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September 25, 2005

Senator Frist and "Insider Trading." A Primer on This Week's Scandal

Senate Majority Leader Bill Frist is a rich guy. Besides making crazy cardiologist loot, he came from a rich family, valued at over a billion. His father, Thomas, helped found Hospital Corporation of America, a company that grew into what is now the nation’s largest chain of private hospitals. And as you might expect, Bill owned some HCA stock.

How much? Well that isn’t quite clear. In 1994 his HCA holdings were valued at $13 million. The next year he entered the Senate, and because he would be working on legislation that could impact the med. industry and therefore HCA, he did what Senators are supposed to do - he placed his HCA and other assets in a blind trust.

Now, I don’t know much about blind trusts. I sorta thought the whole point was that you would be, you know, blind to the assets once they went in. That your trust manager would give you some overall accounting as to the entirety’s worth, but you’d have no input into the purchase or sale of its constituent assets.

I hope I’d be excused as to this notion. The AP notes that Frist himself seemed to believe much the same when he explained in a television interview:

"Well, I think really for our viewers it should be understood that I put this into a blind trust. So as far as I know, I own no HCA stock"

Frist, referring to his trust and those of his family, also said in the interview, "I have no control. It is illegal right now for me to know what the composition of those trusts are. So I have no idea."

(h/t Captain's Quarters)

Now it appears quite certain that Frist knew he still had HCA in his trust. It’s certain because, in June, he specifically directed his imposingly named trust fund manager, M. Kirk Scobey Jr., to sell it. All of it. And the BIG QUESTION is whether Frist was the beneficiary of “inside information” when he ordered the sale.


The background: For a long time HCA had been sort of floundering, been indicted for bad stuff in the past and the stock suffered as a result.

Around October 2004, though, things started to change. HCA began a long upward climb. By late June of 2005, it reached a peak of 56% more than its October value.

During the rise, HCA executives started selling off their personal holdings:

The sales, which included moves by [HCA's] chief executive, treasurer, senior vice president for government programs and several directors, were among the largest insider selloffs analysts had seen, LoPresti said. Many officers made their largest trades ever in April, only to top them again in May and June, LoPresti said

On July 13, 2005, HCA announced a sucky second quarter, with earning beneath the all important “analysts’ expectations.” Not surprisingly, the stock began a prompt tumble, quickly sliding 16% from its June 22, high. And it’s still down round there.

Were the executives making their previous decisions to sell based on insider knowledge that the second quarter was going to be off, knowledge that wasn’t publicly available until July 13?

Tigerhawk runs a detailed analysis of the stock’s movements, and notes that exectives always have a sense of where their company is headed, how it’s currently doing, even if they don’t have prior access to hard figures/info that non-insiders don’t.

Maybe the executives were ‘insider trading.’ Maybe they weren’t. I don’t know. That’s still not Frist’s real concern though.

This is: On June 13th, near the stock’s June 22nd high, and the tail end of the exec’s mass sell off, Frist contacts Scobey, and says “Scobey, sell all my HCA. Mine and my wife’s”

Now Frist, because it’s a blind trust, can’t control the exact timing of the sale, but his trust manager gets around to it, dumping Frist’s personal shares on July 1, and Frist’s wife’s on July 8 - the last sale, coming just one week before the bad earnings announcement and the stock’s fall.

So you see the big question, don’t you? What prompted Frist to sell all his HCA? Did he get a tip from an HCA exec with inside info? Or, put more legalistically, did Frist have material nonpublic information regarding HCA at the time he ordered the sale.

Frist’s office issued a statement saying he was only trying to avoid a confilct of interest. Others point out the curious nature of that excuse:

"Frist has been in the Senate for many years now, and the conflict is not new," said Melanie Sloan, executive director of the watchdog group, Citizens for Responsibility and Ethics in Washington. "Why did he decide to sell it then? Why not years ago? What's changed? Did he know that the stock was about to take a fall?"

The usual crowd, not surprisingly, think the facts, facially, convict the majority leader and the Republican party:

Democrats were quick to pounce on Frist's problem. Democratic National Committee Chairman Howard Dean urged the agencies involved to "fully and vigorously investigate Frist's suspicious stock trade." He added: "Republicans in Washington have made their culture of corruption the norm."
"Bill Frist has this all upside down," said Rep. Rahm Emanuel (D-Ill.), chairman of the House Democrats' campaign committee. "He thought Terri Schiavo could see and his trust was blind."

Federal agencies are looking into the matter:

A spokesman said Frist's office has been contacted by both the SEC and the U.S. attorney's office in Manhattan about his divestiture of the stock. HCA disclosed separately that it was subpoenaed by the same U.S. attorney's office for documents that were related to Frist's sale. Frist and HCA said they are cooperating.


I don’t know what Frist was up to. I’d like to think the guy’s smarter than Martha Stewart and knew that a Senate Majority Leader reaching into a ‘blind trust’ and directing the sale of specific assets that are about to take a plunge is gonna raise eyebrows. (And what’s up with ‘Blind Trusts.’ Is it really copacetic to micromanage like that? What's the point of a blind trust then?)

Really, people buy and sell stock all the time. (For real. There are people called brokers who actually make a living off it) And I believe Frist had some prior campaign loans that needed repaying, and hey, why not sell HCA? The thing had been lagging for a long time. Getting a pretty good price for it now. With second quarter earnings coming out, why take a risk? Why not lock up some gains?

Well why not just say that? Why the lame ‘avoid the appearance of impropriety’ excuse?

Anyway, we’re gonna be hearing a lot about it, as intrinsically technical and boring as it is. Frist wants the republican nomination in ‘08 and this, depending on how it breaks, could take him out. Even if he’s clean, he doesn’t need ‘Mr. and Mrs. Swing-Vote’ learning his name in the context of scandal allegations.

Somewhere, a former Senate Majority leader is chuckling himself silly.

digg this
posted by Dr. Reo Symes at 04:55 PM

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