Sep 23, 2005

Senate Leader Explains His Sale of a Stock That Then Plummeted

By DAVID D. KIRKPATRICK
Published: September 22, 2005

WASHINGTON, Sept. 21 -
Senator Bill Frist offered an explanation on Wednesday for the timing of his sale in June of his stake in HCA, the giant hospital company that his family founded, as its shares reached a peak and began a steep slide.

An aide to Mr. Frist, majority leader of the Senate and brother of the HCA chairman emeritus, disclosed the sale on Monday in an interview with Congressional Quarterly.

The senator's spokesman, Bob Stevenson, said Wednesday that Mr. Frist "made a conscious decision to divest himself of all HCA assets" so he could pursue an ambitious agenda of health care legislation free of any appearance of self-interest.

Since joining the Senate, Mr. Frist had been dogged by accusations about conflicts of interest from his HCA holdings, including "no fewer than 19 instances" of articles or other public accusations, Mr. Stevenson said.

Mr. Frist, who has said he will not run for another term as Tennessee senator, is widely considered to be weighing a presidential bid. That may give him another incentive to put some distance between himself and the company.

"Good fortune, isn't it?" asked Prof. John C. Coffee, an authority on securities law at Columbia.

Professor Coffee said such well-timed sales in the families of top executives were a red flag of possible insider trading and often drew regulatory inquiries, although just a small fraction of such instances lead to formal investigations.

The question, Professor Coffee said, is whether Mr. Frist received private information about the company performance from his brother or other insiders.

"There is no prohibition against a family member's dumping his stock in a company, unless it can be shown that the family member was tipped as to material nonpublic information," he said. "That seems to be the missing link."

Five years ago, the company pleaded guilty to 14 criminal counts for filing fraudulent Medicare reports and paying doctors kickbacks for referrals. It eventually paid $1.7 billion in fines and penalties in connection with the case.

Mr. Frist's brother Thomas F. Frist Jr. had left the management and was vice chairman. But he returned as chief executive to help HCA recover. He remains its largest individual shareholder and chairman emeritus.

The stock bottomed out under $20 a share in 1999 in the federal fraud investigation, but it climbed back steadily. Over the first six months of this year, the stock rose, from about $40 a share to more than $58 at its peak in June.

Top executives took advantage of the run-up to exercise options and sell shares worth $165 million in the first six months of the year, with the heaviest selling in February and April, according to data from Thomson Financial, which tracks insiders' sales. Thomas Frist did not have any significant transactions.

Senator Frist had reported this year that he owned $7 million to $35 million in assets, including his HCA shares, that were in blind trusts managed by others to reduce the appearance of conflicts. Although more than $10 million of the initial holding of the trusts was shares in HCA, Mr. Frist's spokesman said Wednesday that he could not determine how many shares remained.

On June 13, his spokesman said, Mr. Frist told the managers to sell all his shares. The stock hit its peak at $58.22 a share nine days later, on June 22. By July 8, all the shares held by Mr. Frist and his wife and children were sold, his spokesman said, adding that Mr. Frist did not control the exact timing.

Five days after that, on July 13, HCA announced that its second-quarter earnings would fall below Wall Street projections because of lower than expected hospital admissions and higher than expected numbers of patients lacking insurance. Its stock fell 9 percent, to $50.05 a share, that day on the New York Stock Exchange, and closed on Wednesday further down, at $47.41 a share.

Also on Wednesday, the Foundation for Taxpayer and Consumer Rights of Santa Monica, Calif., said it sent a letter to the Securities and Exchange Commission asking for an investigation of the sale.