by John M. Curtis
(310) 204-8700

Copyright October 12, 2005
All Rights Reserved.

nloading his shares in the family business, Senate Majority Leader Bill Frist (R-Tenn.) showed impeccable timing, dumping his family's stake in Hospital Corporation of America, Inc. When Thomson Financial analyst Mark LoPresti noticed that 2.3 million shares, valued at about $112 million, were sold by company insiders between January and June, he realized that a major insider liquidation was underway. As the market value peaked over $58 per share in May and June, HCA's chief executive, treasurer, senior vice president of government programs and several directors dumped another 770,639 shares for gains of about $42 million. On June 13, when the stock neared its peak of $58.40, Frist ordered his trustees to liquidate his family's holdings. By the time the sell-off was complete, HCA had lost 16% of its value, dipping share prices to $45.90, hurting the company's market cap.

      Frist, whose father Thomas Frist Sr. and brother Thomas Frist Jr. founded Nashville, Tenn.-based HCA in 1968, insists he knew nothing about the company's financial picture at the time he sold his family's holdings. Yet only a few short weeks after the sale, HCA reported a bleak earnings outlook. Considered among the frontrunners for the 2008 Republican nomination, Frist was a heart surgeon before winning his senate seat in 1994. Though he's been urged to liquidate his HCA holdings, Frist decided the time was right June 13 to end criticism about possible conflicts-of-interest, especially heath care legislation involving Medicare and HMOs directly affecting the family business. For years, Frist said, and the Senate agreed, his blind trust prevented possible conflicts-of-interest, yet didn't prevent him from instructing his trustees to dump his holdings.

      Blind trusts operate independently of principals who might be tempted to make investment decisions, especially when investors have as stake in the company. “The question here is how blind is blind,” said David Becker, former legal counsel to the Security and Exchange Commission from 2000-2002. Frist's trustee, Kirk Scobey Jr. with Nashiville-based Equitable Trust Co., indicated that the owner of a trust “can direct the elimination of holdings,” attempting to exonerate the Senate majority leader. Whether the owner of trust has the legal right to liquidate holdings has nothing to do with potential conflicts-of-interest arising from Frist's insider knowledge. “If there was any sort of insider information that caused Frist to use ethical considerations as a cover, we think the SEC should investigate,” said Carmen Balbert, consumer advocate for The Foundation for Taxpayer and Consumer Rights.

      Getting a subpoena from the SEC for his personal records, Frist must answer charges that soon-to-be-retiring, two-term senator and possible presidential candidate used insider information to time the sale of his HCA stock. Frist's situation seems similar to homemaking diva Martha Stewart and jet-setting founder of ImClone Systems president Samuel D. Waksal who ditched thousands of shares after learning the Food and Drug Administration wouldn't approve its anti-cancer drug Erbitux back in 2002. While Martha was sprung from federal prison March 7, Waksal isn't scheduled for release for years. Subpoening Frist doesn't bode well for his political future, now consumed with defending himself against insider trading allegations. Blind trusts can't prevent principals with insider information from instructing trustees to sell—something suspected in Frist's case.

      For two weeks, the majority leader's office gave no hint that the SEC had delivered subpoenas for personal records. Frist's problems are double-trouble for the GOP on Capitol Hill, already rocked by the indictment of House Majority Leader Tom DeLay (R-Texas), facing conspiracy and money-laundering charges for violating Texas' campaign finance laws. Frist's dark cloud weakens his effectiveness to advance the Bush agenda, including Social Security Reform and marshalling GOP support for Supreme Court nominee Harriet Miers. It's beyond ironic that many Republicans oppose Miers' appointment, not because she lacks qualifications but precisely because she's not a right wing ideologue. With Bush's key strategist Deputy Chief of Staff Karl Rove and Vice President Dick Cheney's Chief of Staff I. Lewis “Scooter” Libby in hot water, the White House can't afford another battle.

      Frist's problems stem from the hubris associated with being the scion of one the country's richest corporate families. Almost all of Frist's wealth—estimated at between $20 and $40 million—stems from family stock. It's inexplicable that Frist would sacrifice his political career to save himself between $4 and $8 million, dumping shares in advance of bad earnings or profit woes. As already seen with Martha Stewart, unbridled greed—and untreated neurosis—has no logic, compelling eccentric millionaires to engage in self-destructive acts. There's no excuse for Frist trying to save his estate from, at best, a 20% loss. It's laughable that Frist now says he dumped his stock to accommodate criticism about possible conflicts-of-interest. In the end, Frist has no one to blame but himself. Watching the Frist family and upper management dump shares should give investors reason to pause.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

©1999-2005 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.