Special Analysis: Questions Surround Frist Blind Trust Stock Sale

From the Washington Post comes the story of Senate Majority Leader Bill Frist (R-TN) ordering the manager of the WH Frist 2000 Qualified Blind Trust to unload all of his, his wife's, and his kids' stock in HCA, Inc., otherwise known as Hospital Corporation of America, (NYSE:HCA) shortly before the company issued an earnings report that sent the price of its stock down by 15 percent. Were Mr. Frist to have been privy to insider information, he would have been obligated not to act on that information as a matter of law under the Securities Exchange Act of 1934, among other statutory proscriptions against using non-public information in trading of the securities of a public corporation.

Because the HCA stock was held in a blind trust, Mr. Frist would not in principle know exactly what the value nor amount of his holdings of the particular stock were. He has disclosed in public filings that the total worth of his trust holdings is between $7 million and $35 million, and there are indications that the trust was allocated some amount of stock valued at less than $15,000 in hospital companies, but that does not indicate per-share prices of the securities at the time of assignment, nor does it indicate stock of HCA that was included in the original transaction nor stock that was acquired by the trust subsequently.

Mr. Frist may order dispositions from the blind trust, but he may not direct the timings of those dispositions. In practical terms, however, even though the time and nature of the liquidation would be entirely at the discretion of the trustee in most circumstances, he or she would likely understand whether or not there was an urgency to the matter. In general, without the cooperation of a trustee affirming that he or she was pressured to sell stock at a specific time, it would be virtually impossible in many cases to prove that the trustee had responded to a timing directive from a beneficiary.

Questions arise in the case of the WH Frist 2000 Qualified Blind Trust with respect to the liquidation of HCA common stock from the trust portfolio because the order to dispose of the stock was issued by Mr. Frist on June 13, and the execution was completed before the company issued a warning about up-coming, disappointing earnings: the trustee could have waited as long as six months, at his discretion, but chose instead to execute the directive in a timely manner, commencing the liquidation eight days subsequent to HCA common stock reaching a high of $58.22 on June 22. The Washington Post article says that Frist's shares were sold on July 1, and those of his wife and kids were sold on July 8. On July 1, HCA common stock closed at $56.42; on July 8, HCA common stock closed at $54.50.


As of the market close on the day prior to publication of this article, HCA had generally continued to lose ground, dropping $1.35 on September 21, alone, to $47.41 per share, having never fully recovered from the investor sell-off resulting from that July earnings report. The accumulating loss avoided by the Frist blind trust portfolio could be substantial: considering that the sales were executed in the range of $56.42 to $54.50, a rough estimate of the weighted average sell price for his and his family's holdings might be approximately $55.50 per share. with the price now at about $47.50, the avoided losses currently amount to approximately $8.00 per share. If the level of holdings was, say, ten thousand shares (and there is no indication whatsoever that this is the actual figure), Mr. Frist's sell directive saved the trust portfolio from a loss of $80,000.

The concerns about possible insider information having been passed to Sen. Frist center at least to some extent on his family's ties to HCA, Inc. According to The Village Voice, Mr. Frist's father and brother were once officers of HCA. In fact, AP News via TBO.com reports HCA as the Frist "family's hospital company."

As a side note, the Hospital Company of America is no stranger to scandal: in 2002, HCA reached a $1.7 billion agreement to settle charges of overbilling of the government.

But whether or not the officers and directors of HCA continue to communicate with Frist family members is unclear, although the prior and possibly continuing relationship between Mr. Frist's family and the corporation could be argued to establish specific securities law guidelines on manner, level, timings, and special disclosures of sales of securities owned by Mr. Frist. Specifically, Section 16 of the Securities Exchange Act mandates reports be filed on Forms 3, 4, and/or 5 pursuant to sales of stock by insiders of a public corporation. Other sections of federal securities laws may be relevant, as well, in such transactions. In any event, the determination of whether or not any specific deviation from regulatory requirements was involved in the matter of the HCA stock liquidation by the Frist blind trust would be a matter for securities regulators to determine. As a point of modest comparison, the illicit gains from insider trading that resulted in Martha Stewart serving a prison term were approximately $60,000, although the significance of her punishment resulted largely from charges that she had attempted to conceal aspects of the trade that was alleged to have been executed on insider information.

The case with Mr. Frist and HCA common stock is notably different in a number of ways, perhaps most important among them being the direct connection between members of Frist's family and the corporation that was obligated to keep an earnings report under wraps until all shareholders and prospective investors could know its contents at the same time.

Whether or not Mr. Frist was privy to and used insider information prior to its public promulgation is unknown; but it is clear that those who remained shareholders of the corporation subsequent to the disposition of HCA stock by the WH Frist 2000 Qualified Blind Trust suffered losses that Mr. Frist, his wife, and his children did not.



The Dark Wraith leaves it to the readers of this article to decide the level of outrage appropriate to attach to this incident.