Republicans — and $50 million spent on lobbying have something to do with it? Government regulators have been all but emasculated; fewer investigations and enforcement actions are being pursued. Enron taught the government that energy markets can be manipulated, but cash has a strange way of steepening the government’s learning curve.

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Politics Politics Feature

GADFLY

KATRINA — THE EXIT STRATEGY WE’VE BEEN MISSING

The Republican ship of state has capsized in the aftermath of Hurricane Katrina. The Katrina effect only added insult to the injury represented by the steep and precipitous loss of confidence in the administration’s other policies, notably its conduct of the war in Iraq. Opinion polls show that the President is at an all-time low in the public’s confidence, and that the country has stopped trusting him to do what’s needed in Iraq.

In the face of this shipwreck, Republicans appear to be headed for the lifeboats, with public statements that have been openly critical of the administration’s conduct of both these seminal events. And yet, the Democrats continue to suck their collective thumbs, unwilling to capitalize on these gaping opportunities to step into the breach. Instead of adopting the strategy of a strengthened insurgency (much less the “loyal opposition”) in the face of a weakened occupying force (surely no one doubts that Washington is Republican-occupied territory?), they have been paralyzed by what can only be described as an attack of the Stockholm Syndrome (i.e., where the hostages begin to identify with their captors).

Led by no one, but defined by the “go along to get along” attitude perfected by the likes of John Kerry and our very own Congressman Harold Ford Jr., the Democrats appear to be afraid of casting their own political shadow. Even on Katrina, the Democrats have been muted in their righteous criticism of the debacle by falling prey to the “blame game” conundrum being so successfully played on them by the administration’s apologists.

On Iraq, Democrats refuse (with the notable exception of Russ Feingold, whose statement supporting a deadline for withdrawal has been marginalized even by his own party) to offer an alternative to “staying the course,”apparently fearing the false choice of being labeled “cut and runners.” They also can’t seem to get their acts together on deciding whether there’s a risk that John Roberts, unrevealing as his appearance before them was, may end up being another Scalia or Thomas, but in Kennedy clothing. And on Katrina, they even flubbed, in a small but significant way, the slam dunk (favored by 81% of the public) of calling for an independent (rather than a congressional or presidential) investigation of the Katrina debacle by allowing Hillary Clinton, of all the non-polarizing, non-aspirational people they could have gotten, to sponsor the resolution calling for it in the Senate, not surprisingly thereby guaranteeing its defeat along party lines.

But Katrina has now given the Democrats a golden opportunity to turn its normal diet of the proverbial inedible chicken substance into the edible one, and on a two for one special to boot. Polls are showing that the public, (a) doesn’t believe the government can continue to fund operations in Iraq at the same time it undertakes Katrina re-building efforts, and (b) believes that of all the alternatives, the best way to fund the Katrina rebuilding effort is to reduce spending on Iraq.

Voila! An engraved invitation to the Democrats to come out of their bunkers and pronounce, righteously, that it’s impossible for us to fight a war on two fronts (or Gulfs), one on an insurgency in Iraq, and the other on the disastrous socioeconomic and environmental conditions in Louisiana, Mississippi and Alabama, and that we may not, much as we might like to, be able to pay for guns in Baghdad even as we try to pay for butter in New Orleans and Biloxi.

A pronouncement like this gets the Democrats off the horns of their self-created dilemma of calling for an expedited disengagement in Iraq, since they can say it’s not a choice they made, but one that was forced on them by the events in our Gulf, and by a $300 billion deficit.

It would appear that the choice for Americans between helping their countrymen rebuild their lives and helping the citizens of another country build theirs (not one they had to make, for example, during the tsunami, or even when Iraq was first invaded) is a no-brainer,. Who can forget the pictures of pitiful hurricane victims wondering aloud why their country could airlift billions of dollars in supplies to cities they never heard of halfway around the world (Falujah, Ramadi,Tikrit, etc.), in a heartbeat, but not get a few thousand bottles of water to a dehydrated New Orleans in a week?

With the situation in Iraq deteriorating to startling levels (nine more American deaths just today), the electorate believing that the war may not be worth fighting given their concomitant belief (according to the polls) that we’re not achieving one of the main goals of fighting it (i.e., to make us more secure “over here” by fighting “over there”), and the fact that we have now been tragically shown that terrorism may not be the primary threat to our lives, the Democrats could find themselves in a Katerina/Iraq, win/win situation by using one as the reason to extricate us from the other. The question is, can they take their noses out of the Republicans’ butts long enough to smell the coffee?