Federal prosecutors, SEC scrutinize Frist stock sale

Senate Republican leader sold all holdings just before stock slumped

September 24, 2005|By Mary Curtius and Jonathan Peterson

WASHINGTON -- The Securities and Exchange Commission and the Department of Justice are investigating Senate Majority Leader Bill Frist's sale of all his stock in HCA - a hospital chain his family helped found - shortly before a disappointing earnings report triggered a drop in the stock's value, Frist's office said yesterday.

The SEC and Justice Department declined to comment on the focus of the investigation. But the Nashville-based HCA said in a statement issued yesterday that federal prosecutors issued a subpoena late Thursday night seeking "the production of documents" that the company believes "relates to the sale of HCA stock" by Frist.

Frist's spokesman, Bob Stevenson, denied any wrongdoing by the senator from Tennessee.

"Senator Frist had no information about the company or its performance that was not available to the public when he directed trustees to sell the HCA stock," Stevenson said in a statement. "His only objective in selling the stock was to eliminate the appearance of a conflict of interest."

Still, the investigations pose a political embarrassment to Frist, the Senate's most powerful Republican. He is widely viewed as a potential presidential candidate in 2008

"There may not be anything there, but perception is always stronger than reality" in politics, said Marshall Wittmann, a former aide to Sen. John McCain, an Arizona Republican, who is now an analyst with the Democratic Leadership Council, a centrist party group.

Frist created a blind trust containing his HCA stock in 1999, although Senate rules do not require senators to put their stock holdings in such trusts, Stevenson said. A blind trust gives control of the assets to a trustee who provides no details about transactions, only about total value and income earned.

In financial disclosures he filed earlier this year, Frist put the worth of his several blind trusts at between $7 million and $35 million.

Congressional Quarterly disclosed Monday that Frist ordered all his HCA stock sold from the one trust in June. Stevenson said the article, and other media reports, prompted the SEC and Justice Department investigations.

Two sources close to Frist who declined to be named said the majority leader decided to sell his shares and take other steps to eliminate any appearance of conflict of interest in his financial portfolio as he positioned himself for a possible run for the presidency.

On June 13, Frist told the trustee to sell all his shares in HCA and those owned by his wife and his children, a step allowed under Senate ethics rules. Stevenson said the trustee decided when to sell the stocks and Frist had no way of knowing how much was sold or what was earned on the sale.

HCA shares hit a high this year of $58.22 on June 22. After the company announced that its second-quarter earnings would fall below analysts' expectations, the price fell to $49.90 on July 13.

Insider trading cases can be difficult to prove, said Mark LoPresti, an expert in such transactions with Thompson Financial, a New York financial data provider. Prosecutors must sift through mounds of telephone records, calendars, e-mails and trading records in an attempt to make the connection between a trade and private advantage.

LoPresti said that SEC reports showed members of HCA's board of directors and others with close connections to the company sold about 3.2 million shares, worth about $165 million, between January and June of this year. About 25 people, LoPresti said, participated in the stock sale during that period.

"For some insiders, increasingly larger sales occurred in May and June," LoPresti said. "What does stick out is the amount of profits they were protecting."

HCA was founded in 1968 by Frist's father, Thomas; the senator's brother, Thomas Jr.; and Jack Massey, former owner of Kentucky Fried Chicken. Thomas Frist Jr. remains on the company's board of directors and is a major shareholder.

Democrats have repeatedly charged that the Republican-controlled Congress is ethically lax and have vowed to make ethics an issue in next year's congressional campaigns. But Democratic Minority Leader Harry Reid, a Nevada Democrat, declined yesterday to comment on the Frist stock-sale investigations.

Democratic National Committee Chairman Howard Dean showed no such restraint.

Frist's record, Dean said in a statement, showed that he "spends most of his time looking out for his own financial interests and for Republican big business cronies."

Mary Curtius and Jonathan Peterson write for the Los Angeles Times.

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